<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 June 30, 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 July 31, 1998, 20,070,018 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
1
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GUITAR CENTER, INC. AND SUBSIDIARY
INDEX
<TABLE>
<S> <C> <C>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997......... 3
Condensed Consolidated Statements of Operations - Three months ended June 30, 1998
and 1997............................................................................ 4
Condensed Consolidated Statements of Operations - Six months ended June 30,
1998 and 1997....................................................................... 5
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 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. Submission of Matters to a Vote of Security Holders........................13
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K...........................................14
</TABLE>
2
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 108 $ 7,755
Accounts receivable 7,237 7,896
Merchandise inventories 95,180 78,898
Prepaid expenses and other current assets 4,884 3,226
--------- ---------
Total current assets 107,409 97,775
Property and equipment, net 29,629 22,809
Goodwill, net of accumulated amortization 4,711 4,094
Other assets 8,221 7,946
--------- ---------
$ 149,970 $ 132,624
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,002 $ 16,863
Accrued expenses and other current liabilities 16,541 19,301
Line of credit 11,174 -
--------- ---------
Total current liabilities 43,717 36,164
Other long-term liabilities 1,221 1,017
Long term debt 66,667 66,667
Stockholders' equity
Preferred stock; authorized 5,000,000 shares at
June 30, 1998 and December 31, 1997, none issued
and outstanding - -
Common stock, $0.01 par value, authorized
55,000,000 shares, issued and outstanding
20,069,735 at June 30, 1998 and 19,338,073
at December 31, 1997, respectively 201 193
Warrants - 6,500
Additional paid in capital 227,519 220,514
Accumulated deficit (189,355) (198,431)
--------- ---------
Total stockholders' equity 38,365 28,776
--------- ---------
$ 149,970 $ 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
JUNE 30, 1998 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Net sales $ 91,260 $ 69,627
Cost of goods sold, buying and occupancy 65,429 50,617
--------- --------
Gross profit 25,831 19,010
Selling, general and administrative 19,035 13,580
--------- --------
Operating income 6,796 5,430
Interest expense, net 2,096 2,127
Gain on sale of assets (324) (535)
--------- --------
Income before income taxes and
extraordinary loss 5,024 3,838
Income taxes 168 1,630
--------- --------
Income before extraordinary loss $ 4,856 $ 2,208
Extraordinary loss on early extinguishment of
debt, net of tax of $1,679 - (2,739)
--------- --------
Net income (loss) $ 4,856 $ (531)
--------- --------
--------- --------
Net income (loss) per share
Basic $ 0.25 $ (0.03)
--------- --------
--------- --------
Diluted $ 0.23 $ (0.03)
--------- --------
--------- --------
Weighted Average Shares Outstanding
Basic 19,550 19,329
--------- --------
--------- --------
Diluted 21,138 19,329
--------- --------
--------- --------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net sales $ 176,476 $129,436
Cost of goods sold, buying and occupancy 127,115 94,202
---------- ----------
Gross profit 49,361 35,234
Selling, general and administrative 36,238 25,131
---------- ----------
Operating income 13,123 10,103
Interest expense, net 4,068 5,060
Gain on sale of assets (324) (535)
Transaction expense - 731
---------- ----------
Income before income taxes and
extraordinary loss 9,379 4,847
Income taxes 303 1,713
---------- ----------
Income before extraordinary loss $ 9,076 $ 3,134
Extraordinary loss on early extinguishment of
debt, net of tax $1,679 - (2,739)
---------- ----------
Net income $ 9,076 $ 395
---------- ----------
---------- ----------
Net income per share
Basic $ 0.47 $ 0.02
---------- ----------
---------- ----------
Diluted $ 0.43 $ 0.02
---------- ----------
---------- ----------
Weighted average shares outstanding
Basic 19,449 19,329
---------- ----------
---------- ----------
Diluted 20,952 20,456
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,076 $ 395
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,088 1,399
Amortization of deferred financing fees 120 1,242
Gain on sale of property (324) (535)
Changes in operating assets and liabilities:
Accounts receivable 659 (591)
Merchandise inventories (16,282) (15,093)
Prepaid expenses (1,658) (1,869)
Other assets (1,013) (241)
Accounts payable (861) 2,673
Accrued expenses and other current liabilities (2,253) 208
Other long term liabilities 204 194
-------- --------
Net cash provided by (used in) operating activities (10,244) (12,218)
INVESTING ACTIVITIES
Proceeds from sale of property 733 893
Purchase of property and equipment (9,315) (5,009)
Payment for purchase of Rhythm City, Inc., net of
cash acquired (507) (10,300)
-------- --------
Net cash used in investing activities (9,089) (14,416)
FINANCING ACTIVITIES
Net change in revolving debt facility 11,174 (3,536)
Redemption of senior notes - (33,333)
Proceeds from sale of stock to management - 310
Proceeds from initial public offering - 107,631
Redemption of management common stock - (18,417)
Redemption of senior preferred stock - (22,963)
Exercise of stock options 599 -
Warrant underwriting (87) -
-------- --------
Net cash provided by financing activities 11,686 29,692
Net increase (decrease) in cash and cash equivalents (7,647) 3,058
Cash and cash equivalents at beginning of year 7,755 47
-------- --------
Cash and cash equivalents at end of period $ 108 $ 3,105
-------- --------
-------- --------
</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 unaudited condensed
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
June 30, 1998, and the results of operations and cash flows for the
three and six months ended June 30, 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 and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for
the full year.
2. 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 as of December 31, 1997. Accordingly,
no provision for income taxes has been made in the condensed
consolidated statement of operations for the three and six months ended
June 30, 1998, except for certain minimum federal and state taxes.
3. Warrants
In June 1996, Guitar Center, Inc. issued warrants to purchase an
aggregate of 676,325 shares of common stock, par value $0.01 per share,
of the Company. On June 3, 1998, the warrants were exercised and
converted into shares of common stock, on a cash-less exercise basis.
The effect to the Company's total stockholders' equity was immaterial.
4. Earnings Per Share
In 1997, the Company adopted SFAS 128, which requires the presentation of
basic and diluted earnings per share. The difference between the weighted
average number of shares outstanding for basic and diluted earnings per
share represents the dilutive effect of the Company's potential common
stock (stock options and warrants outstanding during the applicable
periods).
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
3. OVERVIEW
Guitar Center operated 42 stores in 23 major markets as of June 30,
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 June 30, 1998, the Company had opened six additional
stores in 1998. Presently, the Company expects to open an additional four
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. Management also expects competition to increase over
time as other music products retailers attempt to execute growth strategies.
The following table sets forth certain historical income statement data
as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 28.3 27.3 28.0 27.2
Selling, general, and administrative
expenses 20.9 19.5 20.6 19.4
------- -------- ------- -------
Operating income 7.4 7.8 7.4 7.8
Interest expense, net 2.3 3.1 2.3 3.9
Gain on sale of assets (0.4) (0.8) (0.2) (0.4)
Transaction expenses and other - - - 0.6
------- -------- ------- -------
Income before income taxes and
extraordinary item 5.5 5.5 5.3 3.7
Income taxes 0.2 2.3 0.2 1.3
------- -------- ------- -------
Net income before extraordinary
item 5.3% 3.2% 5.1% 2.4%
------- -------- ------- -------
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1998.
Net sales of the Company increased to $91.3 million for the three months
ended June 30, 1998, from $69.6 million for the comparable prior period, a
31.1% increase. This growth was attributable to an increase of 14.0% in
comparable store net sales which contributed $9.6 million, or 44.4%, of the
total increase. New store net sales accounted for the balance of the increase
in net store sales. In the opinion of management, the strong comparable store
sales performance in the second quarter of 1998 reflects the effect of
successful promotions and the continuing roll out of the Company's Preferred
Player credit card. Management does not expect this comparable store sales
trend to continue at this high level.
Gross profit dollars for the three months ended June 30, 1998 compared
to 1997 increased 35.9% to $25.8 million from $19.0 million. Gross profit as
a percentage of net sales for the three months ended June 30, 1998 compared
to 1997 increased to 28.3% from 27.3%. The increase in gross profit
percentage is primarily due to opportunity buys in merchandise and improved
margins in the pro audio and keyboard segments of the business.
Selling, general and administrative expenses for the three months ended
June 30, 1998 compared to 1997 increased 40.2% to $19.0 million from $13.6
million. The increase in total selling, general and administrative expenses
is a result of certain selling expenses incurred at the store 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 20.9% from 19.5%. 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 June 30, 1998 was $6.8
million compared to operating income of $5.4 million for the same three
months of 1997, an increase of 25.2%. 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 June 30,
1998 was 7.4% compared to 7.8% in 1997. The decrease is principally related
to the increase in selling, general and administrative expenses, partially
offset by the increase in gross margin.
Interest expense, net for the three months ended June 30, 1998 was $2.1
million unchanged from 1997. The interest expense for the second quarter of
1998 consisted of interest on the Company's 11% Senior Notes due 2006 (the
"Senior Notes") and borrowings under the Company's line of credit. On April
19, 1997, the Company redeemed, at a premium, $33.3 million principal amount
of the Senior Notes.
In the second quarter of 1997, an extraordinary charge to operations of
$4.4 million, net of tax of $1.7 million, was incurred equal to the premium
paid on the Senior Notes redeemed plus the write-off of one-third of the
unamortized deferred financing fees.
Net income (loss) for the three months ended June 30, 1998 increased to
$4.9 million from a loss of $(0.5) million for the same period in 1997,
principally as a result of the effect of the extraordinary charge as
discussed above, as well as an increase in sales and gross margin, partially
offset by an increase in selling, general and administrative expenses. See
"Note 2. Income Taxes".
9
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1997
Net sales of the Company increased to $176.5 million for the six months
ended June 30, 1998 from $129.4 million for the comparable prior period, a
36.3% increase. This growth was attributable to an increase of 15.7% in
comparable store net sales which contributed $20.0 million, or 42.6% of the
total increase. New store net sales accounted for the balance of the increase
in net store sales.
Gross profit dollars for the six months ended June 30, 1998 compared to
1997 increased 40.1% to $49.4 million from $35.2 million. Gross profit as a
percentage of net sales for six months ended June 30, 1998 compared to 1997
increased to 28.0% from 27.2% in the six months ended June 30, 1997. The
increase in gross profit percentage is primarily due to opportunity buys in
merchandise and improved margins in the pro audio and keyboard segments of
the business.
Selling, general and administrative expenses for the six months ended
June 30, 1998 compared to 1997 increased 44.2% to $36.2 million from $25.1
million. The increase in total selling, general and administrative expenses
is a result of certain selling expenses incurred at the store 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 20.6% from 19.4%. 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 six months ended June 30, 1998 was $13.1
million compared to operating income of $10.1 million for the same six months
of 1997, an increase of 29.9%. 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 six months ended June 30, 1998 was 7.4%
compared to 7.8% in 1997. The decrease is related to the increase in
selling, general and administrative expenses, partially offset by the
increase in gross margin.
Interest expense, net for the six months ended June 30, 1998 decreased
to $4.1 million from $5.1 million in the same period of 1997. The interest
expense for the six months ended June 30, 1998 consisted principally of
interest on the Company's Senior Notes and borrowings under the Company's
line of credit. On April 19, 1997, the Company redeemed, at a premium, $33.3
million principal amount of the Senior Notes.
In the second quarter of 1997 an extraordinary charge to operations of
$4.4 million, net of tax of $1.7 million, was incurred equal to the premium
paid on the Senior Notes redeemed plus the write-off of one-third of the
unamortized deferred financing fees.
Net income for the six months ended June 30, 1998 increased to $9.1
million from $0.4 million for the same period in 1997, principally as a
result of the effect of the extraordinary charge discussed above, as well as
an increase in sales and gross margin, 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 their final maturity in 2006. As of June 30, 1998, the Company had $11.2
million outstanding under its Credit Facility, excluding $0.7 million
outstanding on standby letters of credit, and had available borrowings under
the 1997 Credit Facility of approximately $28.1million. The agreement
underlying the Credit Facility expires July 1, 2004 and includes certain
restrictive covenants
10
<PAGE>
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 June 30, 1998.
For the six months ended June 30, 1998, cash used by operating
activities was $10.2 million. Cash used in investing activities totaled $9.1
million, relating principally to the opening of new stores and remodeling of
moved stores. Cash provided by financing activities totaled $11.7 million,
which consisted principally of borrowings under the Credit Facility.
During the second quarter of 1998, the outstanding warrants were
exercised and converted to 376,325 shares of common stock, par value $0.01
per share. The effect to the Company's total stockholders' equity was
immaterial.
During the second quarter of 1998, inventory turn for new product in
mature stores decreased from 3.7 times as of June 30, 1997 to 3.3 times as of
June 30, 1998. Management believes that the increase in inventory balances
has 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 June
30, 1998, the Company opened four 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.
YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. In January
1997, the Company developed a plan to deal with the Year 2000 problem to make
its systems Year 2000 compliant. The plan has been assigned to a Senior Vice
President of the Company and provides for the conversion efforts to be
completed by the end of 1998. The plan includes modifying, upgrading, or
replacing its internal computer software applications and information
systems. The Company does not expect that the cost of its year 2000
compliance program will be material to its business, results of operations or
financial condition. Although the impact on the Company caused by the failure
of the Company's significant suppliers to achieve year 2000 compliance in
11
<PAGE>
a timely manner or effective matter is uncertain, the Company's business and
results of operations could be materially adversely affected by such a
failure.
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.
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 for the period ending March 31, 1999
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, changes 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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company's shareholders (the "Annual Meeting")
was held on May 6, 1998. At that time there were present, in person or
by proxy, 17,211,471 shares of the Company's Common Stock.
(b) At the annual meeting, three items were submitted to a vote of
shareholders: (1) the election of directors; (2) the approval of the
Company's 1997 Equity Participation Plan, as amended; and (3) the
amendment to the Company's 1996 Performance Stock Option Plan.
(c) The results of voting for the election of eight directors at the Annual
Meeting were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Larry Thomas 17,041,971 169,500
Marty Albertson 17,041,971 169,500
Steven Burge 17,041,871 169,600
David Ferguson 17,041,871 169,600
Harvey Kibel 17,044,671 166,800
Michael Lazarus 17,044,571 166,900
Peter Starrett 17,044,671 166,800
Jeffrey Walker 17,044,431 167,040
</TABLE>
The results of voting for the approval of the Company's 1997 Equity
Participation Plan, as amended, were as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
1997 EPP 17,148,087 61,170 2,214 0
</TABLE>
The results of voting for the amendment to the Company's 1996
Performance Stock Option Plan were as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
1996 PSOP 17,139,046 50,666 2,469 19,290
</TABLE>
13
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) Exhibits.
Exhibit 11. Income (loss) per share.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed a Form 8-K dated June 3,
1998 relating to the conversion of Warrants to purchase 676,566
shares of Guitar Center, Inc. Common Stock.
14
<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 31st day of July, 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)
15
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Income (Loss) Per Share
27 Financial Data Schedule
</TABLE>
16
<PAGE>
EXHIBIT 11
GUITAR CENTER, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1998 1997 1998 1997
------ ------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,856 $ (531) $ 9,076 $ 395
Weighted average shares outstanding
Basic 19,550 19,329 19,449 19,329
-------- -------- ------- -------
-------- -------- ------- -------
Diluted 21,138 19,329 20,952 20,456
-------- -------- ------- -------
-------- -------- ------- -------
Income (loss) per common share
Basic $ 0.25 $ (0.03) $ 0.47 $ 0.02
-------- -------- ------- -------
Diluted $ 0.23 $ (0.03) $ 0.43 $ 0.02
-------- -------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 7,411
<ALLOWANCES> 174
<INVENTORY> 95,180
<CURRENT-ASSETS> 107,409
<PP&E> 43,667
<DEPRECIATION> 14,038
<TOTAL-ASSETS> 149,970
<CURRENT-LIABILITIES> 43,717
<BONDS> 66,667
0
0
<COMMON> 201
<OTHER-SE> 38,164
<TOTAL-LIABILITY-AND-EQUITY> 149,970
<SALES> 176,476
<TOTAL-REVENUES> 176,476
<CGS> 127,115
<TOTAL-COSTS> 36,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,068
<INCOME-PRETAX> 9,379
<INCOME-TAX> 303
<INCOME-CONTINUING> 9,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,076
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.43
</TABLE>
