<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, 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.
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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 August 9, 2000, 22,054,517 shares of our Common Stock, $.01 par value,
were outstanding.
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 .........................3
Consolidated Statements of Operations - Three months ended
June 30, 2000 and 1999.....................................................................4
Consolidated Statements of Income - Six months ended
June 30, 2000 and 1999.....................................................................5
Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and 1999 ....................................................................6
Notes to Consolidated Financial Statements ...............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......................14
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.........................................................................16
</TABLE>
2
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,146 $ 6,773
Merchandise inventory, net 184,061 160,571
Accounts receivable, net 12,418 14,127
Prepaid expenses and deposits 4,245 3,388
Deferred income taxes 11,918 11,918
--------------- ---------------
Total current assets 220,788 196,777
Property and equipment, net 61,061 58,174
Deferred income taxes 555 555
Goodwill, net 5,422 4,448
Other assets 9,464 6,897
--------------- ---------------
$ 297,290 $ 266,851
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,049 $ 41,133
Accrued expenses and other current liabilities 23,958 23,446
Merchandise advances 8,858 8,455
Revolving line of credit 51,094 42,770
Current portion of long-term debt 458 437
--------------- ---------------
Total current liabilities 138,417 116,241
Other long-term liabilities 2,430 2,070
Long-term debt 67,802 68,221
--------------- ---------------
Total liabilities 208,649 186,532
Stockholders' equity:
Preferred stock; authorized 5,000 shares at June 30, 2000 and
December 31, 1999, none issued and outstanding - -
Common stock, $0.01 par value, authorized
55,000 shares, issued and outstanding
22,038 at June 30, 2000 and 22,023 at
December 31, 1999, respectively 221 221
Additional paid in capital 244,161 244,003
Accumulated deficit (155,741) (163,905)
--------------- ---------------
Total stockholders' equity 88,641 80,319
--------------- ---------------
$ 297,290 $ 266,851
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------ ------------------------
<S> <C> <C>
Net sales $ 178,552 $ 139,186
Cost of goods sold, buying and occupancy 132,520 102,340
------------------------ ------------------------
Gross profit 46,032 36,846
Selling, general and administrative expenses 36,464 30,591
Transaction and conversion costs - 3,627
------------------------ ------------------------
Operating income 9,568 2,628
Interest expense, net 3,034 2,576
Interest expense to related parties - 201
------------------------ ------------------------
Income (loss) before income taxes 6,534 (149)
Income taxes 2,484 -
------------------------ ------------------------
Net income (loss) $ 4,050 $ (149)
======================== ========================
Net income (loss) per share
Basic $ 0.18 $ (0.01)
======================== ========================
Diluted $ 0.18 $ (0.01)
======================== ========================
Weighted average shares outstanding
Basic 22,031 22,022
======================== ========================
Diluted 22,342 22,375
======================== ========================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------ ------------------------
<S> <C> <C>
Net sales $ 354,398 $ 274,624
Cost of goods sold, buying and occupancy 263,095 202,729
------------------------ ------------------------
Gross profit 91,303 71,895
Selling, general and administrative expenses 72,161 59,141
Transaction and conversion costs - 3,627
------------------------ ------------------------
Operating income 19,142 9,127
Interest expense, net 5,965 5,029
Interest expense to related parties - 501
------------------------ ------------------------
Income before income taxes and cumulative effect
of a change in accounting principle 13,177 3,597
Income taxes 5,013 2,099
------------------------ ------------------------
Income before cumulative effect of a change in
accounting principle 8,164 1,498
Cumulative effect of change in accounting principle
to write-off pre-opening costs, net of tax of $578 - 1,074
------------------------ ------------------------
Net income $ 8,164 $ 424
======================== ========================
Net income per share
Basic
Income before cumulative effect of a change
in accounting principle $ 0.37 $ 0.07
Cumulative effect of change in accounting
principle to write-off pre-opening costs, net
of tax - 0.05
------------------------ ------------------------
Net income $ 0.37 $ 0.02
======================== ========================
Diluted
Income before cumulative effect of a change
in accounting principle $ 0.37 $ 0.07
Cumulative effect of change in accounting
principle to write-off pre-opening costs - 0.05
------------------------ ------------------------
Net income $ 0.37 $ 0.02
======================== ========================
Weighted average shares outstanding
Basic 22,027 22,017
======================== ========================
Diluted 22,081 22,573
======================== ========================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GUITAR CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,164 $ 424
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,239 3,726
Amortization of deferred financing fees 199 120
Cumulative effect of change in accounting principle to
write-off pre-opening costs - 1,652
Changes in operating assets and liabilities:
Accounts receivable 1,709 (1,937)
Merchandise inventories (22,231) (20,973)
Prepaid expenses (857) 334
Other assets (627) (517)
Accounts payable 12,916 (1,258)
Accrued expenses and other current liabilities (358) (1,665)
Other long term liabilities 360 167
Merchandise advances 403 17
-------- --------
Net cash provided by (used in) operating activities 4,917 (19,910)
INVESTING ACTIVITIES
Purchase of property and equipment (7,784) (8,868)
Investment in non-consolidated entity (2,388) -
Purchase of Veneman Music, net of cash acquired (1,456) -
-------- --------
Net cash used in investing activities (11,628) (8,868)
FINANCING ACTIVITIES
Net change in revolving debt facility 8,324 28,978
Proceeds from exercise of stock options 158 208
Payments under capital lease (398) -
-------- --------
Net cash provided by financing activities 8,084 29,186
Net increase in cash and cash equivalents 1,373 408
Cash and cash equivalents at beginning of year 6,773 472
-------- --------
Cash and cash equivalents at end of period $ 8,146 $ 880
======== ========
NON-CASH ACTIVITIES
Contribution of land and building - 1,750
Borrowings under capital lease - 890
Related party debt converted to common stock - 13,870
Guitar Center purchased all of the assets of Veneman Music
Company. In conjunction with the acquisition, liabilities
were assumed or liquidated as follows:
Fair value of assets acquired 2,326 -
Cash paid (1,456) -
--------
Liabilities assumed 870 -
========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
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 June 30, 2000 and December 31, 1999, and the
results of operations and cash flows for the three and six months ended
June 30, 2000 and 1999. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for the three and six months ended June 30,
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.
In May 2000, we acquired Veneman Music Company, Inc., a musical
instrument retailer based in Rockville, Maryland. The acquisition was
accounted for using the purchase method and we will amortize the
resulting goodwill over twenty years. All of the debt and other
liabilities of Veneman's were either repaid or assumed by us in
connection with the closing.
3. Segment Information
In accordance with the requirements of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," our reportable business segments
are retail (stores) and direct response (catalog and Internet).
Management evaluates segment performance based primarily on revenue and
income before income taxes.
Net sales, income before income taxes and cumulative effect of a change
in accounting principle, and total assets are summarized as follows for
the quarterly and six month ended June 30, 2000 and June 30, 1999
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Retail Direct Response Total Retail Direct Response Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 149,579 $ 28,973 $ 178,552 $ 294,926 $ 59,472 $354,398
Income before income
taxes and cumulative
effect of change in
accounting principle 5,182 1,352 6,534 10,683 2,494 13,177
Total Assets 273,130 24,160 297,290 273,130 24,160 297,290
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Retail Direct Response Total Retail Direct Response Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 122,431 16,755 139,186 $ 240,494 34,130 274,624
Income (loss) before
income taxes and
cumulative effect of
change in accounting 1,874 (2,023) (149) 7,449 (3,852) 3,597
principle
Total Assets 219,598 17,971 237,569 219,598 17,971 237,569
</TABLE>
4. Change in Accounting for Store Pre-Opening Costs
Effective January 1, 1999, we adopted AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5), which
requires all store pre-opening costs to be expensed as incurred. As a
result of this adoption, we recorded a charge for the cumulative effect
of this change in accounting principle, of $1,074,000 (net of taxes of
$578,000), in the Statement of Operations for the period ending June
30, 1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We operated 74 retail locations in 37 major markets and four stores
in secondary markets as of June 30, 2000. We also operate the largest direct
response channel (Musician's Friend 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% per year 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 Musician's
Friend brand) thirteen Guitar Center stores in 1999 and, as of June 30, 2000,
had opened nine additional Guitar Center stores this year, of which one was
acquired from Veneman Music in May 2000. Presently, we expect to open an
additional five large format Guitar Center stores during the remainder of
2000 and up to two smaller format Guitar Center stores in secondary markets.
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 some
transfer of sales from existing stores to new locations, thereby adversely
affecting comparable store sales statistics.
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. We expect to continue to
make significant investments in the e-commerce and related business
activities of Guitar Center and Musician's Friend.
The following table sets forth historical income statement data as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 25.8 26.5 25.8 26.2
Selling, general, and administrative expenses 20.4 22.0 20.4 21.6
Transaction & conversion costs -- 2.6 -- 1.3
-------- -------- -------- --------
Operating income 5.4 1.9 5.4 3.3
Interest expense, net 1.7 1.9 1.7 1.8
Interest expense to related parties -- 0.1 -- 0.2
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 3.7 (0.1) 3.7 1.3
Income taxes 1.4 -- 1.4 0.8
-------- -------- -------- --------
Income (loss) before cumulative effect of a
change in accounting principle 2.3 (0.1) 2.3 0.6
Cumulative effect of a change in accounting
principle to write-off pre-opening costs, net of tax -- -- -- 0.4
-------- -------- -------- --------
Net income (loss) 2.3 (0.1) 2.3 0.2
-------- -------- -------- --------
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999.
Net sales increased to $178.6 million for the three months ended
June 30, 2000, from $139.2 million for the comparable prior period, a 28.3%
increase. Net sales from retail stores totaled $149.6 million, an increase of
$27.1 million, or 22.2%. Sales from new stores contributed $18.5 million, or
68% of the increase. Comparable store sales increased 7%. 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 percent for
the immediate future, although fluctuations will undoubtedly take place from
period to period. The foregoing statement is a forward-looking statement and
is subject to the qualifications set forth below under "Forward Looking
Statements; Business Risks." Net sales from the direct response channel
totaled $29.0 million, a $12.2 million increase from the second quarter of
1999. Catalog sales for the three months ended June 30, 2000 compared to 1999
increased 45.8% to $20.0 million from $13.7 million and Internet sales
increased 197% to $9.0 million from $3.1 for the same period last year.
Direct response results reflects the increase in average order size, an
increase to $256 compared to $217 in the second quarter of 1999, as a result
of the third-party credit card introduced in the third quarter of 1999 and
the impact of the Net Perceptions selling software installed in first quarter
of this year. Revenues in the 1999 period also reflect inventory shortages
prior to the acquisition by Guitar Center.
Gross profit dollars for the three months ended June 30, 2000
compared to 1999 increased 24.9% to $46.0 million from $36.8 million. Gross
profit as a percentage of net sales for the three months ended June 30, 2000
compared to 1999 decreased to 25.8% from 26.5%. Gross profit margin
percentage for the retail stores after buying and occupancy costs was 25.1%
compared to 26.0% in the second quarter of 1999. The reduction in gross
profit margin relates to increased occupancy costs caused by the number of
stores less than two years old (36 stores out of 78 stores), increased
freight expense and higher shrink losses. The gross profit margin for the
direct response division was 29.1% for the quarter compared to 30.1% in the
second quarter of 1999, primarily due to aggressive marketing programs.
Selling, general and administrative expenses for the three months
ended June 30, 2000 compared to 1999 increased 19.2% to $36.5 million from
$30.6 million. Selling, general and administrative expenses for the three
months ended June 30, 2000 compared to 1999 decreased to 20.4%, as a
percentage of sales, from 22.0%. Selling, general and administrative expenses
for the retail stores in the second quarter, inclusive of pre-opening costs
and corporate general and administrative expenses, was 20.0% as a percentage
of sales compared to 20.7% in last year's second quarter. These results
reflect the leveraging of corporate expenses, partially offset by higher
store level selling, general and administrative expenses due to the number of
stores that are less than two years old. Selling, general and administrative
expenses for the direct response division were 22.4% as a percentage of sales
in the second quarter compared to 31.6% in the same period last year. The
improvement largely reflects the leveraging of corporate overhead and
marketing expenses as a result of the 73% increase in sales compared to 1999.
Transaction and store conversion costs totaled $3.6 million, or 2.6%
of sales, during the three months ended June 30, 1999 with no comparable cost
recognized in 2000. These costs relate to the acquisition of Musician's
Friend during the second quarter of 1999 and principally include financial
advisory fees ($1.3 million), legal and accounting fees ($1.2 million) and a
severance accrual for a former Musician's Friend executive ($0.8 million).
Operating income for the three months ended June 30, 2000 was $9.6
million compared to $2.6 million for the same three months of 1999, an
increase of 264%. The increase is principally due to increase in the
operating income from the direct response unit and the absence of transaction
expenses compared to the prior period. As a percentage of sales, operating
income was 5.4% and 1.9% in the three months ended June 30, 2000 and 1999,
respectively.
Interest expense, net for the three months ended June 30, 2000
increased to $3.0 million from $2.8 million in the same period of 1999. The
increase reflects increased borrowings under our credit facility.
10
<PAGE>
In the three months ended June 30, 2000, a $2.5 million provision
for income taxes was recorded. As the majority of the tax benefit related to
the net operating loss carryforward had been recognized as of December 31,
1999, our effective tax rate for the three months ended June 30, 2000
represents the combined federal and state rates expected to be realized for
the full year. In the quarter ended June 30, 1999, no provision for income
taxes was recorded due to the loss for the period.
Net income for the three months ended June 30, 2000 was $4.1 million
compared to net loss of $149,000 in the second quarter of 1999, principally
as a result of the improvement of results of operations of our direct
response unit and of the effect of the transaction and conversion costs as
discussed above.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999.
Net sales increased to $354.4 million for the six months ended June
30, 2000, from $274.6 million for the comparable prior period, a 29.1%
increase. Net sales from retail stores totaled $294.9 million, an increase of
$54.4 million, or 22.6%. Sales from new stores contributed $36.3 million, or
67% of the increase. Comparable store sales increased 8%. Net sales from the
direct response channel totaled $59.5 million, a $25.3 million increase from
the six months ended June 30, 1999.
Gross profit dollars for the six months ended June 30, 2000 compared
to 1999 increased 27.0% to $91.3 million from $71.9 million. Gross profit as
a percentage of net sales for the six months ended June 30, 2000 compared to
1999 decreased to 25.8% from 26.2%. Gross profit margin percentage for the
retail stores after buying and occupancy costs was 25.2% compared to 25.9% in
the six months ended June 30, 1999. The reduction in gross profit margin
relates to increased occupancy costs caused by the number of stores less than
two years old (36 stores out of 78 stores), increased freight expense and
higher shrink losses. The gross profit margin for the direct response
division was 28.4% for the six months ended June 30, 2000 compared to 28.2%
in the six months ended June 30, 1999.
Selling, general and administrative expenses for the six months
ended June 30, 2000 compared to 1999 increased 22.0% to $72.2 million from
$59.1 million. Selling, general and administrative expenses, for the six
months ended June 30, 2000 compared to 1999 decreased to 20.4%, as a
percentage of sales, from 21.5%. Selling, general and administrative expenses
for the retail stores in the second quarter, inclusive of pre-opening costs
and corporate general and administrative expenses, was 20.0% as a percentage
of sales in the six months ended June 30, 2000 and 1999. Selling, general and
administrative expenses for the direct response division were 22.3% in the
six months ended June 30, 2000 compared to 32.4% in the same period last
year. The improvement largely reflects the leveraging of corporate overhead
and marketing expenses as a result of the 74% increase in sales for the six
months ended June 30, 2000 compared to the same period last year.
Transaction and store conversion costs totaled $3.6 million, or 1.3%
of sales during the six months ended June 30, 1999 with no comparable cost
recognized in 2000. These costs relate to the acquisition of Musician's
Friend during the second quarter of 1999 and principally include financial
advisory fees ($1.3 million), legal and accounting fees ($1.2 million), and a
severance accrual for a former Musician's Friend executive ($0.8 million).
Operating income for the six months ended June 30, 2000 was $19.1
million compared to $9.1 million for the same six months of 1999. The
increase is principally due to increase in the operating income from the
direct response unit and the absence of transaction expenses compared to the
prior period. As a percentage of sales, operating income was 5.4% and 3.3% in
the six months ended June 30, 2000 and 1999, respectively.
Interest expense, net for the six months ended June 30, 2000
increased to $6.0 million from $5.5 million in the same period of 1999. The
increase reflects increased borrowings under our credit facility.
In the six months ended June 30, 2000, a $5.0 million provision for
income taxes was recorded. As the majority of the tax benefit related to the
net operating loss carryforward had been recognized as of December 31, 1999,
our effective tax rate for the six months ended June 30, 2000 represents the
combined federal and state rates expected to be realized for the full year.
11
<PAGE>
In the first quarter of 1999, a charge to operation 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.
Net income for the six months ended June 30, 2000 was $8.2 million,
compared to $0.4 million in the same period of 1999. The increase was
principally to an increase in operating income from the direct response unit,
the absence of transaction expenses compared to the prior period, and 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 and investments. 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 June 30, 2000, we had $51.1 million outstanding
under our credit facility excluding $756,000 outstanding on standby letters
of credit, and had available borrowings of approximately $34.1 million.
For the six months ended June 30, 2000, cash provided by operating
activities was $4.9 million. Cash used in investing activities totaled $11.6
million. Cash provided by financing activities totaled $8.1 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 six months ended
June 30, 2000, we opened nine new stores, of which one was acquired from
Veneman Music Company in the second quarter of 2000. Each new large format
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 incur higher costs in
some geographic areas, particularly the Northeast. We are also currently
evaluating additional capital and strategic requirements related to improving
the fulfillment facilities and technology and pursuing new opportunities in
the e-commerce activities of Guitar Center and Musician's Friend, and related
businesses. 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 five additional stores in 2000 and
approximately 18 to 20 stores in 2001. Some of these stores will be smaller
format units designed for secondary markets. 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 our 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.
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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.
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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 and general industry and business
conditions applicable to Guitar Center. Specific forward-looking statements
are provided regarding our management's current views regarding comparable
store sales trends and new store openings. 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 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, retail sales trends 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. 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., Risks Related to the Business" on pages
13 through 16 of our 1999 Annual Report on Form 10-K. Stockholders are urged
to review these factors carefully. Copies of the Report are available from
our investor relations staff or by accessing the database maintained by the
Securities and Exchange Commission at www.sec.gov. 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.
Part II. OTHER INFORMATION
Item 6. Exhibits
Exhibit 27 Financial Data Schedule
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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 9th day of August
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)
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Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
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