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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, 2000
/ / 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.
- ------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4600862
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 735-8800
- ------------------------------------------------------------------------------
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 May 2, 2000, 22,027,845 shares of our Common Stock, $.01 par value, were
outstanding.
1
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GUITAR CENTER, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<S> <C>
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 ........................3
Consolidated Statements of Income - Three months ended
March 31, 2000 and 1999....................................................................4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 ...................................................................5
Notes to Consolidated Financial Statements ...............................................6
ITEM 2...MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......................11
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..............................12
Item 5. Not Applicable
Item 6. Exhibits.........................................................................14
</TABLE>
2
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GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,514 $ 6,773
Accounts receivable, net 12,388 14,127
Merchandise inventory, net 169,870 160,571
Prepaid expenses and deposits 3,643 3,388
Deferred income tax 11,918 11,918
------------ ------------
Total current assets 206,333 196,777
Property and equipment, net 59,860 58,174
Deferred income tax 555 555
Goodwill, net 4,402 4,448
Other assets 8,715 6,897
------------ ------------
$ 279,865 $ 266,851
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,210 $ 41,133
Accrued expenses and other current liabilities 21,235 23,446
Merchandise advances 9,050 8,455
Revolving line of credit 48,158 42,770
Current portion of long-term debt 447 437
------------ ------------
Total current liabilities 125,100 116,241
Other long-term liabilities 2,300 2,070
Long-term debt 68,032 68,221
------------ ------------
Total liabilities 195,432 186,532
Stockholders' equity
Preferred Stock; authorized 5,000 shares at
March 31, 2000 and December 31, 1999,
none issued and outstanding -- --
Common Stock, $0.01 par value, authorized
55,000 shares, issued and outstanding
22,023 at March 31, 2000 and
December 31, 1999, respectively 221 221
Additional paid in capital 244,003 244,003
Accumulated deficit (159,791) (163,905)
------------ ------------
Total stockholders' equity 84,433 80,319
------------ ------------
$ 279,865 $ 266,851
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------ ------------
<S> <C> <C>
Net sales $ 175,846 $ 135,433
Cost of goods sold, buying and occupancy 130,575 100,387
------------ ------------
Gross profit 45,271 35,046
Selling, general and administrative expenses 35,697 28,546
------------ ------------
Operating income 9,574 6,500
Interest expense, net 2,931 2,442
Interest expense to related parties -- 310
------------ ------------
Income before income taxes and cumulative effect
of a change in accounting principle 6,643 3,748
Income taxes 2,529 2,099
------------ ------------
Income before cumulative effect of a change in
accounting principle 4,114 1,649
Cumulative effect of change in accounting principle
to write-off pre-opening costs, net of tax of $578 -- (1,074)
------------ -------------
Net income $ 4,114 $ 575
============ ============
Net income per share
Basic
Income before cumulative effect of a change
in accounting principle $ 0.19 $ 0.07
Cumulative effect of change in accounting
principle to write-off pre-opening -- (0.04)
costs, net of tax
------------ ------------
Net income $ 0.19 $ 0.03
============ ============
Diluted
Income before cumulative effect of a change
in accounting principle $ 0.19 $ 0.07
Cumulative effect of change in accounting
principle to write-off pre-opening -- (0.04)
costs, net of tax
------------ ------------
Net income 0.19 0.03
============ ============
Weighted average shares outstanding
Basic 22,023 22,011
============ ============
Diluted 22,024 22,722
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,114 $ 575
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,582 1,937
Amortization of deferred financing fees 97 60
Cumulative effect of change in accounting principle to
write-off pre-opening costs -- 1,652
Changes in operating assets and liabilities:
Accounts receivable 1,739 (1,510)
Merchandise inventory (9,299) (4,414)
Prepaid expenses (255) 2,779
Other assets (2,011) (2,964)
Accounts payable 5,077 (3,727)
Accrued expenses and other current liabilities (2,211) 882
Other long term liabilities 230 127
Merchandise advances 595 447
------------ ------------
Net cash provided by (used in) operating activities 658 (4,156)
INVESTING ACTIVITIES
Purchase of property and equipment (4,129) (3,631)
FINANCING ACTIVITIES
Net change in revolving debt facility 5,391 7,874
Proceeds from exercise of stock options -- 199
Payments under capital lease (179) --
Borrowings under related party debt -- 270
------------ ------------
Net cash provided by financing activities 5,212 8,343
Net increase in cash and cash equivalents 1,741 556
Cash and cash equivalents at beginning of year 6,773 472
------------ ------------
Cash and cash equivalents at end of period $ 8,514 $ 1,028
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GUITAR CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of Guitar Center, Inc. and subsidiaries
("Guitar Center") as of March 31, 2000 and December 31, 1999, and the
results of operations and cash flows for the three months ended March
31, 2000 and 1999. The accompanying financial statements should be read
in conjunction with the audited financial statements and notes thereto
contained in our Annual Report on Form 10-K for the year ended December
31, 1999.
The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full
year.
2. Merger
On May 28, 1999, we acquired all of the stock of Musician's Friend,
Inc., a Delaware corporation ("Musician's Friend"), pursuant to a
merger agreement.
The merger was accounted for under the pooling of interests method.
Accordingly, the financial statements of Guitar Center have been
restated for all periods to include the results of Musician's Friend.
The following reflects net sales and net income (loss) of the
previously separate companies for the three month period ended March
31, 1999, which are included in the combined net sales and net income
for the quarter ended March 31, 1999:
Three Months Ended
March 31, 1999
Guitar Center Musician's Friend
------------------------------------
Net sales $ 109,899 25,534
Net income (loss) $ 2,825 (2,250)
3. Segment Information
In accordance with the requirements of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," our reportable
businesses segments are retail (stores) and direct response (catalog
and Internet). Management evaluates segment performance based primarily
on revenue and income before income taxes.
6
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Net sales, income before income taxes and cumulative effect of change
in accounting principle, and total assets are summarized as follows for
the quarters ended March 31, 2000 and March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
Retail Direct Response Total
-----------------------------------------------------------------
<S> <C> <C> <C>
Net sales $145,348 $30,498 $175,846
Income before income taxes
and cumulative effect of change
in accounting principle 5,502 1,141 6,643
Total assets 255,595 24,270 279,865
THREE MONTHS ENDED MARCH 31, 1999
Retail Direct Response Total
-----------------------------------------------------------------
Net sales $118,058 $17,375 $135,433
Income (loss) before income taxes
and cumulative effect of change
in accounting principle 5,578 (1,830) 3,748
Total assets 198,914 15,782 214,696
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We operated 69 retail locations in 35 major markets and four stores in
secondary markets as of March 31, 2000, and with the acquisition of Musician's
Friend, we operate the largest direct response channel (catalog and Internet) in
the musical instruments industry in the United States. From 1995 to 1999, our
net sales grew at an annual compound rate of 31.2%, principally due to the
comparable store sales growth of our Guitar Center stores averaging 14% per
year, the opening of new stores, and a 21% increase in the direct response
channel. We believe such volume increases are the result of the continued
success of the implementation of our business strategy, continued growth in the
music products industry and increasing consumer awareness of the Guitar Center
and Musician's Friend brand names. We do not expect comparable store sales to
continue to increase at historical rates.
We opened (including stores originally opened under the Musician's
Friend brand) thirteen Guitar Center stores in 1999 and, as of March 31, 2000,
had opened four additional Guitar Center stores this year. Presently, we expect
to open an additional eleven Guitar Center stores during the remainder of 2000,
one of which will be the Rockville, Maryland retail location we acquired in
April 2000 from Veneman Music. In preparation for these additional stores, we
have dedicated a substantial amount of resources over the past several years to
building the infrastructure necessary to support a large, national chain. We
believe the infrastructure is in place to support our needs for the immediate
foreseeable future, including our present expansion plans. We will continue to
pursue our 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 this clustering strategy results in
the transfer of sales from existing stores to new locations.
As we enter new markets, we expect that we will initially incur higher
administrative and promotional costs per store than is currently experienced in
established markets. We also expect competition to continue to increase over
time as other music products retailers attempt to execute national growth
strategies. Our business strategy will also emphasize opportunities to grow our
direct response business, particularly opportunities to increase our Internet
activities.
The following table sets forth historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------- --------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 25.7 25.9
Selling, general, and administrative expenses 20.3 21.1
---------- --------
Operating income 5.4 4.8
Interest expense, net 1.7 1.8
Interest expense to related parties -- 0.2
---------- --------
Income before income taxes and cumulative
effect of a change in accounting principle 3.7 2.8
Income taxes 1.4 1.6
---------- --------
Income before cumulative effect of a
change in accounting principle 2.3 1.2
Cumulative effect of a change in accounting
principle to write-off pre-opening costs, net of -- 0.8
tax
---------- --------
Net income 2.3 0.4
---------- --------
</TABLE>
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
Net sales increased to $175.8 million for the three months ended March
31, 2000, from $135.4 million for the comparable prior period, a 29.8% increase.
Net sales from retail stores totaled $145.3 million, an increase of $27.3
million, or 23.1%. Sales from new stores contributed $29.4 million, or 31.7% of
the increase. Comparable store sales increased 8%. The increase in comparable
store sales was due to aggressive pricing on certain elements of inventory,
particularly at former Musician's Friend stores and good store sales performance
due to the effect of successful promotions. Our management is presently
anticipating comparable store sales growth of 5% to 7% for the immediate future.
The foregoing guidance is subject to the qualifications set forth below under
"Forward-Looking Statements; Business Risks." Net sales from the direct response
channel totaled $30.5 million, a $13.1 million increase from the first quarter
of 1999. Catalog sales for the three months ended March 31, 2000 compared to
1999 increased 46.5% to $22.7 million from $15.5 million and Internet sales
increased 311% to $7.8 million from $2.0 million for the same period last year.
This is primarily due to the increase in average order size, an increase to $232
compared to $206 in the first quarter of 1999, as a result of the third-party
credit card introduced in the third quarter of 1999.
Gross profit dollars for the three months ended March 31, 2000 compared
to 1999 increased 29.2% to $45.3 million from $35.0 million. Gross profit as a
percentage of net sales for the three months ended March 31, 2000 was 25.7% and
25.9% for the 1999 period. Gross profit margin percentage for the retail stores
after buying and occupancy costs was 25.3% compared to 25.8% in the first
quarter of 1999. The reduction in gross profit margin is due to increased
occupancy costs due to the number of stores less than two years old (33 stores
out of 73 stores), and increased freight expense. Selling margin was roughly
similar for the two periods. The gross profit margin for the direct response
division was 27.7% for the quarter compared to 26.4% in the first quarter of
1999. In the first quarter of 1999, significant markdowns were required to clear
excess catalog and Internet inventories.
Selling, general and administrative expenses for the three months ended
March 31, 2000 compared to 1999 increased 25.1% to $35.7 million from $28.5
million. Selling, general and administrative expenses, as a percentage of sales,
for the three months ended March 31, 2000 compared to 1999 decreased to 20.3%
from 21.1%. Selling, general and administrative expenses for the retail stores
in the first quarter, inclusive of pre-opening costs and corporate general and
administrative expenses, was 19.9% as a percentage of sales compared to 19.3% in
last year's first quarter. The increase is attributable to aggressive marketing
programs we implemented and the opening of four stores in the first quarter of
2000 compared to three in the first quarter of 1999. Selling, general and
administrative expenses for the direct response division were 22.2% as a
percentage of sales in the first quarter compared to 33.1% in the same period
last year. This reflects the leveraging of fixed expenses.
Operating income for the three months ended March 31, 2000 was $9.6
million compared to $6.5 million for the same three months of 1999, an increase
of 47.3%. The increase is principally the result of the increase in sales
derived from both new and existing stores as well as from our direct response
unit. As a percentage of sales, operating income was 5.4% in the three months
ended March 31, 2000 and 4.8% in 1999.
Interest expense, net for the three months ended March 31, 2000
increased to $2.9 million from $2.4 million in the same period of 1999. The
increase reflects increased borrowings under our credit facility.
In the three months ended March 31, 2000, a $2.5 million provision for
income taxes was recorded. As the majority of the tax benefits related to the
net operating loss carryforward had been recognized as of December 31, 1999, the
Company's effective tax rate for the three months ended March 31, 2000
represents the combined federal and state rates expected to be realized for the
full year.
In the first quarter of 1999, a charge to operations of $1.7 million,
net of tax of $0.6 million, was incurred for the cumulative effect of a change
in accounting principle to expense pre-opening costs as incurred.
9
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Net income for the three months ended March 31, 2000 was $4.1 million,
compared to net income of $0.6 million in the first quarter of 1999, due to
increase in sales derived from both new and existing stores as well as from our
direct response units and as a result of the effect of the cumulative change in
accounting principle as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our need for liquidity will arise primarily from interest payable on
indebtedness and the funding of capital expenditures and working capital
requirements, as well as possible acquisitions. We have historically financed
our operations through internally generated funds and borrowings under our
credit facilities. We have no mandatory payments of principal on the $66.7
million of Senior Notes outstanding prior to their final maturity in 2006. As of
March 31, 2000, we had $48.2 million outstanding under the 2000 Credit Facility,
excluding $922,000 outstanding on standby letters of credit, and had available
borrowings of approximately $31.9 million.
For the three months ended March 31, 2000, net cash provided by
operating activities was $0.7 million. Cash used in investing activities totaled
$4.1 million, which principally consisted of capital expenditures under our
store expansion program. Cash provided by financing activities totaled $5.2
million, which principally consisted of borrowings under the credit facility.
We intend to pursue an aggressive growth strategy by opening additional
stores in new and existing markets. During the three months ended March 31,
2000, we opened four new stores. Each new Guitar Center store typically has
required approximately $1.8 million for gross inventory. Historically, our cost
of capital improvements for an average Guitar Center new store has been
approximately $850,000, consisting of leasehold improvements, fixtures and
equipment. We are also currently evaluating additional capital and strategic
requirements related to improving the technology and pursuing new opportunities
for the Internet business. Such costs could be significant.
Our expansion strategy is to continue to increase our market share in
existing markets and to penetrate strategically selected new markets. We opened
a total of 13 stores in 1999 and 16 stores in 1998, and currently anticipate
opening approximately eleven additional stores in 2000 and approximately 16 to
18 stores in 2001. One of the stores to be opened during 2000 is the Rockville,
Maryland retail location we acquired in April 2000 from Veneman Music. In
preparation for this expansion, we have dedicated a substantial amount of our
resources over the past several years to building the infrastructure necessary
to support a large national chain. We also believe there may be attractive
opportunities to expand by selectively acquiring existing music products
retailers. However, in the music industry there are only a small number of
companies that would strategically and financially be a beneficial opportunity
for us to acquire. Our "average" store is 15,000 square feet, carrying 7,000
SKUs and generating first year sales of $5.5 million, whereas the "average"
industry store is 3,200 square feet, carrying 2,500 SKUs and generating sales of
$1.0 million.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION. Interpretation 44 provides
criteria for the recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK-BASED COMPENSATION. Interpretation
44 is effective July 1, 2000, with certain provisions that are effective
retroactively to December 15, 1998 and January 12, 2000. Interpretation 44 is
not expected to have an impact on the Company's financial statements.
SEASONALITY
Our operating results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than any other
quarter.
INFLATION
We believe that the relatively moderate rates of inflation experienced
in recent years have not had a significant impact on our net sales or
profitability.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
This Report contains forward-looking statements relating to, among
other things, future results of operations, growth plans, sales, gross margin
and expense trends, capital requirements, liquidity requirements and general
industry and business conditions applicable to Guitar Center. These
forward-looking statements are based largely on our current expectations and are
subject to risks and uncertainties. Actual results could differ materially from
these forward-looking statements. Important factors to consider
10
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in evaluating any of these forward-looking statements include changes in
external competitive market factors, the effectiveness of our promotion and
merchandising strategies, changes in our business strategy or any inability to
execute our business 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 us
from competing successfully in existing or future markets. We are also dependent
on our continuing access to the credit markets to fund our working capital and
growth capital requirements. These matters and other business risks to which
Guitar Center is subject are discussed in our periodic reports and registration
statements filed from time to time with the Securities and Exchange Commission.
In particular, a discussion of some of the business risks that we face is
contained under the caption "Item 1., Business Risks Related to the Business" on
pages 12 through 16 of our 1999 Annual Report on Form 10-K. We do not presently
intend to update any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Guitar Center does not have any assets or liabilities which in its view
impose upon it significant market risk except that it has outstanding $66.7
million in aggregate principal amount of 11% Senior Notes due 2006. These senior
notes constitute long-term, fixed interest rate obligations for which market
quotations are available.
11
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Part II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company's shareholders (the "Annual Meeting")
was held on May 2, 2000. At that time there were present, in person or
by proxy, 13,799,949 shares of the Company's Common Stock.
(b) At the annual meeting, four items were submitted to a vote of
shareholders: (1) the election of directors; (2) the approval of the
amendment to the Company's 1997 Equity Participation Plan to
increase the number of shares authorized for issuance; (3) the
approval of the amendment to the Company's 1997 Equity Participation
Plan to allow for non-employee directors' fees to be paid in either
cash or options; and (4) the approval of the amendment to the
Company's 1997 Equity Participation Plan to allow for options issued
under the plan to be repriced.
(c) (1) The results of voting for the election of seven directors at the
Annual Meeting were as follows:
NOMINEE FOR WITHHELD
Larry Thomas 13,632,649 167,300
Marty Albertson 13,632,649 167,300
Steven Burge 13,631,649 168,300
David Ferguson 13,632,649 167,300
Harvey Kibel 13,631,649 168,300
Peter Starrett 13,631,649 168,300
Jeffrey Walker 13,631,649 168,300
(2) The results of voting for the amendment of the Company's 1997
Equity Participation Plan to increase the number of shares that may be
issued from 2,225,000 to 2,725,000 shares were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
11,736,049 2,063,900 0 0
(3) The results of voting for the amendment of the Company's 1997
Equity Participation Plan to allow for non-employee directors' fees to
be paid in either cash or options to acquire shares of our common stock
were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
13,104,824 694,207 918 0
(4) The results of voting for the amendment of the Company's 1997
Equity Participation Plan to allow for options issued under the plan to
be repriced at the discretion of a committee of our Board of Directors
were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
9,439,577 4,359,151 1,221 0
Item 6. EXHIBITS
(a) Exhibit 10.37. Amendment to 1997 Equity Participation Plan
as Approved by Stockholders at the Year 2000 Annual Meeting
of Stockholders.
(b) Exhibit 27. Financial Data Schedule.
12
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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 2nd day of May 2000.
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)
13
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Exhibit Index
EXHIBIT NO. DESCRIPTION
10.37 Amendment to 1997 Equity Participation Plan as Approved by
Stockholders at the Year 2000 Annual Meeting of Stockholders.
27 Financial Data Schedule.
14
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AMENDMENT
TO THE
1997 EQUITY PARTICIPATION PLAN
OF
GUITAR CENTER, INC.
Pursuant to the authority reserved to the Board of Directors (the "BOARD")
of Guitar Center, Inc., a corporation organized under the laws of State of
Delaware (the "COMPANY"), under Section 10.2 of the 1997 Equity Participation
Plan of Guitar Center, Inc. (the "PLAN"), the Board hereby amends the Plan as
follows.
1. The definition of "Award Limit" is amended to read in its
entirety as follows:
"'Award Limit'" shall mean 250,000 shares of Common Stock.
2. The first sentence of the definition of "Option" is amended to
read in its entirety as follows:
"'Option' shall mean a stock option granted under Article III or
Article IIIA of this Plan."
3. The second sentence of Section 2.1(a) of the Plan is amended to
read in its entirety as follows:
"The aggregate number of such shares which may be issued upon exercise
of such options or rights or upon any such awards under the Plan shall not
exceed two million, seven hundred twenty-five thousand (2,725,000)."
4. Section 3.4(b) of the Plan is amended to read in its entirety as
follows:
"(b) Upon the selection of a key Employee, consultant or Independent
Director to be granted an Option, the Committee (or the Board, with respect to
an Option granted to an Independent Director) shall instruct the Secretary of
the Company to issue the Option and may impose such conditions on the grant of
the Option as it deems appropriate. Without limiting the generality of the
preceding sentence, (x) the Board may, in its discretion and on such terms as it
deems appropriate, provide that an Option granted to any Independent Director
shall be in addition or in lieu of an Option that may be or has been granted to
such Independent Director pursuant to Section 3.4(d) or Article IIIA hereof, or
(y) the
<PAGE>
Committee (or the Board, with respect to an Option granted to an Independent
Director) may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee, consultant or
Independent Director that the Employee, consultant or Independent Director
surrender for cancellation some or all of the unexercised Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments or other rights which have been
previously granted to him under this Plan or otherwise. An Option, the grant of
which is conditioned upon such surrender, may have an option price equal to,
higher or lower than the exercise price of such surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms as the Committee
(or the Board, with respect to an Option granted to an Independent Director)
deems appropriate, and shall be exercisable in accordance with its terms,
without regard to the number of shares, exercise period or any other term or
condition of such surrendered Option or other award."
5. The second sentence of Section 3.1 is hereby amended to read in
its entirety as follows:
"Each Independent Director of the Company shall be eligible to be
granted Options at the times and in the manner set forth in Section
3.4(a)(i), 3.4(d) or Article IIIA."
6. Article IIIA is hereby added to the Plan to read in its entirety
as follows:
"ARTICLE IIIA
INDEPENDENT DIRECTOR OPTION PROGRAM
3.1A GRANTING OF ADDITIONAL OPTIONS.
(a) In addition to those Options referenced in Section 3.4(d), during
each 12-month (or shorter) period commencing on the date of the Company's annual
stockholders' meeting (each, a "PLAN YEAR") in which a person is an Independent
Director and is entitled to receive the Retainer (as defined below) during the
term of the Plan, each such Independent Director may elect to receive all or any
portion of his or her Retainer either (i) in cash or (ii) in the form of an
Option (an "ADDITIONAL OPTION"), with the exercise price of such Option to be as
set forth in Section 3.2A, below (the "ELECTION"). The number of shares of
Common Stock subject to such Additional Option shall be equal to a fraction
(rounded to the nearest whole number), with the numerator of such fraction equal
to the Retainer and denominator of such fraction equal to the product of (i)
fifteen one-hundredths (0.15) and (ii) the Fair Market Value of a share of
Common Stock as of the date of grant of such Additional Option. Each Additional
Option shall
2
<PAGE>
be granted in one or more installments on the same date(s) on which all or any
portion of the Retainer would otherwise have been paid if it were paid in cash
(with such date referred to as the "date of grant"). For purposes of this Plan,
"Retainer" shall mean the amount of compensation (including, without limitation,
annual Director fees, committee fees and meeting fees) set by the Board from
time to time as payable to a Director in each Plan Year.
(b) The Election described in Section 3.1A(a) must be made by written
notice provided by the Independent Director to the Committee no later than the
last day of the Plan Year immediately preceding the Plan Year with respect to
which such Election is intended to be effective; PROVIDED, HOWEVER, that no
Election shall be effective with respect to any portion of the Retainer
attributable to services rendered prior to the date of filing of such Election.
An Election shall be irrevocable with respect to the Plan Year for which it is
made, and shall remain in effect for a subsequent Plan Year unless revoked by
written notice provided by the Independent Director to the Committee prior to
the first day of such subsequent Plan Year.
3.2A ADDITIONAL OPTION TERMS. Notwithstanding anything in Article IV
to the contrary, with respect to any Additional Option granted pursuant to
Section 3.1A, the exercise price of each share of Common Stock subject to such
Additional Option shall be equal to the product of (i) the Fair Market Value of
a share of Common Stock subject to such Additional Option (determined as of the
date of grant of such Additional Option) and (ii) eighty-five one-hundredths
(0.85); the term of such Additional Option shall be ten (10) years from the date
the Additional Option is granted, except as may be amended by the Committee in
its discretion; and such Additional Option shall be fully exercisable as of the
date the Additional Option is granted.
7. This Amendment shall be submitted for approval at the annual
meeting of stockholders of the Company scheduled to be held on May 2, 2000, or
any postponement or adjournment thereof. The provisions of this Amendment shall
be presented to the stockholders severally in such format as shall be approved
by the Secretary of the Corporation and may be considered and approved or
disapproved by the stockholders independently in the format approved by the
Secretary, except that paragraph 6 relating to the "Independent Director Option
Plan" shall not be deemed approved unless the increase in authorized shares
contemplated by paragraph 3 is approved.
* * * * * * * * * *
3
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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0
0
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<SALES> 175,846
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