<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File No. 000-22207
GUITAR CENTER, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4600862
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification Number)
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
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(Address of principal executive offices) (Zip Code)
(818)735-8800
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
As of April 28, 1997, 19,329,079 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
Guitar Center, Inc.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - March 31, 1997 and December 31, 1996 . . . . . . . . . . 2
Condensed Statements of Operations - Three months ended March 31, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statement of Stockholders' Equity (Deficit) - March 31, 1997. . . . . . . 4
Condensed Statements of Cash Flows - Three months ended March 31, 1997 and
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements. . . . . . . . . . . . . . . . . . . . . 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 9-12
Part II. Other Information
Item 1. Not Applicable
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . .13
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . .13
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .13
</TABLE>
1
<PAGE>
GUITAR CENTER, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,038 $ 47
Accounts receivable 4,028 4,062
Merchandise inventories 58,047 49,705
Prepaid expenses and other current assets 2,781 1,455
---------- ----------
Total current assets 125,894 55,269
Property and equipment, net 16,062 14,966
Goodwill, net of accumulated amortization 429 432
Other assets 4,095 4,182
---------- ----------
$ 146,480 $ 74,849
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 15,010 $ 14,005
Accrued expenses and other current liabilities 30,892 10,292
Line of credit - 3,536
---------- ----------
Total current liabilities 45,902 27,833
Other long-term liabilities 737 645
Long term debt 100,000 100,000
Senior preferred stock, aggregate liquidating
preference of $21,602 at December 31, 1996 - 15,186
Stockholders' equity (deficit)
Junior preferred stock; aggregate liquidating
preference of $144,859 at December 31,
1996:authorized 5,000,000 shares at March 31,
1997, none issued and outstanding - 138,610
Common stock, $0.01 par value, authorized
55,000,000 shares, issued and outstanding
18,316,579 at March 31, 1997 and 3,622,804
at December 31, 1996, respectively 183 36
Warrants 6,500 6,500
Additional paid in capital 207,004 (6,966)
Retained earnings (deficit) (213,846) (206,995)
---------- ----------
Total stockholders' equity (deficit) (159) (68,815)
---------- ----------
$ 146,480 $ 74,849
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------------- --------------------
<S> <C> <C>
Net sales $ 59,809 $ 43,343
Cost of goods sold, buying and occupancy 43,585 30,561
-------- --------
Gross profit 16,224 12,782
Selling, general and administrative 11,551 8,895
-------- --------
Operating income 4,673 3,887
Interest expense, net 2,933 123
Transaction expenses 731 -
-------- --------
Income before income taxes 1,009 3,764
Income taxes 83 26
-------- --------
Net income $ 926 $ 3,738
-------- --------
-------- --------
Income per share $ 0.05 $ 0.18
-------- --------
-------- --------
Weighted average shares outstanding 20,420 20,420
-------- --------
-------- --------
Pro forma data:
Income before income taxes $ 1,009 $ 3,764
Pro forma income taxes 83 1,430
-------- --------
Pro forma net income $ 926 $ 2,334
Senior preferred stock dividends 7,747 -
-------- --------
Pro forma net income (loss) applicable to common
stockholders $ (6,821) $ 2,334
-------- --------
-------- --------
Pro forma net income (loss) per share
applicable to common stockholders $ (0.33) $ 0.11
-------- --------
Weighted average shares outstanding 20,420 20,420
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENTS STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Junior Additional Retained
Preferred Common Paid in Earnings
Stock Stock Warrants Capital (Deficit) Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 138,610 $ 36 $ 6,500 $ (6,966) $ (206,995) $ (68,815)
Sale of equity to management 307 - - 3 - 310
Conversion of junior preferred stock (138,917) 93 - 138,824 - -
Offering of common stock - 67 - 93,547 - 93,614
Repurchase of management common
stock - (13) - (18,404) - (18,417)
Senior preferred stock dividends paid - - - - (7,747) (7,747)
Accretion of senior preferred stock - - - - (30) (30)
Net income - - - - 926 926
------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ - $ 183 $ 6,500 $207,004 $ (213,846) $ (159)
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
GUITAR CENTER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 926 $ 3,738
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 674 475
Amortization of deferred financing fees 90 -
Changes in operating assets and liabilities:
Accounts receivable 34 (1,276)
Merchandise inventories (8,342) (4,224)
Prepaid expenses (1,326) (326)
Other assets - (367)
Accounts payable 1,005 (557)
Accrued expenses and other current liabilities 20,600 (1,634)
Other long term liabilities 92 23
---------- --------
Net cash provided by (used in) operating activities 13,753 (4,148)
INVESTING ACTIVITIES
Purchase of property and equipment (1,770) (1,551)
---------- --------
Net cash used in investing activities (1,770) (1,551)
FINANCING ACTIVITIES
Net change in revolving debt facility (3,536) 11,546
Proceeds from sale of stock to management 310 -
Issuance of common stock 93,614 -
Redemption of management common stock (18,417) -
Redemption of senior preferred stock (22,963) -
Distributions to stockholder - (7,148)
---------- --------
Net cash provided by (used in) financing activities 49,008 4,398
Net increase (decrease) in cash and cash equivalents 60,991 (1,301)
Cash and cash equivalents at beginning of year 47 1,338
---------- --------
Cash and cash equivalents at end of period $ 61,038 $ 37
---------- --------
---------- --------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GUITAR CENTER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. General
In the opinion of management, the accompanying condensed unaudited
financial statements contain all adjustments necessary to present fairly
the financial position of Guitar Center, Inc., a Delaware corporation
("Guitar Center" or the "Company"), as of March 31, 1997, and the results
of operations and cash flows for the three months ended March 31, 1997 and
1996. The accompanying financial statements should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. Initial Public Offering
On March 19, 1997, the Company completed an initial public offering (the
"Offering") of the Company's common stock, $.01 par value ("Common Stock"),
pursuant to which it sold 6,750,000 shares of Common Stock and received
approximately $94.4 million in net cash proceeds (before deducting expenses
associated with the Offering.) On April 15, 1997, the Company sold an
additional 1,012,500 shares of Common Stock in the Offering and received an
additional $14.1 million in net cash proceeds from the underwriters'
exercise in full of their over-allotment option. Upon consummation of the
Offering, all of the outstanding shares of the Company's 8% Junior
Preferred Stock, $.01 par value ("Junior Preferred Stock"), were
automatically converted into shares of Common Stock at a ratio of 6.667
shares of Common Stock to each share of Junior Preferred Stock (the
"Junior Preferred Stock Conversion"). No accrued and unpaid dividends were
paid on any shares of Junior Preferred Stock. Approximately $23.0 million
of the net proceeds from the Offering were used to redeem, at a premium of
3%, all of the outstanding shares of the Company's 14% Senior Preferred
Stock, $.01 par value ("Senior Preferred Stock"). As a result, the
Company incurred a charge to dividends in the first quarter of 1997 of $7.7
million for the difference between the financial statement value of the
Senior Preferred Stock and the face amount thereof, plus premium.
Approximately $9.7 million of the net proceeds from the Offering were used
to repay all amounts under the Company's existing bank facility (the "1996
Credit Facility"). In addition, the Company used approximately $18.4
million to redeem approximately 1,317,000 shares of Common Stock from
management (the "Management Tax Redemption"). Immediately following the
Offering, the Company called for redemption, at a premium of 10%, an
aggregate of $33.3 million principal amount of 11% Senior Notes due 2006
(the "Senior Notes"). On April 19, 1997, Company used $37.9 million of the
net proceeds from the Offering to redeem such Senior Notes (the "Senior
Note Redemption"), including payment of all accrued and unpaid interest
with respect to the Senior Notes called for redemption. Accordingly, the
Company anticipates that an extraordinary charge to operations will be
incurred in the second quarter of 1997 equal to the premium paid on the
Senior Notes plus the write off of one-third of the unamortized deferred
financing fees. The balance of the net proceeds was retained for general
corporate purposes, which has included the acquisition of two musical
instrument stores in the Atlanta, Georgia market in April 1997.
3. Pro Forma Tax Data
Prior to June 5, 1996, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Pro forma
information has been provided to reflect the estimated statutory provision
for income taxes assuming the Company had been taxed as a C corporation for
all periods presented.
6
<PAGE>
4. Pro Forma Net Income (Loss) Per Share
Pro Forma Net Income (Loss) Per Share has been computed by dividing pro
forma net income (loss) by the weighted average number of shares
outstanding during the period. The pro forma net income (loss) per share
gives effect to: (i) the issuance of Common Stock sold in the Offering,
including the underwriters' over-allotment option; (ii) the issuance of
Common Stock upon the conversion of all outstanding shares of Junior
Preferred Stock in connection with the Offering; (iii) the assumed
issuance of Common Stock upon the exercise of all outstanding warrants
and common stock equivalents; and (iv) the Management Tax Redemption.
5. Adjusted Income Per Share
If the Offering, including the exercise of the underwriters' over-allotment
option, had been consummated on January 1, 1997, adjusted income per share
for the quarter ended March 31, 1997 would be as follows (in thousands,
except per share amounts):
Income (loss) per common stockholders per financial statements $ (6,821)
Reduction of interest on debt assumed repaid, net of tax (1,037)
Reduction of Senior Preferred Stock Dividends (7,747)
----------
Adjusted net income $ 1,963
----------
----------
Adjusted net income per share $ 0.10
----------
----------
Weighted average shares used in calculation 20,420
----------
----------
The adjusted income per share presentation set forth above gives effect to
the capitalization changes related to the Company's Offering and the
application of the proceeds therefrom. This data does not attempt to give
effect to any other pro forma adjustments, including (i) non-recurring
transaction expenses of $0.7 million (or $0.04 per share) related to
payroll taxes incurred as a result of the Junior Preferred Stock
Conversion or (ii) any pro forma adjustments related to the reduction in
the compensation of the Company's former Chairman of the Board subsequent
to the Company's recapitalization or any other similar changes in
selling, general and administrative expenses or (iii) any pro forma
income taxes at the effective rate of 38%. The foregoing data is
presented solely to facilitate further analysis of the Company based upon
the assumptions indicated above. Such data is not necessarily indicative
of the Company's results of operations had the Offering occurred in the
earlier period nor the results expected in the future.
6. Subsequent Events
On April 16, 1997, the Company acquired Rhythm City, Inc. ("Rhythm
City"), the operator of two musical retail stores in the Atlanta,
Georgia market. Purchase consideration consisted of cash of $10.3
million, subject to adjustment based on the actual level of working
capital on such date and other matters. The purchase price included
the acquisition of the building and improvements of the flagship Rhythm
City store in Atlanta. All of the debt and other liabilities of Rhythm
City were either repaid or assumed by the sellers prior to closing. This
acquisition was not considered material under the "Significant Subsidiary"
rules of the Rules and Regulations of the Securities and Exchange
Commission.
In addition, as noted above, during April 1997 the Company (i) issued an
additional 1,012,500 shares of Common Stock upon exercise in full of the
underwriters' over-allotment option and (ii) completed the redemption of
$33.3 million principal amount of Senior Notes.
7. Impact of Recently Issued Pronouncements
The Financial Accounting Standards Board has recently issued Statement
No. 128, "Earnings per share" ("FAS 128"), issued in March 1997 and
effective for fiscal years ending after December 15, 1997. The
Company will adopt FAS 128 in 1997. FAS 128 introduces and requires the
presentation of "Basic" earnings per share which represents net earnings
divided by the weighted average shares outstanding excluding all common
stock equivalents. A dual presentation of
7
<PAGE>
"Diluted" earnings per share reflecting the dilutive effects of all
common stock equivalents, will also be required. The Diluted
presentation is similar to the current presentation of fully
diluted earnings per share. Management believes the adoption of
FAS 128 will not have a material impact on the Company's financial
position or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Guitar Center operated 31 stores in 17 major markets as of March 31, 1997.
From 1992 to 1996, Guitar Center's net sales and operating income before
deferred compensation expense grew at compound annual growth rates of 25.6% and
43.0%, respectively, principally due to comparable store sales growth averaging
14.8% per year and the opening of new stores. The increases were principally
attributable to increases in unit sales rather than increases in prices or
changes in product mix. Management believes such volume increases are the
result of the continued success of the Company's implementation of its business
strategy, continued strong growth in the music products industry and increasing
consumer awareness of the Guitar Center name. The Company does not expect
comparable store sales to continue to increase at historical rates.
The Company opened seven stores in 1996 and, as of March 31, 1997, the
Company had opened three additional stores in 1997. In April 1997, the
Company purchased two additional stores and presently expects to open an
additional three stores during the remainder of 1997. In preparation for
these additional stores, management had dedicated a substantial amount of
resources over the past several years to building the infrastructure
necessary to support a large, national chain. Management believes the
infrastructure is in place to support its needs for the immediately
foreseeable future, including its present expansion plans. The Company will
continue to pursue its strategy of clustering stores in major markets to take
advantage of operating and advertising efficiencies and to build awareness of
the Guitar Center name in new markets. In some markets where the Company has
pursued its clustering strategy, there has been some transfer of sales from
certain existing stores to new locations. Generally, however, mature stores
have demonstrated net sales growth rates consistent with the Company's
average. As the Company enters new markets, management expects that its will
initially incur higher administrative and advertising costs per store than it
currently experiences in established markets.
The following table sets forth certain historical income statement data as
a percentage of net sales:
Three Months Ended
March 31,
1997 1996
-------- --------
Net sales 100.0% 100.0%
Gross profit 27.1 29.5
Selling, general, and administrative
expenses
19.3 20.5
-------- --------
Operating income 7.8 9.0
Interest expense, net 4.9 0.3
Transaction expenses 1.2 -
-------- --------
Income before income taxes 1.7 8.7
Income taxes 0.1 -
-------- --------
Net income 1.6% 8.7%
-------- --------
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996.
Net sales of the Company increased to $59.8 million for the three months
ended March 31, 1997, from $43.3 million for the comparable prior period, a
38.0% increase. This growth was attributable to an increase of 13.6% in
comparable store net sales which contributed $5.1 million, or 33.8% of the
total increase. New store net sales of $11.4 million accounted for the
balance of the increase in net store sales.
Gross profit dollars for the three months ended March 31, 1997 compared
to 1996 increased 26.9% to $16.2 million from $12.8 million. Gross profit as
a percentage of net sales for the three months ended March 31, 1997 compared
to 1996 decreased to 27.1% from 29.5% in the quarter ended March 31, 1996.
Gross margin for the immediately preceding quarter ended December 31, 1996
(which included the Christmas selling season) was 28.0%. The decrease in
gross profit percentage reflects the impact in the first quarter of 1997 of
operating 10 new stores (out of the total store base of 31 stores), which
typically experience lower gross profit margins than existing stores.
Comparatively, the first quarter of 1996 included the results of 2 new stores
(out of the total store base of 23 stores). In addition, the gross profit
percentage was reduced by the effects of an increase in the mix of sales of
pro audio and recording products, which historically produce lower margins
than guitars, amplifiers and percussion equipment.
Selling, general and administrative expenses for the three months ended
March 31, 1997 compared to 1996 increased 29.9% to $11.6 million from $8.9
million. The increase in total selling, general and administrative expenses
is a result of certain selling expenses incurred at the retail level due to
an increase in the number of stores in 1997 as compared to 1996. The increase
was partially offset by a reduction in administrative expense of
approximately $225,000 related to the compensation of the Company's former
Chairman, who is now a consultant to the Company. As a percentage of net
sales, selling, general and administrative expenses decreased to 19.3% from
20.5%. The change in percentage of sales reflects the relatively fixed
nature of certain general and administrative expenses and the effect of the
increase in sales volume.
Operating income for the three months ended March 31, 1997 was $4.7
million compared to operating income of $3.9 million for the same three
months of 1996, an increase of 20.2%. The increase is principally the result
of the increase in sales derived from both new and existing stores. As a
percentage of sales, operating income for the three months ended March 31,
1997 was 7.8% compared to 9.0% in 1996. The decrease is principally related
to the decreased margins experienced in the first quarter of 1997.
Interest expense, net for the three months ended March 31, 1997
increased to $2.9 million from $0.1 million in the same period of 1996. The
increase is principally the result of interest incurred on the Senior Notes.
On April 19, 1997, the Company redeemed, at a premium, $33.3 million
principal amount of the Senior Notes.
Non-recurring transaction expenses of $0.7 million relate to payroll
taxes in connection with the closing of the Offering incurred as a result of
management's conversion of their Junior Preferred Stock to Common Stock.
Net income for the three months ended March 31, 1997 decreased to $0.9
million from $3.7 million for the same period in 1996, principally as a
result of interest expense on the Senior Notes and the transaction expenses
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On March 19, 1997, the Company completed an initial public offering (the
"Offering") pursuant to which it sold 6,750,000 shares of Common Stock and
received approximately $94.4 million in net cash proceeds (before deducting
expenses associated with the Offering.) On April 15, 1997, the Company sold
an additional 1,012,500 shares of Common Stock in the Offering and received
an additional $14.1 million in net cash proceeds from the underwriters'
exercise in full of their over-allotment option. Upon consummation of the
Offering, all of the outstanding shares of the Company's Junior Preferred
Stock was automatically converted into shares of Common Stock at a ratio of
6.667 shares of Common Stock to each
10
<PAGE>
share of Junior Preferred Stock. No accrued and unpaid dividends were paid
on any shares of Junior Preferred Stock. Approximately $23.0 million of the
net proceeds from the Offering were used to redeem, at a premium of 3%, all
of the outstanding shares of Senior Preferred Stock. As a result, the
Company incurred a charge to dividends in the three months ended March 31,
1997 of $7.7 million for the difference between the financial statement value
of the Senior Preferred Stock and the face amount thereof, plus premium.
Approximately $9.7 million of the net proceeds from the Offering were used to
repay all amounts under the Company's 1996 Credit Facility. In addition, the
Company used approximately $18.4 million to redeem approximately 1,317,000
shares of Common Stock from management in the Management Tax Redemption.
Immediately following the Offering, the Company called for redemption, at a
premium of 10%, an aggregate of $33.3 million principal amount of Senior
Notes. On April 19, 1997, Company used $37.9 million of the net proceeds from
the Offering to redeem such Senior Notes, including payment of all accrued
and unpaid interest with respect to the Senior Notes called for redemption.
Accordingly, the Company anticipates that an extraordinary charge to
operations will be incurred in the second quarter of 1997 equal to the premium
paid on the Senior Notes plus the write off of one-third of the unamortized
deferred financing fees. The balance of the net proceeds was retained for
general corporate purposes, including the acquisition of two musical instrument
stores in the Atlanta, Georgia market in April 1997.
Guitar Center's need for liquidity will arise primarily from interest
payable on its indebtedness and the funding of the Company's capital
expenditures and working capital requirements, as well as possible
acquisitions. The Company has historically financed its operations through
internally generated funds and borrowings under its credit facilities. The
Company has no mandatory payments of principal on the Senior Notes prior the
their final maturity in 2006. The Company currently has no borrowings
outstanding under its 1996 Credit Facility. The agreement underlying the
1996 Credit Facility expires June 1, 2001 and includes certain restrictive
covenants, which, among other things, require the Company to maintain certain
financial ratios. The Company was in compliance with respect to such
requirements as of March 31, 1997. The Company may borrow up to $25 million
under the 1996 Credit Facility, as in place on the date of this Report. The
Company is currently negotiating a secured successor new bank facility to
replace the 1996 Credit Facility, although no agreement has been reached as
of the date of this Report. If and when the Company enters into such
successor facility, it may permit borrowings in excess of the $25 million of
borrowings permitted under the 1996 Credit Facility.
For the three months ended March 31, 1997, cash provided by operating
activities was $13.8 million. Capital expenditures totaled $1.8 million,
relating principally to the opening of new stores and relocation of an
existing store. Cash provided by financing activities totaled $49.0 million,
which consisted principally of proceeds from the Offering of $93.6 million,
net of the redemption of the Senior Preferred Stock of $23.0 million,
redemption of $18.4 million of Common Stock in the Management Tax
Redemption, and $3.5 million to repay the 1996 Credit Facility.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. During the quarter ended
March 31, 1997, the Company opened three new stores. Each new store
typically has required approximately $1.5 million for gross inventory.
Historically, the Company's cost of capital improvements for an average new
store has been approximately $450,000, consisting of leasehold improvements,
fixtures and equipment. Pre-opening costs for new stores have averaged
approximately $110,000 per new store, the majority of which are expensed and
remaining portion of which are capitalized and amortized over a twelve-month
period. Nominal pre-opening costs are incurred for the stores that are
relocated.
The Company also believes that there may be attractive opportunities to
expand by selectively acquiring existing music products retailers. For
example, as discussed above, in April 1997 the Company acquired a music
products retailer operating two stores in the Atlanta, Georgia market.
Purchase consideration consisted of cash of $10.3 million, subject to
adjustment based on the actual level of working capital on such date and
other matters. The purchase price included in the acquisition of the
building and improvements of the flagship Rhythm City store in Atlanta. All
of the debt and other liabilities of Rhythm City were either repaid or
assumed by the sellers prior to closing. The Company, in the ordinary course
of its business, regularly evaluates and enters into negotiations relating to
potential acquisition candidates in
11
<PAGE>
new and existing market areas. Any such transactions may involve the payment
by the Company of cash or securities (including equity securities), or a
combination thereof. There can be no assurance that the Company will be able
to identify suitable acquisition candidates available for sale at reasonable
prices, consummate additional acquisitions or successfully integrate any such
acquired companies into its operations.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the next twelve months
including its present plans for expansion. The Company's capital resources
and liquidity are expected to be provided by the Company's net cash flow from
operations, funds retained from the net proceeds of the Offering and
borrowings under the 1996 Credit Facility, or a replacement facility (if
implemented). Depending upon market conditions, the Company may also incur
additional indebtedness or issue equity securities. There can be no
assurance that such additional capital, if and when required, will be
available on terms acceptable to the Company, if at all.
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than any other
quarter.
INFLATION
The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its net
sales or profitability.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement
No. 128, "Earnings per share" ("FAS 128"), issued in March 1997 and effective
for fiscal years ending after December 15, 1997. The Company will adopt FAS
128 in 1997. FAS 128 introduces and requires the presentation of "Basic"
earnings per share which represents net earnings divided by the weighted
average shares outstanding excluding all common stock equivalents. A dual
presentation of "Diluted" earnings per share reflecting the dilutive effects
of all common stock equivalents, will also be required. The Diluted
presentation is similar to the current presentation of fully diluted earnings
per share. Management believes the adoption of FAS 128 will not have a
material impact on the Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS; BUSINESS RISKS
This Report contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, gross
margin and expense trends, capital requirements and general industry and
business conditions applicable to the Company. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include changes in
external competitive market factors, change in the Company's business
strategy or an inability to execute its strategy due to unanticipated changes
in the music products industry or the economy in general, the emergence of
new or growing specialty retailers of music products and various competitive
factors that may prevent the Company from competing successfully in existing
or future markets. These matters and other business risks to which the
Company is subject are discussed in the Company's periodic reports and
registration statements filed from time to time with the Securities and
Exchange Commission. In particular, a discussion of such risks in greater
detail is contained under the caption "Item 1., Business - Business Risks" on
pages 11 through 13 of the Company's 1996 Annual Report on Form 10-K.
12
<PAGE>
Part II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES.
Pursuant to an agreement effective December 31, 1996, certain
employees of the Company purchased 3,100 Units (or 28,464 shares of Common
Stock, after giving effect to the Junior Preferred Stock Conversion
described in Note 2 to Notes to Condensed Financial Statements) for an
aggregate purchase price of $310,000 pursuant to a Supplemental Employee
Stock Purchase Plan of the Company. Such purchases were consummated in
February 1997. Such transactions were exempt by virtue of Section 4(2) of,
and Rules 505 and 506 under, the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated as of January 24, 1997 (the "Stockholders
Consent"), holders of 97.9% of the Company's then-outstanding Common Stock,
holders of 97.9% of the Company's then-outstanding Junior Preferred Stock
and holders of 100% of the Company's then-outstanding 14% Senior Preferred
Stock approved the following: (i) the adoption of certain amendments to
the Company's Certificate of Incorporation, which amendments among other
things permitted the Junior Preferred Stock Conversion and the Senior Note
Redemption (see Note 2 to Notes to Condensed Financial Statements); (ii)
the adoption of a Restated Certificate of Incorporation to be effective
following the Offering; (iii) the adoption of Restated Bylaws to be
effective following the Offering; (iv) the adoption of an amendment to the
Company's Amended and Restated 1996 Performance Stock Option Plan (the
"1996 Plan"); (v) the adoption of the 1997 Equity Performance Plan (the
"1997 Plan"); (vi) the form of indemnification agreement with the Company's
officers and directors; (vii) the waiver of certain holders' rights to
register such holders' securities in connection with the Offering; and
(viii) the issuance of Units pursuant to the Supplemental Employee Stock
Purchase Plan, as described in "Item 2. Changes in Securities." The
requisite notice pursuant to Section 228(d) of the General Corporation Law
of the State of Delaware was provided to non-consenting stockholders. The
Stockholders Consent and the Company's Restated Certificate of
Incorporation, Restated Bylaws, 1996 Plan, as amended, 1997 Plan, form of
indemnification agreement and Supplemental Employee Stock Purchase Plan
approved pursuant to such Stockholders Consent have been previously filed
with the Securities and Exchange Commission as exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11. Computation of Income (Loss) Per Share.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K. None.
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 30th day of April, 1997.
Guitar Center, Inc.
/s/ Bruce L. Ross
Bruce L. Ross, Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of Income (Loss) Per Share
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
GUITAR CENTER, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE)
Quarter ended
March 31,
----------------------------
1997 1996
---------- ----------
Net income (loss) $ 926 $ 3,738
Weighted average shares outstanding 19,330 19,330
Common stock equivalents 1,090 1,090
---------- ----------
Weighted average shares outstanding 20,420 20,420
---------- ----------
---------- ----------
Income (loss) per share $ 0.05 $ 0.18
---------- ----------
---------- ----------
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 61,038
<SECURITIES> 0
<RECEIVABLES> 4,028
<ALLOWANCES> 0
<INVENTORY> 58,047
<CURRENT-ASSETS> 125,894
<PP&E> 16,062
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,480
<CURRENT-LIABILITIES> 45,902
<BONDS> 100,000
0
0
<COMMON> 183
<OTHER-SE> (342)
<TOTAL-LIABILITY-AND-EQUITY> 146,480
<SALES> 59,809
<TOTAL-REVENUES> 59,809
<CGS> 43,585
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<OTHER-EXPENSES> 731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,933
<INCOME-PRETAX> 1,009
<INCOME-TAX> 83
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 926
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