Document:

Prepared by MERRILL CORPORATION

 
October 10, 2001 

GUITAR
CENTER, INC.

5795 Lindero Canyon Road

Westlake Village, California 91326

Attn: Chief Financial Officer

Fax No. (818) 735-4923 

	 	 	Re:	 	The "Lenders" defined below; Foothill Capital Corporation, as agent for the Lenders (in such capacity, "Agent"); Guitar Center, Inc. ("GCI"), Guitar Center Stores, Inc. ("GCS"), and Musician's Friend, Inc. ("MFI; and together with GCI and GCS,
individually and collectively, jointly and severally, the "Borrowers")

Ladies and Gentlemen: 

    This
letter agreement (this "Letter Agreement") is entered into by and among, on the one hand, the Borrowers, and, on the other hand,
Agent, the financial institutions (collectively, the "Lenders" and individually, a "Lender") that are
signatories to the "Loan Agreement" defined below, and Fleet Retail Finance Inc., as documentation agent for the Lenders (in such capacity "Documentation
Agent"; and together with Agent and the Lenders, the "Lender Group"), in light of the following: 

    A.  Borrowers
and the Lender Group have entered into that certain Amended and Restated Loan and Security Agreement, dated as of April 16, 2001 (the
"Loan Agreement"). 

    C.  Borrowers
have requested that the Lender Group consent to a temporary reduction of Required Availability, as described in more detail below. 

    D.  Subject
to the terms and conditions set forth in this Letter Agreement, the Lender Group is willing to consent to a temporary reduction of Required Availability, as
described in more detail below. 

    NOW
THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Lender Group and Borrowers represent, covenant, and agree as
follows: 

    1.  Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Loan Agreement. 

    2.  Subject
to Borrowers' fulfillment of each of the conditions set forth below, 

    (a) As
of any date of determination from the date hereof through December 15, 2001 only, "Required Availability" shall be deemed to mean Excess Availability in
an amount no less than the lesser of (i) 15% of the Facility Amount in effect on such date of determination, and (ii) $10,000,000. 

    (b) As
of any date of determination from the date hereof through December 15, 2001 only, at no time shall the
aggregate amount of outstanding Agent Advances under Section 2.3(e) of the Loan Agreement exceed the result of (i) the  lesser of (A)
 $5,000,000, and (B) 10% of the Borrowing Base then in effect, minus
(ii) the amount of optional Overadvance Loans made by Agent to the Borrowers pursuant to Section 2.3(i) of the Loan Agreement. 

    3.  The
satisfaction of each of the following shall constitute conditions precedent to the effectiveness of this Letter Agreement and each and every provision hereof: 

    (a) Agent
shall have received this Letter Agreement duly executed and delivered by an authorized official of each of the Borrowers; 

    (b) The
representations and warranties in this Letter Agreement shall be true and correct in all respects on and as of the date hereof, as though made on such date; 

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    (c) No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the
date hereof, nor shall result from the consummation of the transactions contemplated herein; 

    (d) No
injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein
shall have been issued and remain in force by any Governmental Authority against the Borrowers, or any member of the Lender Group; and 

    (e) Agent,
for the ratable benefit of the Lenders, shall have received a fee in the amount of $100,000, which fee shall be charged to the Loan Account and apportioned
among the Lenders with a Revolving Credit Commitment based upon their Pro Rata Shares of the Revolving Credit Commitment. 

    4.  Each
Borrower represents and warrants to each member of the Lender Group as follows: 

    (a) Each
Borrower has the requisite power and authority to execute and deliver this Letter Agreement and to perform its obligations hereunder and under the Loan
Documents to which it is a party. The execution, delivery, and performance by each Borrower of this Letter Agreement and the performance by it of each Loan Document to which it is a party
(i) have been duly approved by all necessary action and no other proceedings are necessary to consummate such transactions; and (ii) are not in contravention of (A) any law, rule,
or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court or governmental authority binding on such Borrower, (B) the terms of such Borrower's
organizational documents, or (C) any provision of any contract or undertaking to which such Borrower is a party or by which any of its properties may be bound or affected; 

    (b) This
Letter Agreement has been duly executed and delivered by each Borrower. This Letter Agreement and each Loan Document is the legal, valid and binding obligation
of each Borrower, enforceable against such Borrower in accordance with its terms, and is in full force and effect except as such validity and enforceability is limited by the laws of insolvency and
bankruptcy, laws affecting creditors' rights and principles of equity applicable hereto; and 

    (c) The
representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as
of a date other than the date hereof and except as acknowledged in this Letter Agreement) are true and correct in all material respects on and as of the date hereof as though made on and as of the
date hereof. 

    5.  Nothing
contained in this agreement is intended to or shall be construed as a waiver of any of the rights, remedies, and powers of any member of the Lender Group
against Borrowers or the Collateral, or as a waiver of any Defaults or Events of Default, and each member of the Lender Group hereby reserves expressly all of its rights, remedies, and powers under
the Loan Agreement and the other Loan Documents, at law, in equity, or otherwise. Except as expressly set forth herein, this Letter Agreement shall not operate as a consent to any further or other
matter, under the Loan Documents. All other terms of the Loan Agreement remain in full force and effect, except as expressly set forth herein. 

    6.  This
Letter Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties
hereto may execute this Letter Agreement by signing any such counterpart. Delivery of an executed counterpart of this Letter Agreement by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Letter Agreement. Any party delivering an executed counterpart of this Letter Agreement by telefacsimile also shall deliver an original executed counterpart of
this Letter Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Letter Agreement. 

    7.  This
Letter Agreement is a Loan Document. 

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    8.  All notices given hereunder shall be given in the manner set forth in the Loan Agreement. 

[signature
pages follow] 

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    Please indicate your agreement with the foregoing by signing in the space provided below and returning to the undersigned. 

	 	 	FOOTHILL CAPITAL CORPORATION, as a Lender and as Agent
	

 	
 	

By:	
 	

 
	 	 	 	 	

	 	 	Name:	 	 
	 	 	 	 	

	 	 	Title:	 	 
	 	 	 	 	

	 	 	Acknowledged and Agreed

as of the date first above written:
	

 	
 	
GUITAR CENTER, INC., a Delaware corporation
	

By:	
 	

 	
 	

 
	 	 	
	 	 
	 	 	Title:	 	 
	

 	
 	
GUITAR CENTER STORES, INC., a Delaware corporation
	

By:	
 	

 	
 	

 
	 	 	
	 	 
	 	 	Title:	 	 
	

 	
 	
MUSICIAN'S FRIEND, INC., a Delaware corporation
	

By:	
 	

 	
 	

 
	 	 	
	 	 
	 	 	Title:

	 	 

[signature
pages continue] 

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	 	 	FLEET RETAIL FINANCE INC,

a Delaware corporation, formerly know as BankBoston Retail Finance Inc., as Documentation Agent and as a Lender
	

 	
 	

By:	
 	

 Name: Christine M. Scott

Title: Vice President
	

 	
 	
BANK OF AMERICA, N.A.,

as a Lender
	

 	
 	

By:	
 	

 Name: Robert M. Dalton

Title: Vice President
	

 	
 	
UNION BANK OF CALIFORNIA, N.A.,

as a Lender
	

 	
 	

By:	
 	

 Name: Albert R. Joseph

Title: Vice President

5Prepared by MERRILL CORPORATION

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SECOND AMENDMENT TO
  AMENDED AND RESTATED
  MEMORANDUM OF UNDERSTANDING
  AND STOCK OPTION AGREEMENT    
  

    Effective as of September 5, 2001 

    1.  General.  Reference is made to that certain Amended and Restated Memorandum of Understanding and
Stock Option Agreement dated as of December 30, 1996 and the Amendment and Consent thereto effective as of November 9, 1998 (as amended, the "Stock
Option"). Capitalized but undefined terms shall have the meanings provided in the Stock Option. Section 15 of the Stock Option provides that it 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 and each of such persons is identified
on the signature pages to this agreement. The sole purpose of this Second Amendment to Amended and Restated Memorandum of Understanding and Stock Option Agreement is to delete the restriction that the
Options may only be exercised on two separate occasions. 

    2.  Amendment.  The final paragraph of Section 2 of the Stock Option is hereby restated in its entirety
as follows: 

"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 and from time to 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
be only 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 (ii) 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 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 each such exercise be pro rata among each member of Management and each Fund." 

    3.  Miscellaneous.  Except for the restatement of the final paragraph of Section 2 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 Second Amendment to Amended and Restated Memorandum of
Understanding and Stock Option Agreement. 

(Signature
Page Follows) 

 

    IN WITNESS WHEREOF, the undersigned have duly executed this Second Amendment to Amended and Restated Memorandum of Understanding and Stock Option Agreement as required by Section 15
of the Stock Option, effective as of the first date set forth above. 

	 	 	/s/ LARRY THOMAS   
 Larry Thomas
	

 	
 	

/s/ MARTY ALBERTSON   
 Marty Albertson
	

 	
 	
J.P. MORGAN PARTNERS (SBIC), LLC
	

 	
 	

/s/ DAVID L. FERGUSON   
 By: David L. Ferguson

Its: Managing Director
	

 	
 	
WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC.
	

 	
 	

/s/ STEVEN W. BURGE   
 By: Steven W. Burge

Its: Managing Director
	

 	
 	
WESTON PRESIDIO CAPITAL II, L.P.
	

 	
 	

By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P.

Its: General Partner
	

 	
 	

/s/ MICHAEL P. LAZARUS   
 By: Michael P. Lazarus

Its: General Partner

S–1

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SECOND AMENDMENT TO AMENDED AND RESTATED MEMORANDUM OF UNDERSTANDING AND STOCK OPTION AGREEMENT

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