-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HWMxrV3nJUd9GcQ7ODxkMC2NENXnZ2dJ2bn8557bJU9Lg2mmOmDUIPy7q+o/gzZ9 2Ofn7A7RZovLfSvbXSj4rw== 0000889812-99-002105.txt : 19990713 0000889812-99-002105.hdr.sgml : 19990713 ACCESSION NUMBER: 0000889812-99-002105 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990712 GROUP MEMBERS: CHASE EQUITY ASSOCIATES, L.P. GROUP MEMBERS: CHASE VENTURE CAPITAL ASSOCIATES L P SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: GUITAR CENTER INC CENTRAL INDEX KEY: 0001021113 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 954600862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-52291 FILM NUMBER: 99662867 BUSINESS ADDRESS: STREET 1: 5155 CLARETON DR CITY: AGOURA HILLS STATE: CA ZIP: 91301 BUSINESS PHONE: 8187358800 MAIL ADDRESS: STREET 1: 5155 CLARETON DR CITY: AGOURA HILLS STATE: CA ZIP: 91301 FORMER COMPANY: FORMER CONFORMED NAME: GUITAR CENTER MANAGEMENT CO INC DATE OF NAME CHANGE: 19960816 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CHASE VENTURE CAPITAL ASSOCIATES L P CENTRAL INDEX KEY: 0001015240 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: 12TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126223100 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: 12TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 SC 13D 1 STATEMENT OF BENEFICIAL OWNERSHIP OMB APPROVAL OMB Number: .... 3235-0145 Expires: August 31, 1999 Estimated average burden hours per response .... 14.90 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Guitar Center, Inc. (Name of Issuer) Common Stock, $0.01 par value (Title of Class of Securities) 402040109 (CUSIP Number) Harvey M. Eisenberg, Esq. O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza - 41st Floor New York, New York 10112 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) July 1, 1999 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of ss.ss.240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. [_] Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See ss.240.13d-7 for other parties to whom copies of this statement are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). Chase Venture Capital Associates, L.P. 13-337-6808 -------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (See Instructions) (a) X ------------------------------------------------------------------ (b) ------------------------------------------------------------------ 3. SEC Use Only ------------------------------------------------------- 4. Source of Funds (See Instructions) WC ------------------------------- 5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) --------------------------------------------------- 6. Citizenship or Place of Organization California ------------------------------ Number of Shares 7. Sole Voting Power 4,590,831 Beneficially Owned --------------------- by Each Reporting Person With 8. Shared Voting Power Not applicable --------------------- 9. Sole Dispositive Power 4,590,831 --------------------- 10. Shared Dispositive Power Not applicable --------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 4,590,831 ---------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) -------- 13. Percent of Class Represented by Amount in Row (11) 21.9% ------------------ 14. Type of Reporting Person (See Instructions) PN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. Names of Reporting Persons. I.R.S. Identification Nos. of above persons (entities only). Chase Equity Associates, L.P. 13-3371826 --------------------------------------------------------------------- 2. Check the Appropriate Box if a Member of a Group (See Instructions) (a) ------------------------------------------------------------------ (b) ------------------------------------------------------------------ 3. SEC Use Only -------------------------------------------------------- 4. Source of Funds (See Instructions) WC ---------------------------------- 5. Check if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e) -------------------------------------------------- 6. Citizenship or Place of Organization California ------------------------------ Number of Shares 7. Sole Voting Power 518,910 Beneficially Owned ---------------------------- by Each Reporting Person With 8. Shared Voting Power Not applicable -------------------------- 9. Sole Dispositive Power 518,910 ----------------------- 10. Shared Dispositive Power Not applicable --------------------- 11. Aggregate Amount Beneficially Owned by Each Reporting Person 518,910 -------- 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See Instructions) --------- 13. Percent of Class Represented by Amount in Row (11) 2.5% ----------------- 14. Type of Reporting Person (See Instructions) PN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Item 1. Security and Issuer. This statement relates to the Common Stock, par value $0.01 per share (the "Common Stock"), of Guitar Center, Inc. (the "Issuer"). The Issuer's principal executive offices are located at 5155 Clareton Drive, Agoura Hills, CA 91301. Item 2. Identity and Background. This statement is being filed by Chase Venture Capital Associates, L.P. and Chase Equity Associates, L.P., each a California limited partnership (hereinafter referred to as "CVCA" and "CEA", respectively), each of whose principal office is located at 380 Madison Avenue, 12th Floor, New York, New York 10017. Each of CVCA and CEA is engaged in the venture capital and leveraged buyout business. The general partner of each of CVCA and CEA is Chase Capital Partners, a New York general partnership ("CCP"), which is also engaged in the venture capital and leveraged buyout business, and whose principal office is located at the same address as CVCA and CEA. Set forth below are the names of each general partner of CCP who is a natural person. Each such general partner is a U.S. citizen, whose principal occupation is general partner of CCP and whose business address (except for Mr. Soghikian) is c/o Chase Capital Partners, 380 Madison Avenue, 12th Floor, New York, New York 10017. John R. Baron Christopher C. Behrens Mitchell J. Blutt, M.D. Arnold L. Chavkin Michael R. Hannon Donald J. Hofmann Stephen P. Murray John M. B. O'Connor Brian J. Richmand Shahan D. Soghikian Jonas Steinman Jeffrey C. Walker Damion E. Wicker, M.D. Mr. Soghikian's address is c/o Chase Capital Partners, 50 California Street, Suite 2940, San Francisco, CA 94111. Jeffrey C. Walker is the managing general partner of CCP. The remaining general partners of CCP are Chase Capital Corporation, a New York corporation ("Chase Capital"), CCP Principals, L.P., a Delaware limited partnership ("Principals") and CCP European Principals, L.P., a Delaware limited partnership ("European Principals"), each of whose principal office is located at 380 Madison Avenue, 12th Floor, New York, New York 10017. Chase Capital is a wholly-owned subsidiary of The Chase Manhattan Corporation. The general partners of each of Principals and European Principals is Chase Capital. Chase Capital, Principals and European Principals are each engaged in the venture capital and leveraged buyout business. Set forth in Schedule A hereto and incorporated herein by reference are the names, business addresses and principal occupations or employments of each executive officer and director of Chase Capital, each of whom is a U.S. citizen. The Chase Manhattan Corporation ("Chase") is a Delaware corporation engaged (primarily through subsidiaries) in the commercial banking business with its principal office located at 270 Park Avenue, New York, New York 10017. Set forth in Schedule B hereto and incorporated herein by reference are the names, business addresses, principal occupations and employments of each executive officer and director of Chase, each of whom is a U.S. citizen. To CVCA's and CEA's knowledge, the response to Items 2(d) and (e) of Schedule 13D is negative with respect to CVCA and CEA and all persons to whom information is required hereunder by virtue of CVCA's and CEA's response to Item 2. Insofar as the requirements of Items 3-6 inclusive of this Schedule 13D Statement require that, in addition to CVCA and CEA, the information called for therein should be given with respect to each of the persons listed in this Item 2, including CCP, CCP's individual general partners, Chase Capital, Chase Capital's executive officers and directors, Principals, and Principals' controlling partner, European Principals and European Principals' controlling partner, Chase and Chase's executive officers and directors, the information provided in Items 3-6 with respect to CVCA and CEA should also be considered fully responsive with respect to the aforementioned persons who have no separate interests in the Issuer's Common Stock which is required to be reported thereunder. Although the definition of "beneficial ownership" in Rule 13d-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), might also be deemed to constitute these persons beneficial owners of the Issuer's Common Stock acquired by CVCA and CEA, neither the filing of this statement nor any of its contents shall be deemed an admission that any of such persons is a beneficial owner of the Issuer's Common Stock acquired by CVCA and CEA or a member of a group together with CVCA and CEA either for the purpose of Schedule 13D of the Exchange Act or for any other purpose with respect to the Issuer's Common Stock. Item 3. Source and Amount of Funds or Other Consideration. Transactions Involving the Issuer On June 5, 1996, in connection with a $70 million recapitalization of the Issuer (the "Recapitalization") and pursuant to a Recapitalization Agreement dated as of May 1, 1996 between the Issuer, CVCA and the other parties thereto (the "Recapitalization Agreement", a copy of which is attached hereto as Exhibit 1 and incorporated herein by reference), CVCA and CB Capital Investors, L.P. ("CBCI"), an affiliate of CVCA, purchased 332,640 and 187,110 shares of the Issuer's Junior Preferred Stock, respectively, for an aggregate purchase price of $33,264,000 and $18,711,000, respectively, and 336,000 and 189,000 shares of the Issuer's Common Stock, respectively, for an aggregate purchase price of $336,000 and $189,000, respectively. In connection with the Recapitalization, each of CVCA and CBCI became parties to a Stockholders Agreement dated as of June 5, 1996 (the "Stockholders Agreement") and a Registration Rights Agreement dated as of June 5, 1996, as amended and restated as of May 28, 1999 (the "Registration Rights Agreement", a copy of which is attached hereto as Exhibit 2 and incorporated herein by reference). The Stockholders Agreement, which terminated upon the Issuer's initial public offering on March 14, 1997, granted the stockholders of the Issuer, including each of CVCA and CBCI, certain rights, including without limitation, the right to designate members of the Issuer's Board of Directors and the right to subscribe for a proportional share of certain future equity issuances by the Issuer. The Registration Rights Agreement granted certain stockholders of the Issuer, including CVCA and CBCI, the right to cause the Issuer to register such shareholder's shares of equity at any time upon the request of at least 60% of the equity securities held by such holders, as well as the right to include their shares of equity securities in any registration of equity securities in any public offering and the Issuer has agreed to pay all costs associated with any such registrations. At the time of the Recapitalization, CVCA designated Jeffrey C. Walker, the managing general partner of CCP, the sole general partner of each of CVCA and CEA, as its designee on the Issuer's Board of Directors. Mr. Walker is presently a member of the Issuer's Board of Directors. On October 29, 1996, CBCI sold its investment in the Issuer to CVCA for $18,900,000. Also on October 29, 1996, CVCA sold 24,948 shares of the Issuer's Junior Preferred Stock at a cost of $2,494,000 and 25,200 shares of the Issuer's Common Stock at a cost of $25,200 to the Guitar Center Investors Fund, LLC. Pursuant to an Amended and Restated Memorandum of Understanding and Stock Option Agreement dated as of December 30, 1996 (the "Investor's Option Agreement," a copy of which is attached hereto as Exhibit 3 and incorporated herein by reference), CVCA granted options ("Options") to purchase an aggregate of 22,641.52 shares of the Issuer's Common Stock at a purchase price of $4.33 per share to certain officers and key managers of the Issuer. The Options are presently exercisable and expire on December 30, 2001. On March 14, 1997, the Issuer had an initial public offering of its Common Stock and as a result thereof, CVCA's Junior Preferred Stock was reclassified into Common Stock at a rate of 6.67:1 and CVCA's Stock was reclassified into Common Stock at a rate of 2.5817:1. As a result of the public offering, CVCA received 4,589,164 shares of the Issuer's Common Stock. On May 6, 1998, pursuant to the Issuer's Amended and Restated 1996 Performance Stock Option Plan (the "Option Plan", a copy of which is attached hereto as Exhibit 4 and incorporated herein by reference), Jeffrey C. Walker was granted an Incentive Stock Option (the "Option", a copy of which is attached hereto as Exhibit 5 and incorporated by reference) to purchase up to 5,000 shares of the Issuer's Common Stock at a purchase price of $28.5625 per share. The Option expires on May 6, 2008 and is subject to vesting as follows: 1,667 shares on May 6, 1999; 1,667 shares on May 6, 2000 and 1,666 shares on May 6, 2001. Mr. Walker is obligated to transfer any shares issued under the Option to CVCA. The Option, therefore allows CVCA, as transferee, to purchase up to 5,000 shares of the Issuer's Common Stock. On June 15, 1999 and June 16, 1999, CEA purchased the following shares of the Issuer's therefore, Common Stock in open market transactions: Date Shares of Common Stock Price/Share Total Price ---- ---------------------- ----------- ----------- 6/15/99 25,000 $9.8125 $245,312.50 6/15/99 100,000 $9.6250 $962,500.00 6/15/99 200,000 $9.6250 $1,925,000.00 6/15/99 155,000 $9.6250 $1,491,875.00 6/15/99 19,000 $9.6250 $182,875.00 6/15/99 6,000 $9.7500 $58,500.00 6/16/99 13,910 $9.6250 $133,883.75 Source of Funds The funds provided by CVCA for the purchase of the Issuer's Junior Preferred Stock and Common Stock were obtained from CVCA's contributed capital, which includes funds that are held available for such purpose. The funds provided by CEA for the purchase of the Issuer's Common Stock were obtained from CEA's contributed capital, which includes funds that are held available for such purpose. Each of CVCA and CEA disclaims that it is a member of a group with any other persons either for purposes of this Schedule 13D or for any other purpose related to its beneficial ownership of the Issuer's securities. Item 4. Purpose of Transaction. The acquisition of the Issuer's equity securities has been made by CVCA and CEA for investment purposes. Although neither CVCA or CEA has a present intention to do so, each of CVCA and CEA may make additional purchases of the Issuer's Common Stock either in the open market or in privately negotiated transactions, including transactions with the Issuer, depending on an evaluation of the Issuer's business prospects and financial condition, the market for the Common Stock, other available investment opportunities, money and stock market conditions and other future developments. Depending on these factors, each of CVCA and CEA may decide to sell all or part of its holdings of the Issuer's Common Stock in one or more public or private transactions. Except as set forth in this Item 4, neither CVCA or CEA has a present plan or proposal that relate to or would result in any of the actions specified in clauses (a) through (j) of Item 4 of Schedule 13D. However, CVCA and CEA each reserve the right to propose or participate in future transactions which may result in one or more of such actions, including but not limited to, an extraordinary corporate transaction, such as a merger, reorganization or liquidation or sale, of a material amount of assets of the Issuer or its subsidiaries, or other transactions which might have the effect of causing the Issuer's Common Stock to cease to be listed on the NASDAQ National Market System or causing the Common Stock to become eligible for termination of registration, under section 12(g) of the Exchange Act. Item 5. Interest in Securities of the Issuer. CVCA may be deemed the beneficial owner of 4,590,831 shares of the Issuer's Common Stock. CVCA's deemed beneficial ownership represents 21.9% of the Common Stock as of June 16, 1999. CVCA has the sole voting power and dispositive power with respect to its shares of the Issuer's Common Stock. CEA may be deemed beneficial owner of 518,910 shares of the Issuer's Common Stock. CEA's deemed beneficial ownership represents 2.5% of the outstanding shares of Common Stock as of June 16, 1999. CEA has the sole voting power and dispositive power with respect to its shares of the Issuer's Common Stock. Except as reported in Item 3 above and incorporated herein by reference, there have been no transactions involving the Issuer's Common Stock during the past sixty days which are required to be reported in this Statement. No person other than CVCA and CEA, respectively, has the right to receive or the power to direct the receipt of dividends from or the proceeds from the sale of the Issuer's Common Stock owned beneficially by CVCA and CEA, respectively. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. Reference is made to the information disclosed under Items 3 and 4 of this Statement which is incorporated by reference in response to this Item. Item 7. Material to be Filed as Exhibits. 1. Recapitalization Agreement dated as of May 1, 1996, among the Issuer, CUCA and the other parties thereto, which is incorporated by reference to Exhibit 10.2 in the Issuer's Registration Statement in Form S-1 (file No. 333-10491). 2. Amended and Restated Registration Rights Agreement, dated as of May 28, 1999, among the Issuer and the Shareholders party thereto. 3. Amended and Restated Memorandum of Understanding and Stock Option Agreement, dated as of December 30, 1996 among CVCA, the other investors party thereto and certain members of the Issuer's management. 4. Company's Amended and Restated 1996 Performance Stock Option Plan, as amended by Amendment No. 1 and the Modification to the Amended and Restated 1996 Performance Stock Option Plan, which are incorporated by reference to Exhibits 10.5, 10.24 and 10.28, respectively, in the issuer's Registration Statement on form S-1 (File No. 333-10491). 5. Incentive Stock Option dated as of May 6, 1998. SCHEDULE A Item 2 information for executive officers and directors of Chase Capital Corporation. SCHEDULE B Item 2 information for executive officers and directors of The Chase Manhattan Corporation. SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, Its General Partner By: /s/ Christopher C. Behrens ------------------------------------------------ Name: Christopher C. Behrens Title: A General Partner of Chase Capital Partners July 8, 1999 - ------------------------------ Date SCHEDULE A CHASE CAPITAL CORPORATION Executive Officers Chairman & Chief Executive Officer William B. Harrison, Jr.* President Jeffrey C. Walker** Executive Vice President Mitchell J. Blutt, M.D.** Vice President & Secretary Gregory Meridith* Vice President and Treasurer Elisa R. Stein** Assistant Secretary Robert C. Carroll* Assistant Secretary Anthony J. Horan* Assistant Secretary Denise G. Connors* Directors William B. Harrison, Jr.* Jeffrey C. Walker** - ------------------- *Principal occupation is employee and/or officer of Chase. Business address is c/o The Chase Manhattan Corporation, 270 Park Avenue, New York, New York 10017. **Principal occupation is employee of Chase and/or general partner of Chase Capital Partners. Business address is c/o Chase Capital Partners, 380 Madison Avenue, 12th Floor, New York, NY 10017. SCHEDULE B THE CHASE MANHATTAN CORPORATION Executive Officers* Walter V. Shipley, Chairman of the Board William B. Harrison, Jr., President and Chief Executive Officer Donald L. Boudreau, Vice Chairman James B. Lee, Jr., Vice Chairman Denis J. O'Leary, Executive Vice President Marc J. Shapiro, Vice Chairman Joseph G. Sponholz, Vice Chairman John J. Farrell, Director, Human Resources Frederick W. Hill, Director Corporate Marketing and Communication William H. McDavid, General Counsel Directors** Principal Occupation or Employment; Name Business or Residence Address - ---- ----------------------------------- Hans W. Becherer Chairman of the Board Chief Executive Officer Deere & Company 8601 John Deere Road Moline, IL 61265 Frank A. Bennack, Jr. President and Chief Executive Officer The Hearst Corporation 959 Eighth Avenue New York, New York 10019 Susan V. Berresford President The Ford Foundation 320 E. 43rd Street New York, New York 10017 M. Anthony Burns Chairman of the Board, President and Chief Executive Officer Ryder System, Inc. 2800 N.W. 82nd Avenue Miami, Florida 33166 - -------------------- * Principal occupation is executive officer and/or employee of The Chase Manhattan Bank. Business address is c/o The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017. Each executive officer of Chase is a U.S. citizen. ** Each of the persons named below is a citizen of the United States of America. H. Laurence Fuller Co-Chairman of the Board and Chief Executive Officer Amoco Corporation 200 East Randolph Drive Chicago, Illinois 60601 William H. Gray, III President and Chief Executive Officer The College Fund/UNCF 9860 Willow Oaks Corporate Drive P.O. Box 10444 Fairfax, Virginia 22031 William B. Harrison, Jr. President and Chief Executive Officer The Chase Manhattan Corporation 270 Park Avenue, 8th Floor New York, New York 10017-2070 Harold S. Hook Retired Chairman and Chief Executive Officer American General Corporation 2929 Allen Parkway Houston, Texas 77019 Helene L. Kaplan Of Counsel Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue - Room 29-72 New York, New York 10022 Thomas G. Labrecque Retired President and Chief Operating Officer The Chase Manhattan Corporation 270 Park Avenue New York, New York 10017 Henry B. Schacht Director and Senior Advisor E.M. Warburg, Pincus & Co., LLC 466 Lexington Avenue, 10th Floor New York, New York 10017 Walter V. Shipley Chairman of the Board The Chase Manhattan Corporation 270 Park Avenue New York, New York 10017 Andrew C. Sigler Retired Chairman of the Board and Chief Executive Officer Champion International Corporation One Champion Plaza Stamford, Connecticut 06921 John R. Stafford Chairman, President and Chief Executive Officer American Home Products Corporation 5 Giralda Farms Madison, New Jersey 07940 Marina v.N. Whitman Professor of Business Administration and Public Policy The University of Michigan School of Public Policy 411 Lorch Hall, 611 Tappan Street Ann Arbor, MI 48109-1220 EX-99.2 2 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Exhibit 2 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement") is dated as of May 28, 1999, among Guitar Center, Inc., a Delaware Corporation (the "Company"), and the Shareholders (as defined below). RECITALS: WHEREAS, the predecessor to the Company by merger, Guitar Center Management Company, Inc., a California corporation, entered into a Registration Rights Agreement (the "Original Registration Rights Agreement"), dated as of June 5, 1996 among it and the shareholders identified on the signature pages thereto governing the terms and conditions upon which the Company was obligated to register certain of its equity securities under the Securities Act (as defined below). WHEREAS, by operation of Rule 144 and Rule 144(k) promulgated under the Securities Act, the only remaining "Shareholders" subject to the Original Registration Rights Agreement are Chase Venture Capital Associates, L.P., Wells Fargo Small Business Investment Company, Inc., Weston Presidio Capital II, L.P., Larry Thomas, Marty Albertson, and certain trusts and other related entities associated with Messrs. Thomas and Albertson (collectively, the "Remaining Shareholders"). WHEREAS, pursuant to the terms of that certain Agreement and Plan of Merger (the "Merger Agreement"), dated as of May 13, 1999, between the Company, EMIC Acquisition Corporation, Musician's Friend, Inc. ("MFI") and the stockholders of MFI, each of whom is identified on Annex I thereto, the Company is issuing shares of its common stock to the former stockholders of MFI in a transaction exempt from registration under the Securities Act (all such shares of Common Stock to be issued pursuant to the Merger Agreement being referred to as the "MFI Shares"). Upon the terms and subject to the conditions of this Agreement, the Company desires to agree to register the MFI Shares for resale under the Securities Act. WHEREAS, the Remaining Shareholders along with the Company have the authority, pursuant to Section 18(f) of the Original Registration Rights Agreement, to amend that agreement, and desire to exercise that authority to amend and restate the Original Registration Rights Agreement in order to include the MFI Shares in the amended and restated agreement, thereby providing a single, unified agreement governing the registration obligations of the Company. AGREEMENT: NOW THEREFORE, in consideration of the premises and mutual covenants and obligations hereinafter set forth, the Company and the Shareholders hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Board" means the Board of Directors of the Company. "Business Day" means any day that is not a Saturday, Sunday or a day on which banking institutions in New York, New York are not required to be open. "Commission" means the Securities and Exchange Commission or any other governmental body or agency succeeding to the functions thereof. "Common Stock" means the common stock, par value $.01 per share, of the Company. "Demand Registration" means a registration requested by a Shareholder or group of Shareholders pursuant to Section 2 or Section 4. "Exchange Act" means the Securities Exchange Act of 1934 or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Majority Of Registering Shareholders" means, with respect to a registration that includes Registrable Shares, those Shareholders who, at the time in question, hold at least a majority of the Registrable Shares included or proposed to be included in such registration. "Majority Of Shareholders" means those Shareholders who at the time in question hold at least a majority of the Registrable Shares then held by all Shareholders. "Majority Of MFI Shareholders" means those MFI Shareholders who at the time in question hold at least a majority of the Registrable Shares then held by all Shareholders. "Material Transaction" means any material transaction in which the Company or any of its Subsidiaries proposes to engage or is engaged, including a purchase or sale of assets or securities, financing, merger, consolidation, tender offer, and with respect to which the Board reasonably has determined in good faith that compliance with this Agreement may reasonably be expected to either materially interfere with the Company's or such Subsidiary's ability to consummate such transaction in a timely fashion or require the Company to disclose material, non-public information prior to such time as it would otherwise be required to be disclosed. "MFI Shareholder" means a Shareholder who holds Restricted Shares that constitute MFI Shares. 2 "MOU" means that certain Amended and Restated Memorandum of Understanding and Stock Option Agreement dated as of December 30, 1996. "Other Securities" means at any time those shares of Common Stock or other securities convertible into, or exchangeable for, shares of Common Stock and which do not constitute Primary Shares or Registrable Shares. "Person" shall be construed broadly and shall include an individual, a partnership, a corporation, an association, a joint stock company, a limited liability company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Primary Shares" means at any time the authorized but unissued shares of Common Stock and shares of Common Stock held by the Company in its treasury or any security convertible into or exchangeable for unissued shares of Common Stock. "Prospectus" means the prospectus included in a Registration Statement, including any prospectus subject to completion, and any such prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Shares and, in each case, by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Public Offering" means the closing of a public offering of Common Stock pursuant to a Registration Statement declared effective under the Securities Act, except that a Public Offering shall not include an offering of securities to be issued as consideration in connection with a business acquisition or an offering of securities issuable pursuant to an employee benefit plan. "Registrable Shares" means Restricted Shares that constitute Common Stock. "Registration Date" means the date upon which the Registration Statement pursuant to which the Company shall have initially registered shares of Common Stock under the Securities Act for sale in a Public Offering shall have been declared effective by the Commission. "Registration Statement" shall mean any registration statement of the Company which covers any of the Registrable Shares and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Restricted Shares" means shares of Common Stock, and includes (i) shares of Common Stock which may be issued as a dividend or distribution, (ii) any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock, and (iii) any securities received in respect of the foregoing (including securities described in Section 13), in each case in clauses (i) through (iii) which at any time are held by the Shareholders. As to any particular Restricted Shares, such Restricted Shares shall cease to be Restricted Shares when (A) 3 they have been registered under the Securities Act, the Registration Statement in connection therewith has been declared effective and they have been disposed of pursuant to and in the manner described in such effective Registration Statement, (B) they, along with all Restricted Shares of a Shareholder, may be sold or distributed pursuant to Rule 144 by such Shareholder within a three-month period, (C) they have been otherwise transferred and new certificates or other evidences of ownership for them not bearing a restrictive legend and not subject to any stop transfer order or other restriction on transfer have been delivered by the Company or the issuer of other securities issued in exchange for the Restricted Shares, or (D) they have ceased to be outstanding. "Rule 144" means Rule 144 promulgated under the Securities Act or any successor rule thereto or any complementary rule thereto. "Securities Act" means the Securities Act of 1933 or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Shareholders" means, collectively, each of the Shareholders listed on the signature pages hereto, and includes any successor to, of Restricted Shares or transferee of Restricted Shares of, any such Person who or which agrees in writing to be treated as a Shareholder hereunder and to be bound by the terms and comply with all applicable provisions hereof (including without limitation any Person who may acquire shares of Common Stock pursuant to the MOU). "Subsidiary" means, with respect to any Person, any other Person of which the securities having a majority of the ordinary voting power in electing the board of directors (or other governing body), at the time as of which any determination is being made, are owned by such first Person either directly or through one or more of its Subsidiaries. 2. REQUIRED REGISTRATION. (a) Subject to Sections 2(b) and 2(d), if the Company shall be requested by (i) a Majority of Shareholders at any time or (ii) by a majority of MFI Shareholders at any time prior to the first anniversary of the date of this Agreement, to effect the registration under the Securities Act of Registrable Shares, the Company shall use its reasonable best efforts promptly to effect the registration under the Securities Act of the Registrable Shares which the Company has been so requested to register. (b) Promptly after receiving such request pursuant to Section 2(a) above, the Company shall provide written notice thereof to all Shareholders (other than the Shareholders that made the request pursuant to Section 2(a) above). Any Shareholder may, within 15 Business Days of the date of such notice by the Company, give written notice to the Company that such Shareholder wishes to participate in the proposed registration and shall specify the number of Registrable Shares such Shareholder desires to include in such registration. (c) Anything contained in Section 2(a) to the contrary notwithstanding, the Company shall not be obligated to effect any registration under the Securities Act pursuant to Section 2(a) except in accordance with the following provisions: 4 (i) the Company shall not be obligated to file and cause to become effective any Registration Statement during any period in which any other Registration Statement (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto) pursuant to which Primary Shares are to be or were sold has been filed and not withdrawn or has been declared effective within the prior 90 days; (ii) the Company may delay the filing or effectiveness of any Registration Statement for a period of up to 90 days after the date of a request for registration pursuant to this Section 2 if at the time of such request (A) the Company is engaged, or has fixed plans to engage within 90 days of the time of such request, in a firm commitment underwritten public offering of Primary Shares in which the holders of Registrable Shares may include Registrable Shares pursuant to Section 3 or (B) a Material Transaction exists at such time, provided that the Company may only so delay the filing or effectiveness of a particular Registration Statement once pursuant to this Section 2(c)(ii); (iii) at any time prior to the effectiveness of a Registration Statement, the Company may, in its sole discretion, convert a registration pursuant to Section 2 into a registration pursuant to Section 3, in which case the provisions (including those governing inclusion of shares) set forth in Section 3 shall apply and such registration so converted will not count as a registration pursuant to this Section 2; (iv) with respect to any registration pursuant to this Section 2, the Company may include in such registration any Primary Shares, Other Securities and/or other securities; provided, however, that if the managing underwriter advises the Company that the inclusion of all Registrable Shares, Primary Shares, Other Securities and/or other securities proposed to be included in such registration would interfere with the successful marketing (including pricing) of the Registrable Shares proposed to be included in such registration, then the number of Registrable Shares; Primary Shares, Other Securities and/or other securities proposed to be included in such registration shall be included in the following order: (A) FIRST, all Registrable Shares requested to be included in such registration by (1) the Majority of Shareholders or Majority of MFI Shareholders (as the case may be) who requested such registration pursuant to Section 2(a) and (2) the other Shareholders who requested the inclusion of their Registrable Shares in such registration pursuant to Section 2(b), pro rata among all such Shareholders based on the number of Registrable Shares owned by each such Shareholder; (B) SECOND, the Primary Shares; (C) THIRD, the Other Securities; and (D) FOURTH, other securities requested to be registered pursuant to agreements providing registration rights to other Persons; (v) at any time before the Registration Statement covering Registrable Shares becomes effective, the Shareholder or group of Shareholders which requested 5 such registration pursuant to Section 2(a) may request the Company to withdraw or not to file the Registration Statement; and (vi) the Company may, at its sole option, elect to satisfy a request for a Demand Registration pursuant to Section 2(a) on Form S-2 or Form S-3 promulgated under the Securities Act (or any successor forms thereto), if such forms are then available to the Company. (d) Notwithstanding any provision of this Agreement to the contrary, the Company shall not be obligated to register any MFI Shares under this Agreement (whether under Section 2, 3 or 4) except as follows: (i) forty percent (40%) of the MFI Shares shall constitute Registrable Shares for all purposes of this Agreement (the "Base Shares"); and (ii) MFI Shares in excess of the Base Shares may constitute Registrable Shares hereunder if, but only if, approved in advance by the Chairman of the Board of the Company in writing, it being understood that such approval may be granted or withheld by the Chairman in his sole, absolute and binding discretion, and which approval may be granted on any number of shares as determined by the Chairman. The right to register shall be pro rata among all MFI Shareholders; provided, however, that if any MFI Shareholder does not participate to the full extent of its pro rata share, then the participating MFI Shareholders shall have the right to register that amount of additional shares. The Base Shares must include the shares contained in the Tax Audit Escrow Fund (as defined in the Merger Agreement), which must also be the first shares of the Base Shares registered and sold hereunder. 3. PIGGYBACK REGISTRATION. If the Company at any time proposes for any reason to register (whether for itself or others) any of its securities under the Securities Act (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto) other than pursuant to Section 2 hereof, it shall promptly give written notice to the Shareholders of its intention to so register such shares and, upon the written request, delivered to the Company within 15 Business Days after the date of such notice by the Company, of the Shareholders to include in such registration Registrable Shares (which request shall specify the number of Registrable Shares proposed to be included in such registration), the Company shall use its reasonable best efforts to cause all such Registrable Shares to be included in such registration on the same terms and conditions as the securities otherwise being sold in such registration; provided, however, that if the managing underwriter advises the Company that the inclusion of any or all Registrable Shares and other securities requested to be included in such registration would materially interfere with the successful marketing (including pricing) of the Primary Shares or other securities proposed to be registered by the Company, then the number of Primary Shares, Registrable Shares, Other Securities and other securities proposed to be included in such registration shall be included in the following order: (a) FIRST, in the case of a registration proposed by the Company for its own account (including by operation of Section 2(c)(iii)), all securities proposed by the Company to be sold for its own account, or in the case of any securities initially proposed to be registered by the Company for the accounts of other Persons pursuant to the exercise of demand registration rights granted pursuant to an applicable registration rights agreement between the Company and 6 such other Person, the securities requested to be registered by such Person but only in such amount and to the extent required by such agreement; (b) SECOND, such Registrable Shares requested to be included in such registration pursuant to this Agreement and any securities required to be included in such registration by other Persons who have incidental registration rights, on a pro rata basis with respect to each type of security. 4. REGISTRATIONS ON FORM S-3. (a) Anything contained in Section 2 to the contrary notwithstanding, at such time as the Company shall have qualified for the use of Form S-3 promulgated under the Securities Act or any successor form thereto, each Shareholder (acting alone or with other Shareholders) shall have the right to request in writing registration of Registrable Shares on Form S-3 or such successor form, which request or requests shall (i) specify the number of Registrable Shares intended to be sold or disposed of and the holders thereof, (ii) state the intended method of disposition of such Registrable Shares and (iii) relate to Registrable Shares having an anticipated aggregate gross offering price (before underwriting discounts and commissions) of at least $5,000,000, and upon receipt of any such request, the Company shall use its reasonable best efforts promptly to effect the registration under the Securities Act of the Registrable Shares so requested to be registered; provided that the Company shall not be obligated to effect more than two registrations under the Securities Act pursuant to this Section 4(a) in any twelve month period. (b) Promptly after receiving such request pursuant to Section 4(a) above, the Company shall provide written notice thereof to all Shareholders (other than the Shareholder(s) that made the request pursuant to Section 4(a) above). Any Shareholder may, within 15 Business Days of the date of the notice from the Company, give written notice to the Company that such Shareholder wishes to participate in the proposed registration and shall specify the number of Registrable Shares such Shareholder desires to include in such registration. (c) The provisions of Section 2(c) are incorporated into this Section 4 by reference, with each reference to Section 2 (or any subsection or clause thereof) being a reference to this Section 4 (or the corresponding subsection or clause hereof). 5. HOLDBACK AGREEMENT. (a) If the Company at any time shall register its securities under the Securities Act for sale to the public pursuant to an underwritten offering (excluding a registration initiated pursuant to Section 4), to the extent the following restrictions are legally permitted, the Shareholders shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any securities of the Company similar to those being registered (other than securities included in such registration) without the prior written consent of the Company, for a period designated by the Company in writing to the Shareholders, which period shall not begin earlier than 10 days prior to the effectiveness of the Registration Statement pursuant to which such public offering shall be made and shall not last more than 90 days after the closing of the sale of securities pursuant to such Registration Statement. The Company shall 7 obtain the agreement of any Person permitted to sell securities in a registration to be bound by and to comply with this Section 5 with respect to such registration as if such Person was a Shareholder hereunder. The restriction contained in this paragraph may be enforced by the entry of stop transfer instructions with the Company's transfer agent. (b) If the Company at any time pursuant to Section 2 of this Agreement shall register under the Securities Act Registrable Shares held by Shareholders for sale to the public pursuant to an underwritten offering, the Company shall not, without the prior written consent of a Majority of Shareholders, effect any public sale or distribution of securities similar to those being registered, or any securities convertible into or exercisable or exchangeable for such securities (other than issuances pursuant to compensatory plans, issuances made in connection with acquisitions, issuances the Company is obligated to make pursuant to commitments made prior to such holdback period or securities included in such registration), for such period as shall be determined by the managing underwriters, which period shall not begin more than 10 days prior to the effectiveness of the Registration Statement pursuant to which such public offering shall be made and shall not last more than 60 days after the closing of the sale of shares pursuant to such Registration Statement. 6. PREPARATION AND FILING. (a) If and whenever the Company is under an obligation pursuant to the provisions of this Agreement to use its reasonable best efforts to effect the registration of, and keep effective a Registration Statement for, any Registrable Shares, the Company shall, as expeditiously as practicable: (i) use its reasonable best efforts to cause a Registration Statement that registers such Registrable Shares to become and remain effective for a period of 90 days (extended for such period of time as the Shareholders are required to discontinue disposition of Registrable Shares pursuant to Section 6(b) below) or until all of such Registrable Shares have been disposed of (if earlier); (ii) furnish, at least five Business Days before filing a Registration Statement that relates to the registration of such Registrable Shares, a Prospectus relating thereto or any amendments or supplements relating to such a Registration Statement or Prospectus, to one counsel (the "Shareholders' Counsel") selected by a Majority of Registering Shareholders, copies of all such documents proposed to be filed (it being understood that such five business day period need not apply to successive drafts of the same document proposed to be filed so long as such successive drafts are supplied to the Shareholders' Counsel in advance of the proposed filing by a period of time that is customary and reasonable under the circumstances); (iii) notify the Shareholders whose Registrable Shares are included therein of the effectiveness of such Registration Statement and prepare and promptly file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to (A) keep such Registration Statement effective for at least a period of 90 days (extended for such period of time as Shareholders are required to discontinue disposition of Registrable Shares 8 pursuant to Section 6(b) below) or until all of such Registrable Shares have been disposed of (if earlier), (B) correct any statements or omissions if any event with respect to the Company shall have occurred as a result of which any such Registration Statement or Prospectus as then in effect would include an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading, and (C) comply with the provisions of the Securities Act with respect to the sale or other disposition of such Registrable Shares; (iv) notify in writing the Shareholders' Counsel, and the Shareholders whose Registrable Shares may be included in such Registration Statement, promptly of (A) the receipt by the Company of any notification with respect to any comments by the Commission with respect to such Registration Statement or Prospectus or any amendment or supplement thereto or any request by the Commission for the amending or supplementing thereof or for additional information with respect thereto, (B) the receipt by the Company of any notification or written information with respect to the issuance or threatened issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or Prospectus or any amendment or supplement thereto or the initiation or threatening of any proceeding for that purpose (and the Company shall use its reasonable best efforts to prevent the issuance thereof or, if issued, to obtain its withdrawal) and (C) the receipt by the Company of any notification with respect to the suspension of the qualification of such Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purposes; (v) use its reasonable best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of such domestic jurisdictions as the Shareholders reasonably request and do any and all other acts and things which may be reasonably necessary or advisable to enable the Shareholders to consummate the disposition in such jurisdictions of the Registrable Shares owned by the Shareholders; provided, however, that the Company will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it would not otherwise be required to do so but for this clause (v) or to provide any material undertaking or make any changes in its By-laws or Certificate of Incorporation which the Board determines to be contrary to the best interests of the Company; (vi) furnish to the Shareholders holding such Registrable Shares such number of copies of a Prospectus, including a preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Shareholders may legally require and may reasonably request in order to facilitate the public sale or other disposition of such Registrable Shares; (vii) use its reasonable best efforts to cause such Registrable Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Shareholders holding such Registrable Shares to consummate the disposition of such Registrable Shares; 9 (viii) notify the Shareholders holding such Registrable Shares on a timely basis at any time when a Prospectus relating to such Registrable Shares is required to be delivered under the Securities Act within the appropriate period mentioned in clause (i) of this Section 6(a), of the happening of any event as a result of which the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and prepare and furnish to such Shareholders a reasonable number of copies of, and file with the Commission, a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the offerees of such shares, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ix) subject to the execution of confidentiality agreements in form and substance satisfactory to the Company, make available upon reasonable notice and during normal business hours, for inspection by the Shareholders holding Registrable Shares requested to be included in such registration, any underwriter participating in any disposition pursuant to such Registration Statement and any attorney, accountant or other agent retained by the Shareholders or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), and cause the Company's officers, directors and employees to supply all information (together with the Records, the "Information") reasonably requested by any such Inspector, in each case as shall be reasonably necessary to enable them to exercise their due diligence responsibility in connection with such Registration Statement; provided, however, that any of the Information that the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, shall not be disclosed by the Inspectors unless (A) the disclosure of such Information is necessary to avoid or correct a misstatement or omission in the Registration Statement or Prospectus, (B) the release of such Information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or, upon the written advice of counsel, is otherwise required by law, or (C) such Information has been made generally available to the public, and the Shareholders agree that they will, upon learning that disclosure of such Information is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Information deemed confidential; (x) use its reasonable best efforts to obtain from its independent certified public accountants "cold comfort" letters in customary form and at customary times and covering matters of the type customarily covered by cold comfort letters to the extent such a letter may be obtained under then-prevailing guidelines applicable to independent certified public accountants; (xi) use its reasonable best efforts to obtain from its counsel an opinion or opinions in customary form naming the Shareholders as additional addressees or parties who may rely thereon; 10 (xii) provide a transfer agent and registrar (which may be the same entity and which may be the Company) for such Registrable Shares; (xiii) issue to any underwriter to which the Shareholders holding such Registrable Shares may sell shares in such offering certificates evidencing such Registrable Shares; (xiv) list such Registrable Shares on any national securities exchange on which any shares of the Common Stock are listed or, if the Common Stock is not listed on a national securities exchange, use its reasonable best efforts to qualify such Registrable Shares for inclusion on the Nasdaq Stock Market; (xv) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission and make available to its securityholders, as soon as reasonably practicable, earnings statements (which need not be audited) covering a period of 12 months beginning within three months after the effective date of the Registration Statement, which earnings statements shall satisfy the provisions of Section 1 l(a) of the Securities Act; and (xvi) use its reasonable best efforts to take all other steps necessary to effect the registration of, and maintain an effective Registration Statement with respect to, such Registrable Shares contemplated hereby. (b) Each holder of the Registrable Shares, upon receipt of any notice from the Company of any event of the kind described in Section 6(a)(viii) or Section 7 hereof, shall forthwith discontinue disposition of the Registrable Shares pursuant to the Registration Statement covering such Registrable Shares until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(a)(viii) hereof, and, if so directed by the Company, such holder shall deliver to the Company all copies, other than permanent file copies then in such holder's possession, of the most recent Prospectus covering such Registrable Shares at the time of receipt of such notice. 7. SUSPENSION. Anything contained in this Agreement to the contrary notwithstanding, the Company may, by notice in writing to each holder of Registrable Shares to which a Prospectus relates, require such holder to suspend, for up to 90 days (the "Suspension Period"), the use of any Prospectus included in a Registration Statement filed under Section 2, 3 or 4 hereof if a Material Transaction exists that would require an amendment to such Registration Statement or supplement to such Prospectus (including any such amendment or supplement made through incorporation by reference to a report filed under Section 13 of the Exchange Act). The Company may (but shall not be obligated to) withdraw the effectiveness of any Registration Statement subject to this provision. 8. EXPENSES. All expenses (other than underwriting discounts and commissions relating to the Registrable Shares, as provided in the last sentence of this Section 8) incurred by the Company 11 in complying with Section 6, including, without limitation, all registration and filing fees (including all expenses incident to filings with the National Association of Securities Dealers, Inc.), fees and expenses of complying with securities and blue sky laws, printing expenses, fees and expenses of the Company's counsel and accountants and fees and expenses of the Shareholders' Counsel, shall be paid by the Company; provided, however, that all underwriting discounts and selling commissions applicable to the Registrable Shares and Other Shares shall be borne by the holders selling such Registrable Shares and Other Shares, in proportion to the number of Registrable Shares and Other Shares sold by each such holder. 9. INDEMNIFICATION. (a) In connection with any registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless, to the fullest extent permitted by law, each holder of Registrable Shares, each underwriter, broker or any other Person acting on behalf of the holders of Registrable Shares and each other Person, if any, who controls any of the foregoing Persons within the meaning of the Securities Act (each such indemnified Person being referred to herein as an "Indemnified Person") against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof), to which any of the foregoing Persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or allegedly untrue statement of a material fact contained in or incorporated by reference in the Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary Prospectus or final Prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any Prospectus, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or any violation by the Company of the Securities Act or state securities or blue sky laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration or qualification under such state securities or blue sky laws; and shall promptly reimburse the Indemnified Persons for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to any such Indemnified Person to the extent that any such loss, claim, damage, liability or action (including any legal or other expenses incurred) arises out of or is based upon an untrue statement or allegedly untrue statement or omission or alleged omission made in said Registration Statement, preliminary Prospectus, final Prospectus, amendment, supplement or document incident to registration or qualification of any Registrable Shares in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Indemnified Person specifically for use in the preparation thereof; provided further, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, allegedly untrue statement, omission or alleged omission made in any preliminary Prospectus but eliminated or remedied in the final 12 Prospectus (filed pursuant to Rule 424 of the Securities Act), such indemnity agreement shall not inure to the benefit of any Indemnified Person from whom the Person asserting any loss, claim, damage, liability or expense purchased the Restricted Shares which are the subject thereof, if a copy of such final Prospectus had been made available to such Indemnified Person and such final Prospectus was not delivered to such Person with or prior to the written confirmation of the sale of such Registrable Shares to such Person. (b) In connection with any registration of Registrable Shares under the Securities Act pursuant to this Agreement, each holder of Registrable Shares being registered shall, severally and not jointly, to the fullest extent permitted by law, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9(a) above) the Company, each director of the Company, each officer of the Company who shall have signed such Registration Statement, each agent, underwriter, broker or other Person acting on behalf of the Company, each other holder of Registrable Shares or Other Shares and each Person who controls any of the foregoing Persons within the meaning of the Securities Act with respect to any statement or omission from such Registration Statement, any preliminary Prospectus or final Prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or such underwriter by or on behalf of such holder specifically for use in connection with the preparation of such Registration Statement, preliminary Prospectus, final Prospectus, amendment, supplement or document; provided, however, that the maximum amount of liability in respect of such indemnification shall be limited, in the case of each holder of Registrable Shares, to an amount equal to the net proceeds actually received by such holder from the sale of Registrable Shares effected pursuant to such registration. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in Section 9(a) or (b), such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the indemnified party's failure to give such notice shall not release, relieve or in any way affect the indemnifying party's obligation hereunder to indemnify the indemnified party unless and only to the extent that the rights of the indemnifying party are prejudiced thereby. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its selection so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded (based on the written advice of counsel) that there may be one or more legal or equitable defenses available to such indemnified party which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 9, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnifying party shall reimburse such indemnified party and any Person controlling such indemnified party for that portion of the fees and expenses reasonably incurred by counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section 9. 13 (d) If the indemnification provided for in this Section 9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein (other than as a result of the applicability of the two provisos in Section 9(a)), then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indenmifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 10. UNDERWRITING AGREEMENT. (a) Notwithstanding the provisions of Sections 5, 6, 8 and 9, to the extent that the Company and at least the Majority of Registering Shareholders shall enter into an underwriting or similar agreement that contains provisions which conflict with any provision of any such Sections, the provisions contained in such agreement shall control with respect to such underwritten offering. (b) If any registration pursuant to Section 2 is requested to be an underwritten offering, the Company shall negotiate in good faith to enter into a reasonable and customary underwriting agreement with the underwriters thereof. The Company shall be entitled to receive indemnities from lead institutions, underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement and to the extent customarily given their role in such distribution. (c) No Shareholder may participate in any registration hereunder that is underwritten unless such Shareholder agrees to (i) sell such Shareholder's Registrable Shares proposed to be included therein on the basis provided in any underwriting arrangements approved by the Company and the Majority of Registering Shareholders (which approval shall not be unreasonably withheld by such Shareholders) and (ii) as expeditiously as possible, notify the Company of the occurrence of any event concerning such Shareholder as a result of which the Prospectus relating to such registration contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 11. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable Shares are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election by written notice to the Company effective upon receipt by the Company, be treated as a Shareholder for purposes of any request 14 or other action by any Shareholder pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Shares held by any Shareholder contemplated by this Agreement. If the beneficial owner of any Registrable Shares so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Shares. Prior to receipt by the Company of written notice contemplated hereby, any action taken by any nominee shall be binding upon any such beneficial owner. 12. INFORMATION BY HOLDER. The Shareholders shall furnish to the Company such written information regarding the Shareholders and the distribution proposed by the Shareholders as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 13. EXCHANGE ACT COMPLIANCE. From the Registration Date or such earlier date as a Registration Statement filed by the Company pursuant to the Exchange Act relating to any class of the Company's securities shall have become effective, the Company shall comply with all of the reporting requirements of the Exchange Act applicable to it and shall comply with all other public information reporting requirements of the Commission which are conditions to the availability of Rule 144 for the sale of the Common Stock. The Company shall cooperate with the Shareholders in supplying such information as may be necessary for the Shareholders to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of Rule 144. 14. MERGERS, Etc. The Company shall not, directly or indirectly, enter into any merger, consolidation or reorganization in which the Company shall not be the surviving corporation unless the surviving corporation shall, prior to such merger, consolidation or reorganization, agree in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Shares" shall be deemed to include the shares of common stock, if any, that the Shareholders would be entitled to receive in exchange for Common Stock under any such merger, consolidation or reorganization; provided, however, that, to the extent the Shareholders receive securities that are by their terms convertible into shares of common stock of the issuer thereof, then only such shares of common stock as are issued or issuable upon conversion of said convertible securities shall be included within the definition of "Registrable Securities." 15. NEW CERTIFICATES. As expeditiously as possible after the effectiveness of any Registration Statement filed pursuant to this Agreement, the Company will deliver in exchange for any legended certificate evidencing Restricted Shares so registered, new stock certificates not beating any restrictive legends, provided that in the event less than all of the Restricted Shares evidenced by such legended certificate are registered, the holder thereof agrees that a new certificate evidencing such unregistered shares will be issued beating the appropriate restrictive legend. 15 16. NO CONFLICT OF RIGHTS; SELECTION OF UNDERWRITER. The Company shall not, at any time after the date hereof, grant any registration rights that conflict with, or have any priority over, the registration rights granted hereby. In any Public Offering, the managing underwriter shall be a nationally recognized investment banking finn chosen by the Board. 17. TERMINATION. This Agreement shall terminate and be of no further force or effect when there shall no longer be any Registrable Shares outstanding. 18. MISCELLANEOUS. (a) Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and the Shareholders and, subject to Section 18(b), the respective successors and assigns of the Company and the Shareholders. Except as otherwise expressly provided in Sections 2, 3 and 5, this Agreement is not intended to create any third party beneficiaries. (b) Assignment. Each Shareholder may assign its rights hereunder to any purchaser or transferee of Registrable Shares; provided, however, that such purchaser or transferee shall, as a condition to the effectiveness of such assignment, be required to execute a counterpart to this Agreement agreeing to be treated as an Shareholder, whereupon such purchaser or transferee shall have the benefits of and shall be subject to the restrictions contained in this Agreement as if such purchaser or transferee was originally included in the definition of a Shareholder and had originally been a party hereto. For purposes of this Agreement, any trust, charitable foundation, family partnership or similar entity that is a transferee of Mr. Thomas or Mr. Albertson shall be considered a Shareholder under this Agreement provided they counterpart of this Agreement as contemplated by the immediately preceding sentence. (c) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (d) Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous arrangements or understandings with respect hereto and thereto. 16 (e) Notices. All communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy, nationally-recognized overnight courier guaranteeing next day delivery or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at its address below or such other address as such party may hereafter designate in writing: if to the Company, to: Guitar Center, Inc. 5155 Clareton Drive Agoura Hills, CA 91362 Attention: Chief Executive Officer Telecopier: (818) 735-8833; with copies to: Guitar Center, Inc. 5155 Clareton Drive Agoura Hills, California 91362 Attention: General Counsel Telecopier: (818) 735-8833 and to: Latham & Watkins 135 Commonwealth Drive Menlo Park, California 94025 Attention: Anthony J. Richmond, Esq. Telecopier: (650) 463-2600 and if to any Shareholder, to such Shareholder at the address indicated on the signature pages hereto. All such notices, requests, consents and other communications shall be deemed to have been given and received (i) in the case of personal delivery or delivery by telecopy, on the date of such delivery, (ii) in the case of dispatch by nationally-recognized overnight courier, on the next Business Day following such dispatch and (iii) in the case of mailing, on the fifth Business Day after the posting thereof. (f) Modifications; Amendments; Waivers. The terms and provisions of this Agreement may not be modified or amended, nor may any provision be waived, except pursuant to a writing signed by the Company and the Majority of Shareholders; provided, however, that no such modification, amendment or waiver that would treat any Shareholder in a non-ratable, discriminatory manner shall be made without the prior written consent of such Shareholder; and provided, further, that a modification, amendment or waiver to Section 2(d) shall require only the consent of the Company and the Majority of MFI Shareholders proposing to participate in a given registration. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the fight of such 17 party thereafter to enforce each and every provision of this Agreement in accordance with its terms. The Shareholders, to the fullest extent permitted by applicable laws, release the members of the Board from any and all claims for breach of fiduciary duty arising out of the application of this Section 18(1). (g) Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (h) Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. (i) Governing Law. This agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice of law or conflicting provision or rule that would cause the laws of any jurisdiction other than the State of Delaware to be applied. In furtherance of the foregoing, the internal laws of the State of Delaware will control the interpretation and construction of this agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. (j) Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. (k) Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa. (l) Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (m) Approval of Amendment and Restatement. By execution of this Agreement, the undersigned, constituting all holders of Registrable Securities under the Original Registration Rights Agreement, hereby approve the amendment and restatement of that agreement made by this Agreement. (Signature pages follow) 18 IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Registration Rights Agreement on the date first written above. GUITAR CENTER, INC. By: ------------------------------------ Larry Thomas Co-Chief Executive Officer CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners Its General Partner By: ------------------------------------ A General Partner Address for Notice: 380 Madison Avenue, 12th Floor New York, New York 10017 Attention: Chief Administrative Officer Telecopy: (212) 622-3101 WESTON PRESIDIO CAPITAL II, L.P. By: Weston Presidio Capital Management II, L.P., Its General Partner By: ------------------------------------ Michael P. Lazarus General Partner Address for Notice: 343 Sansome Street, Suite 1210 San Francisco, California 94104 Attention: Michael P. Lazarus Telecopy: (415) 398-0990 WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC. By: ------------------------------------ Steven W. Burge Managing Director Address for Notice: Norwest Equity Partners 333 South Grand Avenue, Suite 1200 Los Angeles, California 90071 Attention: Steven W. Burge Telecopy: (213) 621-2623 ---------------------------------------- Larry Thomas Address for Notice: -------------------------- -------------------------- Telecopy: ----------------- ---------------------------------------- Marty Albertson Address for Notice: -------------------------- -------------------------- Telecopy: ------------------------------- AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THE MFI STOCKHOLDERS AMAZING GRACE FOUNDATION By: ------------------------------------ Robert V. Eastman Trustee By: ------------------------------------ DeAnna L. Eastman Trustee THE EMMANUEL FOUNDATION By: ------------------------------------ Allen J. Dinardi Trustee By: ------------------------------------ Sheraine Dinardi Trustee MIDAS TOUCH INVESTMENTS TRUST By: ------------------------------------ Robert V. Eastman Trustee By: ------------------------------------ DeAnna L. Eastman Trustee STERLING INVESTMENTS TRUST By: ------------------------------------ Allen J. Dinardi Trustee By: ------------------------------------ Sheraine Dinardi Trustee SYRINGA INVESTMENTS TRUST By: ------------------------------------ Maxine E. Jackson Trustee By: ------------------------------------ Robert V. Eastman Trustee EIGER MOUNTAIN REAL ESTATE TRUST By: ------------------------------------ Robert V. Eastman Trustee By: ------------------------------------ DeAnna L. Eastman Trustee PROMISE LAND REAL ESTATE DEVELOPMENT TRUST By: ------------------------------------ Allen J. Dinardi Trustee By: ------------------------------------ Shemine Dinardi Trustee MUSICIAN'S FRIEND TRUST By: ------------------------------------ Robert V. Eastman Trustee By: ------------------------------------ DeAnna L. Eastman Trustee By: ------------------------------------ Allen J. Dinardi Trustee EX-99.3 3 AMENDED AND RESTATED MEMORANDUM OF UNDERSTANDING AND STOCK OPTION AGREEMENT Exhibit 3 THIS AMENDED AND RESTATED MEMORANDUM OF UNDERSTANDING AND STOCK OPTION AGREEMENT (the "Agreement") is entered into effective as of December 30, 1996, by and among the officers and other key managers of GUITAR CENTER, INC. identified on the signature pages hereto (collectively, "Management") and CHASE VENTURE CAPITAL ASSOCIATES, L.P. ("CVCA"), WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY ("Wells") and WESTON PRESIDIO CAPITAL II, L.P. ("Weston" and, collectively with CVCA and Wells, the "Funds"). Neither this Agreement nor the Units issuable upon exercise hereof have been registered under the Securities Act of 1933, as amended, and may not be pledged, hypothecated, sold, transferred or otherwise disposed of in the absence of an effective registration under such Act or an effective exemption therefrom and otherwise in compliance with this Agreement and the Stockholders Agreement (as defined herein). 1. Defined Terms. As used herein, the following terms shall have the following respective meanings: "Common Stock" shall mean the common stock, par value $.01 per share, of the Company. "Company" shall mean Guitar Center, Inc., a Delaware corporation, and any successor thereto. "Junior preferred Stock" shall mean the Junior Preferred Stock, par value $.01 and liquidation preference $100 per share. "Unit" shall mean an investment unit consisting of (i) one share of Common Stock and (ii) 0.99 share of Junior Preferred Stock. 2. Grant of options. The Funds, severally and not jointly, hereby grant to Management the option to acquire an aggregate of 30,188.68 Units presently held by them (the "Options"), in each case for an exercise price of $39.75 per Unit in cash (the "Exercise Price"). Such Options are granted by the Funds as follows: OPTIONS ------- CVCA 22,641.52 Wells 4,312.66 Weston 3,234.50 -------- 30,188.68 Such Options are granted by the Funds to Management in accordance with the schedule attached hereto as Exhibit A. Each such grant shall, to the extent mathematically possible, be deemed granted by each Fund to each member of Management in the same ratio as granted by the Funds (i.e., 75.00% by Chase, 14.29% by Wells and 10.71% by Weston). At the election of the Funds, any delivery of Units or other securities hereunder may be rounded to the nearest whole share. Each such Option shall be exercisable upon the first to occur of (i) receipt of the approval, if any, required under the Stockholders Agreement (as defined) as contemplated by Section 10 or (ii) a Qualified Public Offering (as defined in the Stockholders Agreement) and shall be exercisable at any time thereafter through and including 5:00 p.m., Los Angeles time, on December 30, 2001 (the "Expiration Date"); provided, however, that Options under this Agreement (i) may only be exercised on two separate occasions, (ii) may only be exercised by written notice of members of Management owning not less than 66-2/3% of the unexercised Options as identified on Exhibit A and (iii) must be exercised pro rata by each member of Management. Such Optione shall be exercised by delivery of the relevant Exercise Price in cash and written notice of exercise to the Funds and the members of Management who did not initiate such exercise pursuant to the procedures provided in Section 14 (the "Exercise Notice"). The Exercise Notice shall also indicate the time and place of the closing of the exercise, which time and place shall be reasonably acceptable to the Funds. Such notice shall be irrevocable, except that closing may be conditioned upon the consummation of a related public offering or a sale of the Company, in which event the such exercise shall be deemed not to be effective if such public offering or sale of the Company is not consummated. The express intention of the foregoing provisions is to require that the Options granted hereunder be exercised on no more than two separate instances and that each such exercise be pro rata among each member of Management and each Fund. 3. No Transfer. The Options granted hereby may not, directly or indirectly, be transferred, conveyed, assigned, pledged, hypothecated or otherwise disposed of by any member of Management without the prior written consent of each Fund (which may be granted or withheld in each such person's discretion); provided, however, that the rights granted hereby may be exercised by any legatee, devisee, heir or other transferee upon the death of any member of Management. 4. Stock Dividends, Splits, Reclassifications, etc. The number of Units subject to the Options granted herein, as well as the related Exercise Price, shall be proportionally adjusted from time to time, as appropriate, to give effect to any, stock split, stock dividend, reclassification, split-up, split-off, recapitalization, merger or other similar transaction involving the Common Stock or Junior Preferred Stock of the Company, as the case may be. Notwithstanding the foregoing, no adjustments shall be made for any distribution of cash or property in respect of the Units prior to exercise of the related Option. 5. Reservation; No Liens. Until the first to occur of the exercise of all Options granted hereunder or the earlier occurrence of the Expiration Date, the Funds shall at all times keep available, free and clear of any liens, charges, security interests or other adverse claim, the number of Units (or other securities, if required by any adjustment made under Section 4) necessary to satisfy its obligations hereunder. 2 6. Consideration. The Funds have granted the Options in consideration for the payment by the members of Management of an aggregate of $100 and other valuable consideration, the receipt of which is hereby acknowledged. Without limiting the generality of the foregoing, no member of Management is obligated to provide any future services to any Fund or to the Company in connection with the grant or exercise of the Options. 7. Several Obligations; Limitations. The obligations of the Funds hereunder to sell the shares covered by this Agreement to the members of Management as identified on Exhibit A, shall be several, not joint. Notwithstanding anything to the contrary herein, under no circumstance shall any of CVCA, Wells or Weston be required to sell to any member of Management more than the respective number of Units identified in the table to Section 2 multiplied by such person's pro rata interest therein as identified on Exhibit A, subject to adjustment as provided in Section 4. The foregoing obligations shall be non-recourse obligations of each Fund. 8. Default on Exercise. Should any member of Management default in the payment of the Exercise Price upon the exercise of any Options in accordance with this Agreement and any related Exercise Notice, such Options shall thereupon be deemed forfeited by such person and shall be exercised by the other members of Management pro rata in accordance with Exhibit A. 9. Restrictions on Shares. Each member of Management, severally and not jointly, acknowledges that they are not relying on the Funds or the Company for any investment, accounting, tax or legal advice in connection with this Agreement and that each such person has been advised to seek independent counsel on such matters. 10. Representations to the Funds. In order to document the compliance by the Funds with applicable federal and state securities laws, each member of Management, severally and not jointly, hereby confirms to each Fund that: (a) Each undersigned member of Management is acquiring the Options and the underlying Units for the undersigned's own account as principal, for investment purposes only, and not with a view to, or for, resale, distribution or fractionalization thereof in contravention of applicable law, and no other person has or will have a direct or indirect beneficial interest in such Units. (b) Each undersigned member of Management: (i) understands that the offering and sale of the Options and the underlying Units is intended to be a transaction not involving any public offering exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and the rules promulgated by the Securities and Exchange Commission thereunder, that neither the Options nor the underlying Units have been registered under the Securities Act or any state securities laws, and that any certificates representing the Units will continue to bear the legends identified in Section 7(a) of the Stockholders Agreement for so long as such legends are legally required; (ii) understands and acknowledges that there are substantial risks of loss of investment involved in an investment in the Units, and that the investment in the Units is 3 an illiquid investment and the undersigned must bear the economic risk of investment in the Units for an indefinite period of time, and the undersigned represents and warrants that he has the financial ability to bear the economic risk of his investment, has adequate means for providing for his current needs and possible contingencies and has no need for liquidity with respect to his investment in the Units and that, at this time, he could bear a complete loss of his investment therein; (iii) understands that there is no established market for the Units and there can be, and has been, no assurance that a public market for such interests will develop either before or after any exercise of the Options; (iv) has such knowledge and experience in financial and business matters, including investments of the type represented by the Units, as to be capable of evaluating the merits of investment in the Company represented by the Units; (v) is familiar with the business and affairs of the Company; and (vi) has not been furnished by the Funds with any oral representation, warranty or information in connection with the Options or the Units. (c) Each undersigned member of Management, severally and not jointly, recognizes that he may have no control regarding when the Options are exercised, will be required at such time to pay the Exercise Price or forfeit the underlying Option, will incur a significant income tax liability at such time of exercise and has been urged to obtain independent counsel regarding such matters as set forth in Section 9. Further, each member of Management acknowledges that each Fund would, as of the date of this Agreement, likely be considered an "affiliate" of Guitar Center, Inc. for purposes of the federal securities laws and that such status, under present law, will prevent the commencement of the "holding period" of the Units provided for in Rule 144(d) under the Securities Act until the related Option is exercised (potentially resulting in a significant delay in the ability to resell such Units in the public market, if any). (d) Each undersigned member of Management, severally and not jointly, further represents and warrants that (i) the undersigned is empowered and authorized to enter into this Agreement, (ii) this Agreement is valid and binding upon undersigned and is enforceable against the undersigned in accordance with its terms (subject to the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally and subject to general principles of equity), and (iii) this Agreement does not conflict with any law, court or administrative order or material agreement to which the undersigned is a party or by which any of its assets may be bound. The foregoing acknowledgements, representations and agreements shall survive the Closing Date. As a condition to the exercise of any Options, the Funds may require that each member of Management confirm in writing the foregoing representations and warranties as well as the acknowledgement set forth in Section 9 and otherwise require that such sale be in compliance with all applicable securities laws and such compliance be documented to the reasonable satisfaction of the Funds. 4 11. Binding Agreement. Subject to Section 3 hereof, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors, assigns, personal representatives, heirs and legatees. 12. Conforming Waiver Under Stockholders Agreement. To the extent that the grant of the Options hereunder is deemed a "Transfer" as that term is used in the Stockholders Agreement, dated as of June 5, 1996 (the "Stockholders Agreement"), or if the exercise thereof shall occur prior to the termination of the transfer restrictions contained in Stockholders Agreement, the parties hereto, which represent holders of the "Requisite Stockholders Shares" as defined thereunder, hereby consent to the treatment of the transactions contemplated hereby as a "Permitted Transfer" pursuant to Section 5 thereof and agree to use their respective best efforts to cause such waiver to be approved by the Company. The consent and agreements provided herein shall apply in a similar manner in the event that any other stockholder of the Company elects to grant one or more comparable options to executive management of the Company (i.e., any such transfer shall also be treated as a "Permitted Transfer," and the related Units will continue to be subject to the Stockholders Agreement in the hands of Management). In all other respects, the Stockholders Agreement shall remain in full force and effect with respect to the Units. Upon request, each member of Management, severally and not jointly, will execute the appropriate written joinder agreement required by Section 5 of the Stockholders Agreement. 13. Conforming Assignment of Rights under the Registration Rights Agreement. In connection with the exercise or anticipated exercise of any of the Options, the Funds shall, to the full extent permitted thereby, assign to the members of Management all rights held by the Funds under the Registration Rights Agreement, dated as of June 5, 1996, by and among the Company and the stockholders identified therein (the "Registration Rights Agreement"), with respect to the "Registrable Shares,' to be transferred. As a condition to any such assignment, each member of Management, severally and not jointly, agrees to make the written undertaking required by Section 18(b) of the Registration Rights Agreement to the effect that such shares, in their hands, continue to be entitled to the benefits of, and subject to the obligations of, such agreement. The Funds and the members of Management will cooperate fully to effect such assignment. 14. Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, postage prepaid and addressed (a) to CVCA,' Wells or Weston at the address shown for such party on the signature pages hereof and (b) to any member of Management at the principal executive office of the Company. Such address may changed by any party hereto by the giving of written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. 15. Amendments. This Agreement may be amended at any time by the written agreement and consent of each of the Funds and by the members of Management holding not less than 66-2/3% of the unexercised Options as set forth on Exhibit A. 5 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to principles of conflicts of laws. 17. Mutual Waiver of Jury Trial. Each party hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, trial by jury in any suit, action or proceeding arising hereunder. 18. Withholdining Taxes. In the event that the Company determines that it is required to withhold federal, state or local income taxes as a result of the exercise of any Options, each member of Management, severally and not jointly, shall make arrangements reasonably satisfactory to the Company to enable the Company to satisfy such requirements. 19. Entire Agreement. This Agreement constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. Without limiting the generality of the foregoing, this Agreement supersedes any and all prior agreements or other understandings between the Funds and any member of Management regarding the grant of options by the Funds to any such person, each of which is hereby terminated without any remaining liability thereunder. This Agreement shall have no effect on any other arrangements that any member of Management may have with the Company regarding issuance of stock of the Company. 20. Further Assurances. Each party hereto shall do and perform or cause to be done and performed all further acts and things and shall execute and deliver all other agreements, certificates, instruments and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. Upon request, each member of Management shall deliver a written spousal consent, in form and substance satisfactory to the Funds, acknowledging and agreeing to the provisions of this Agreement. 21. No Rights as a Stockholder. No member of Management shall be, nor have any rights or privileges of, a stockholder of the Company with respect to any shares purchasable upon exercise of any Option unless and until certificates representing such shares have been duly transferred by the Funds. At all times prior thereto, the Funds, as the case may be, shall be the record holders of such shares with sole right to take any action with respect thereto as any such Fund shall choose and which is not in contravention of this Agreement. 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. (Signature Pages Follow) 6 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners, General Partner By: ---------------------------------- General Partner 380 Madison Avenue, 12th Floor New York, New York 10017 Attn: Chief Administrative Officer WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC. By: ---------------------------------- Steven W. Burge Managing Director 333 South Grand Avenue 12th Floor Los Angeles, California 90071 WESTON PRESIDIO CAPITAL II, L.P. By: Weston Presidio Capital Management II, L.P. Its General Partner By: ---------------------------------- Michael P. Lazarus General Partner 343 Sansome Street Suite 1210 San Francisco, California 94104 Consent to Section 10 is hereby confirmed: CBCAPITAL INVESTORS, INC. By: ---------------------------------- Authorized Signatory MANAGMENT: ---------------------------------- Larry Thomas ---------------------------------- Marty Albertson ---------------------------------- Barry Soosman ---------------------------------- Bruce Ross ---------------------------------- Mark Laughlin ---------------------------------- George Lampos ---------------------------------- Dave Angress ---------------------------------- Greg Bennett ---------------------------------- Peter Schuelzky ---------------------------------- Marty Kloska ---------------------------------- Don Kelsey 8 ---------------------------------- Richard Pidanick ---------------------------------- Bill McGarry ---------------------------------- Rod Barger ---------------------------------- Dave DiMartino ---------------------------------- Andrew Heyneman ---------------------------------- Max Galster 9 EXHIBIT A: [TO COME] 10 GUITAR.EX EXHIBIT A: Units Available: 30,188,68 OPTIONS HELD BY MANAGEMENT NAME UNITS PERCENT - ---------------------------- -------------------- ----------------------- Larry Thomas 11,949.665 39.583% Marty Albertson 11.949.665 39.583% Barry Soosman 419.290 1.389% Bruce Ross 419.290 1.389% Mark Laughlin 419.290 1.389% George Lampos 419,290 1.389% Dave Angress 419.290 1.389% Greg Bennett 419.290 1.389% Peter Schuelzky 419.290 1.389% Marty Kloska 419.290 1.389% Don Kelsey 419.290 1.389% Richard Pidanick 419.290 1.389% Bill McGarry 419.290 1.389% Rob Barger 419.290 1.389% Dave DiMartino 419.290 1.389% Andrew Heyneman 419.290 1.389% Mark Galster 419.290 1.389% -------------------- ----------------------- TOTALS 30,188.680 100.000% ==================== ======================= This Exhibit shall be appropriately updated after the first exercise of the Agreement in the event that less than all Options are exercised at that time. 11 AMENDMENT AND CONSENT Effective as of November 9, 1998 Reference is made to that certain Amended and Restated Memorandum of Understanding and Stock Option Agreement dated as of December 30, 1996 (the "Stock Option"). Capitalized but undefined terms shall have the meanings provided in the Stock Option. It is hereby confirmed that the Stock Option is amended to delete the entry for Greg Bennett on Exhibit A to the Stock Option and to hereafter reduce the number of Units covered by the Stock Option from 30,188.68 to 29,769.39. The obligations of CVCA, Wells and Weston set forth in Section 2 of the Stock Option shall be proportionately reduced and the terminated options shall not be reissued. Except for the termination of the rights of Greg Bennett as provided herein, the Stock Option remains in full force and effect. The miscellaneous provisions contained in Sections 16, 17, 19, 20 and 22 shall apply to this Amendment and Consent. IN WITNESS WHEREOF, the undersigned have duly executed this Amendment and Consent as required by Section 15 of the Stock Option, effective as of the first date set forth above. - ----------------------------- Greg Bennett - ----------------------------- Sharon Bennett (to the extent of any interest in the Stock Option) - ----------------------------- Larry Thomas - ----------------------------- Marty Albertson 1 CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: Chase Capital Partners General Partner By: ---------------------------------------- David L. Ferguson Authorized Signatory WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC. By: ---------------------------------------- Steven W. Burge Managing Director WESTON PRESIDIO CAPITAL II, L.P. By: Weston Presidio Capital Management, L.P. General Parmer By: ---------------------------------------- Michael P. Lazarus General Partner 2 EX-99.5 4 INCENTIVE STOCK OPTION Exhibit 5 NOTICE OF GRANT OF STOCK OPTIONS AND OPTION AGREEMENT Guitar Center, Inc. ID: 95-4600862 5155 Clareton Drive Agoura Hills, CA 91301 - -------------------------------------------------------------------------------- Jeffrey Walker Option Number: 00000167 Chase Capital Partners Plan: 1997 380 Madison Avenue 12th Floor New York, NY USA 10017 ID: - -------------------------------------------------------------------------------- Effective 5/6/98, you have been granted a(n) Incentive Stock Option to buy 5,000 shares of Guitar Center, Inc. (the Company) stock at $28.5625 per share. The total option price of the shares granted is $142,812.50. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration --------------- --------------------- ----------------- ------------ 1,667 On Vest Date 5/6/99 5/6/08 1,667 On Vest Date 5/6/00 5/6/08 1,666 On Vest Date 5/6/01 5/6/08 - -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - -------------------------------------------------------------------------------- - ------------------------------------------------ ------------------------------- Guitar Center, Inc. Date - ------------------------------------------------ ------------------------------- Jeffrey Walker Date -----END PRIVACY-ENHANCED MESSAGE-----