Prepared by MERRILL CORPORATION




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Exhibit 4.2  


 
 

AMENDED AND RESTATED
  MEMORANDUM OF UNDERSTANDING
  AND STOCK OPTION AGREEMENT    
  


    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 662/3% of the unexercised Options as identified on Exhibit A and (iii) must be exercised pro rata by each member of Management. Such Options 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 to 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. 


    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  


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 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 purpose 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: 



    (1) 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; 


    (2) 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
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; 


    (3) 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; 


    (4) 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; 



    (5) is
familiar with the business and affairs of the Company; and 


    (6) 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). 



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    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. 


    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 


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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 662/3% of the unexercised Options as set forth on Exhibit A. 


    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 Trail.  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.  Withholding Taxes.  In the event that the Company determines that it is required to withhold
federal, state or local income taxes as a result of the exercise of any Options, each member of Management, severally and not jointly, shall make arrangements reasonably satisfactory to the Company to
enable the Company to satisfy such requirements. 


    19.  Entire Agreement.  This Agreement constitutes the entire agreement and understanding among the
parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. Without limiting the generality of the foregoing, this Agreement
supersedes any and all prior agreements or other understandings between the Funds and any member of Management regarding the grant of options by the Funds to any such person, each of which is hereby
terminated without any remaining liability thereunder. This Agreement shall have no effect on any other arrangements that any member of Management may have with the Company regarding issuance of stock
of the Company. 


    20.  Further Assurances.  Each party hereto shall do and perform or cause to be done and performed all
further acts and things and shall execute and deliver all other agreements, certificates, instruments and documents as any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. Upon request, each member of Management shall deliver a written spousal consent, in form
and substance satisfactory to the Funds, acknowledging and agreeing to the provisions of this Agreement. 


    21.  No Rights as a Stockholder.  No member of Management shall be, nor have any rights or privileges of,
a stockholder of the Company with respect to any shares purchasable upon exercise of any Option unless and until certificates representing such shares have been duly transferred by the Funds. At all
times prior thereto, the Funds, as the case may be, shall be the record holders of such shares with sole right to take any action with respect thereto as any such Fund shall choose and which is not in
contravention of this Agreement. 


    22.  Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but all of which when taken together shall constitute one and the same instrument. 


(Signature
Pages Follow) 


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    IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first written above. 



	 	 	CHASE VENTURE CAPITAL ASSOCIATES, L.P.
	

 	
 	

By:	

Chase Capital Partners,
	 	 	 	General Partner
	

 	
 	

By:	

/s/ DAVID FERGUSON   

	 	 	 	General Partner
	 	 	380 Madison Avenue, 12th Floor

New York, New York 10017

Attn: Chief Administrative Officer
	

 	
 	

WELLS FARGO SMALL BUSINESS

INVESTMENT COMPANY, INC.
	

 	
 	

By:	

/s/ STEVEN BURGE   

	 	 	 	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:	

/s/ MICHAEL LAZARUS   

	 	 	 	Michael P. Lazarus

General Parnter
	 	 	343 Sansome Street

Suite 1210

San Francisco, California 94104



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Consent to Section 10 is hereby confirmed:
 CB CAPITAL INVESTORS, INC.
	

 	
 	

By:	

/s/ DAVID FERGUSON   
 Authorized Signatory
	

 	
 	
MANAGEMENT:
	

 	
 	

/s/ LARRY THOMAS   
 Larry Thomas
	

 	
 	

/s/ MARTY ALBERTSON   
 Marty Albertson
	

 	
 	

/s/ BARRY SOOSMAN   
 Barry Soosman
	

 	
 	

/s/ BRUCE ROSS   
 Bruce Ross
	

 	
 	

/s/ MARK LAUGHLIN   
 Mark Laughlin
	

 	
 	

/s/ GEORGE LAMPOS   
 George Lampos
	

 	
 	

/s/ DAVE ANGRESS   
 Dave Angress
	

 	
 	

/s/ GREG BENNETT   
 Greg Bennett
	

 	
 	

/s/ PETER SCHUELZKY   
 Peter Schuelzky



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/s/ MARTY KLOSKA   
 Marty Kloska
	

 	
 	

/s/ DON KELSEY   
 Don Kelsey
	

 	
 	

/s/ RICHARD PIDANICK   
 Richard Pidanick
	

 	
 	

/s/ BILL MCGARRY   
 Bill McGarry
	

 	
 	

/s/ ROD BARGER   
 Rod Barger
	

 	
 	

/s/ DAVE DIMARTINO   
 Dave DiMartino
	

 	
 	

/s/ ANDREW HEYNEMAN   
 Andrew Heyneman
	

 	
 	

/s/ MAX GALSTER   
 Max Galster




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EXHIBIT A:    
  


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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. 


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AMENDMENT AND CONSENT    
  


 
 

Effective as of November 9, 1998    



    Reference
is made to that certain Amended and Restated Memorandum of Understanding and Stock Option Agreement dated as of December 30, 1996 (the "Stock
Option"). Capitalized but undefined terms shall have the meanings provided in the Stock Option. 



    It
is hereby confirmed that the Stock Option is amended to delete the entry for 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 Section 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. 



	 	 	 
	/s/ GREG BENNETT   
	 	 
	Greg Bennett	 	 
	

 	
 	

 
	/s/ SHARON BENNETT   
	 	 
	Sharon Bennett (to the extent of any interest in the Stock Option)	 	 
	

 	
 	

 
	/s/ LARRY THOMAS   
	 	 
	Larry Thomas	 	 
	

 	
 	

 
	/s/ MARTY ALBERTSON   
	 	 
	Marty Albertson	 	 




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	CHASE VENTURE CAPITAL ASSOCIATES, L.P.	 	 
	

By:	
 	

Chase Capital Partners	
 	

 	
 	

 
	 	 	General Partner	 	 	 	 
	

By:	
 	

/s/ DAVID FERGUSON   	
 	

 	
 	

 
	 	 	
 David Ferguson

Authorized Signatory	 	 	 	 
	

WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.	
 	

 
	

By:	
 	

/s/ STEVEN BURGE   	
 	

 	
 	

 
	 	 	
 Steven W. Burge

Managing Director	 	 	 	 
	

WESTON PRESIDIO CAPITAL II, L.P.	
 	

 
	

By:	
 	

Weston Presidio Capital Management, L.P.	
 	

 	
 	

 
	 	 	General Partner	 	 	 	 
	

By:	
 	

/s/ MICHAEL LAZARUS   	
 	

 	
 	

 
	 	 	
 Michael P. Lazarus

General Partner	 	 	 	 




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AMENDED AND RESTATED MEMORANDUM OF UNDERSTANDING AND STOCK OPTION AGREEMENT

EXHIBIT A

AMENDMENT AND CONSENT

Effective as of November 9, 1998