<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, 1998
( ) 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 23, 1998, 19,365,779 shares of the registrant's Common Stock, $.01
par value, were outstanding.
1
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 . . . . . . 3
Condensed Consolidated Statements of Operations - Three months ended March 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Stockholders' Equity - March 31, 1998 . . . . . . . 5
Condensed Consolidated Statements of Cash Flows - Three months ended
March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part II. Other Information
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
2
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 95 $ 7,755
Accounts receivable 6,983 7,896
Merchandise inventories 86,475 78,898
Prepaid expenses and other current 3,697 3,226
-------- --------
Total current assets 97,250 97,775
Property and equipment, net 26,491 22,809
Goodwill, net of accumulated amortization 4,135 4,094
Other assets 7,918 7,946
-------- --------
$ 135,794 $ 132,624
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,716 $ 16,863
Accrued expenses and other current 16,014 19,301
Line of credit 3,012 -
-------- --------
Total current liabilities 34,742 36,164
Other long-term liabilities 1,108 1,017
Long term debt 66,667 66,667
Stockholders' equity
Preferred stock; authorized 5,000,000 at
March 31, 1998 and December 31, 1997 none
issued and outstanding - -
Common stock, $0.01 par value, authorized
55,000,000 shares, issued and outstanding
19,364,490 at March 31, 1998 and 19,338,073
at December 31, 1997, respectively 193 193
Warrants 6,500 6,500
Additional paid in capital 220,795 220,514
Accumulated deficit (194,211) (198,431)
-------- --------
Total stockholders' equity 33,277 28,776
-------- --------
$ 135,794 $ 132,624
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 85,216 $ 59,809
Cost of goods sold, buying and 61,686 43,585
------------ ------------
Gross profit 23,530 16,224
Selling, general and administrative 17,203 11,551
------------ ------------
Operating income 6,327 4,673
Interest expense, net 1,972 2,933
Transaction expenses - 731
------------ ------------
Income before income taxes 4,355 1,009
Income taxes 135 83
------------ ------------
Net income $ 4,220 $ 926
Senior preferred stock dividends - 7,747
------------ ------------
Net income (loss) applicable to common
stockholders $ 4,220 $ (6,821)
------------ ------------
------------ ------------
Net income (loss) per share applicable to
common stockholders
Basic $ 0.22 $ (0.35)
------------ ------------
------------ ------------
Diluted $ 0.20 $ (0.33)
------------ ------------
------------ ------------
Weighted average shares outstanding
Basic 19,347 19,329
------------ ------------
------------ ------------
Diluted 20,773 20,419
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Paid in Earnings
Stock Warrants Capital (Deficit) Total
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 193 $ 6,500 $ 220,514 $ (198,431) $ 28,776
Exercise of stock options - - 281 - 281
Net income - - - 4,220 4,220
---------------------------------------------------
Balance at March 31, 1998 $ 193 $ 6,500 $ 220,795 $ (194,211) $ 33,277
---------------------------------------------------
---------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,220 $ 926
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 996 674
Amortization of deferred financing fees 60 90
Changes in operating assets and liabilities:
Accounts receivable 913 34
Merchandise inventories (7,577) (8,342)
Prepaid expenses (471) (1,326)
Other assets (73) -
Accounts payable (1,147) 1,005
Accrued expenses and other current liabilities (3,287) 20,600
Other long term liabilities 91 92
------- --------
Net cash provided by (used in) operating activities (6,275) 13,753
INVESTING ACTIVITIES
Purchase of property and equipment (4,678) (1,770)
------- --------
Net cash used in investing activities (4,678) (1,770)
FINANCING ACTIVITIES
Net change in revolving debt facility 3,012 (3,536)
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)
Exercise of stock options 281 -
------- --------
Net cash provided by financing activities 3,293 49,008
Net increase (decrease) in cash and cash equivalents (7,660) 60,991
Cash and cash equivalents at beginning of year 7,755 47
------- --------
Cash and cash equivalents at end of period $ 95 $ 61,038
------- --------
------- --------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management, the accompanying condensed unaudited
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of Guitar Center, Inc., a Delaware
corporation, and subsidiary ("Guitar Center" or the "Company"), as of March
31, 1998, and the results of operations and cash flows for the three months
ended March 31, 1998 and 1997. The accompanying consolidated 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, 1997.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
1. Income Taxes
As a result of the $72.4 million loss incurred in fiscal 1996, the Company
had a net operating loss carryforward for federal income taxes of
approximately $61.8 million. Accordingly, no provision for income taxes
has been made in the condensed consolidated statement of operations for the
quarter ended March 31, 1998, except for certain minimum federal and state
taxes.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Guitar Center operated 38 stores in 20 major markets as of March 31, 1998.
From 1993 to 1997, Guitar Center's net sales and operating income before
deferred compensation expense grew at compound annual growth rates of 32.1% and
38.6%, respectively, principally due to comparable store sales growth averaging
14.9% 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 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 eight stores in 1997, of which two were purchased by the
Company and, as of March 31, 1998, the Company had opened two additional stores
in 1998. Presently the Company expects to open an additional eight stores
during the remainder of 1998. 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 immediate 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 it will
initially incur higher administrative and promotional 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 27.6 27.1
Selling, general, and administrative
expenses 20.2 19.3
------ ------
Operating income 7.4 7.8
Interest expense, net 2.3 4.9
Transaction expenses - 1.2
------ ------
Income before income taxes 5.1 1.7
Income taxes 0.2 0.1
------ ------
Net income 4.9% 1.6%
------ ------
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1997.
Net sales of the Company increased to $85.2 million for the three months
ended March 31, 1998, from $59.8 million for the comparable prior period, a
42.5% increase. This growth was attributable to an increase of 17.5% in
comparable store net sales which contributed $10.4 million, or 41.0% of the
total increase. New store net sales of $15.0 million accounted for the balance
of the increase in net store sales. In the opinion of management, the strong
sales performance in the first quarter of 1998 reflects an extraordinarily
successful promotional period, the introduction of the Company's Preferred
Player credit card, and the effect of the Easter holiday falling into the second
quarter of 1998 versus the first quarter in 1997. Management does not expect
this comparable sales trend to continue at this high level.
Gross profit dollars for the three months ended March 31, 1998 compared to
1997 increased 45.0% to $23.5 million from $16.2 million. Gross profit as a
percentage of net sales for the three months ended March 31, 1998 compared to
1997 increased to 27.6% from 27.1%. Gross margin for the immediately preceding
quarter ended December 31, 1997 (which included the Christmas selling season)
was 28.8%.
Selling, general and administrative expenses for the three months ended
March 31, 1998 compared to 1997 increased 48.9% to $17.2 million from $11.6
million. The increase in total selling, general and administrative expenses is
a result of certain selling expenses incurred at the unit level due to an
increase in the number of stores in 1998 as compared to 1997. As a percentage
of net sales, selling, general and administrative expenses increased to 20.2%
from 19.3%. The change in percentage of sales reflects the incremental cost of
staffing newly opened and immature stores, which typically achieve less leverage
than mature stores. In addition, the increase reflects additional corporate
personnel and management information systems expenses associated with the
Company's continuing expansion.
Operating income for the three months ended March 31, 1998 was $6.3 million
compared to operating income of $4.7 million for the same three months of 1997,
an increase of 35.4%. 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, 1998 was 7.4% compared to
7.8% in 1997.
Interest expense, net for the three months ended March 31, 1998 decreased
to $2.0 million from $2.9 million in the same period of 1997. The decrease is
principally the result of interest incurred on the Company's 11% Senior Notes
due 2006 (the "Senior Notes"). On April 19, 1997, the Company redeemed, at a
premium, $33.3 million principal amount of the Senior Notes.
Net income (before Senior Preferred Stock Dividends) for the three months
ended March 31, 1998 increased to $4.2 million from $0.9 million for the same
period in 1997, principally as a result of the increase in sales and gross
margin and a reduction in interest expense of $1.0 million, partially offset by
an increase in selling, general and administrative expenses. See "Note 2.
Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
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 to the final
maturity in 2006. As of March 31, 1998, the Company had $3.0 million
outstanding under its Credit Facility, $0.7 million outstanding on standby
letter of credit, and had available borrowings of approximately $36.3 million.
The agreement underlying the Credit Facility expires July 1, 2004 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 all such requirements as of March 31, 1998.
9
<PAGE>
For the three months ended March 31, 1998, cash used by operating
activities was $6.3 million. Capital expenditures totaled $4.7 million,
relating principally to the opening of new stores and the relocation of two
existing stores. Cash provided by financing activities totaled $3.3 million,
which consisted principally of borrowings under the Credit Facility.
During the first quarter of 1998, inventory turn for new product decreased
from 3.5 times as of March 31, 1997 to 3.2 times as of March 31, 1998 and, as a
result, inventory increased by approximately 4.0% per square foot. Management
believes that the increase in inventory balances reduced store stockouts which
benefited comparable and new store sales.
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. During the quarter ended March
31, 1998, the Company opened two new stores. Each new store typically has
required approximately $2.0 million for gross inventory. Historically, the
Company's cost of capital improvements for an average new store has been
approximately $850,000, consisting of leasehold improvements, fixtures and
equipment.
The Company also believes that there may be attractive opportunities to
expand by selectively acquiring existing music products retailers. The Company,
in the ordinary course of its business, regularly evaluates and enters into
negotiations relating to potential acquisition candidates in 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 of the
foregoing. As of the date of this report, the Company had no existing
agreements or commitments to effect any such acquisition. 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 at least the next twelve
months, including its present plans for expansion as described elsewhere herein.
The Company's capital resources and liquidity are expected to be provided by the
Company's net cash flow from operations and borrowings under the Credit
Facility. 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
In April 1998, the AICPA issued Statement of Position 98-5, "REPORTING ON
THE COSTS OF START-UP ACTIVITIES" (98-5). The SOP requires that costs incurred
during start-up activities, including organization costs, be expenses as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Initial application of the SOP should be as
of the beginning of the fiscal year in which the SOP is first adopted and should
be reported as a cumulative effect of a change in accounting principle.
10
<PAGE>
The Company expects to adopt SOP 98-5 in the first quarter of 1999.
Management estimates that the Company will incur a cumulative effect of a change
in accounting principle of approximately $1.0 million in the consolidated
statement of operations relative to the adoption of the SOP.
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, the effectiveness of the Company's promotion and merchandising
strategies, 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 Risks
Related to the Business" on pages 11 through 13 of the Company's 1997 Annual
Report on Form 10-K.
11
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11. Income (loss) per share.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K. None.
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 23rd day of April, 1998.
Guitar Center, Inc.
/s/ Bruce L. Ross
Bruce L. Ross, Executive Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
12
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Income (Loss) Per Share
27 Financial Data Schedule
</TABLE>
13
<PAGE>
EXHIBIT 11
GUITAR CENTER, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1998 1997
------- --------
<S> <C> <C>
Net income (loss) $ 4,220 $ (6,821)
Weighted average shares outstanding
Basic 19,347 19,329
------- --------
------- --------
Diluted 20,773 20,419
------- --------
------- --------
Income (loss) per common share
Basic $ 0.22 $ (0.35)
------- --------
Diluted $ 0.20 $ (0.33)
------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 7,145
<ALLOWANCES> 162
<INVENTORY> 86,475
<CURRENT-ASSETS> 97,250
<PP&E> 39,939
<DEPRECIATION> 13,448
<TOTAL-ASSETS> 135,794
<CURRENT-LIABILITIES> 34,742
<BONDS> 66,667
0
0
<COMMON> 193
<OTHER-SE> 33,084
<TOTAL-LIABILITY-AND-EQUITY> 135,794
<SALES> 85,216
<TOTAL-REVENUES> 85,216
<CGS> 61,686
<TOTAL-COSTS> 17,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,972
<INCOME-PRETAX> 4,355
<INCOME-TAX> 135
<INCOME-CONTINUING> 4,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,220
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.20
</TABLE>
