PROSPECTUS SUPPLEMENT NO. 2 Filed Pursuant to Rules 424(b)(3) and 424(c)
(To Prospectus dated April 28, 1997) Registration Statement No. 333-10491
GUITAR CENTER, INC.
$66,667,000
11% SENIOR NOTES DUE 2006
------------------------------
THE FOLLOWING INFORMATION SUPPLEMENTS, AND MUST BE READ IN CONJUNCTION
WITH, THE INFORMATION CONTAINED IN THE PROSPECTUS, DATED APRIL 28, 1997, AS
SUPPLEMENTED BY PROSPECTUS SUPPLEMENT NO. 1 THERETO DATED MAY 1, 1997
(COLLECTIVELY, THE "PROSPECTUS"), OF GUITAR CENTER, INC., A DELAWARE CORPORATION
(THE "COMPANY"). THIS PROSPECTUS SUPPLEMENT MUST BE DELIVERED ALONG WITH A COPY
OF THE PROSPECTUS. ANY STATEMENT MADE IN THE PROSPECTUS SHALL BE DEEMED
MODIFIED OR SUPERSEDED FOR PURPOSES THEREOF TO THE EXTENT THAT A STATEMENT
CONTAINED HEREIN MODIFIES OR SUPERSEDES SUCH STATEMENT.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus Supplement is August 1, 1997
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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission File No. 000-22207
GUITAR CENTER, INC.
-------------------------------------------------------------------------
(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 July 29, 1997, 19,329,079 shares of the registrant's Common Stock, $.01
par value, were outstanding.
GUITAR CENTER, INC.
INDEX
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 ............ 2
Condensed Consolidated Statements of Operations - Three months ended June 30, 1997
and 1996 ............................................................................... 3
Condensed Consolidated Statements of Operations - Six months ended June 30, 1997
and 1996 ............................................................................... 4
Condensed Consolidated Statement of Stockholders' Equity (Deficit) - June 30, 1997 ..... 5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1997
and 1996 ............................................................................... 6
Notes to Condensed Financial Statements ................................................ 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ....................................................... 10-14
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 and Reports on Form 8-K ............................................. 15
1
GUITAR CENTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,105 $ 47
Accounts receivable 4,653 4,062
Merchandise inventories 71,098 49,705
Prepaid expenses and other current assets 3,324 1,455
-------- ----------
Total current assets 82,180 55,269
Property and equipment, net 19,519 14,966
Goodwill, net of accumulated amortization 3,903 432
Other assets 3,209 4,182
--------- ----------
$ 108,811 $ 74,849
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 16,678 $ 14,005
Accrued expenses and other current liabilities 11,300 10,292
Line of credit - 3,536
--------- ----------
Total current liabilities 27,978 27,833
Long term debt 66,667 100,000
Other long-term liabilities 839 645
Senior preferred stock, aggregate liquidating
preference of $21,602 at December 31, 1996 - 15,186
Stockholders' equity (deficit)
Junior preferred stock; aggregate liquidating
preference of $144,859 at December 31,
1996:authorized 5,000,000 shares at June 30,
1997, none issued and outstanding - 138,610
Common stock, $0.01 par value, authorized
55,000,000 shares, issued and outstanding
19,329,079 at June 30, 1997 and 3,622,804
at December 31, 1996, respectively 193 36
Warrants 6,500 6,500
Additional paid in capital 221,011 (6,966)
Retained earnings (deficit) (214,377) (206,995)
--------- ---------
Total stockholders' equity (deficit) 13,327 (68,815)
--------- ---------
$ 108,811 $ 74,849
--------- ---------
--------- ---------
See accompanying notes to condensed financial statements.
2
GUITAR CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Net sales $ 69,627 $ 47,705
Cost of goods sold, buying and occupancy 50,617 34,688
-------- --------
Gross profit 19,010 13,017
Selling, general and administrative 13,580 9,423
Deferred compensation expense - 69,892
-------- --------
Operating income (loss) 5,430 (66,298)
Interest expense, net 2,127 5,923
Gain on sale of asset (535) -
Transaction expenses - 6,176
-------- --------
Income (loss) before income taxes and
extraordinary loss 3,838 (78,397)
Income taxes 1,630 105
-------- --------
Income (loss) before extraordinary loss 2,208 (78,502)
Extraordinary loss on early extinguishment of debt,
net of tax of $1,679 (2,739) -
-------- --------
Net income (loss) $ (531) $ (78,502)
-------- --------
-------- --------
Income (loss) per share $ (0.03) $ (3.84)
-------- --------
-------- --------
Weighted average shares outstanding 19,329 20,420
-------- --------
-------- --------
Pro forma data:
Income (loss) before income taxes $ (580) $ (78,397)
Pro forma income tax (benefit) (49) (1,430)
-------- --------
Pro forma net income (loss) $ (531) $ (76,967)
Senior preferred stock dividends - (962)
-------- --------
Pro forma net income (loss) applicable to common
Stockholders $ (531) $ (77,929)
-------- --------
-------- --------
Pro forma net income (loss) per share
applicable to common stockholders $ (0.03) $ (3.82)
-------- --------
-------- --------
Weighted average shares outstanding 19,329 20,420
-------- --------
-------- --------
See accompanying notes to condensed financial statements.
3
GUITAR CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Net sales $ 129,436 $ 91,048
Cost of goods sold, buying and occupancy 94,202 65,249
----------- ----------
Gross profit 35,234 25,799
Selling, general and administrative 25,131 18,318
Deferred compensation expense - 69,892
----------- ---------
Operating income (loss) 10,103 (62,411)
Interest expense, net 5,060 6,046
Gain on sale of asset (535) -
Transaction expenses 731 6,176
----------- ---------
Income (loss) before income taxes and
extraordinary loss 4,847 (74,633)
Income taxes 1,713 131
Income (loss) before extraordinary loss 3,134 (74,764)
Extraordinary loss on early extinguishment of debt,
net of tax of $1,679 (2,739) -
----------- ---------
Net income (loss) $ 395 $ (74,764)
----------- -----------
----------- -----------
Income (loss) per share $ 0.02 $ (3.66)
----------- -----------
----------- -----------
Weighted average shares outstanding 20,456 20,420
----------- -----------
----------- -----------
Pro forma data:
Income (loss) before income taxes $ 429 $ (74,633)
Pro forma income taxes 34 -
----------- -----------
Pro forma net income (loss) $ 395 $ (74,633)
Senior preferred stock dividends 7,747 (962)
----------- -----------
Pro forma net income (loss) applicable to common
Stockholders $ (7,352) $ (75,595)
----------- -----------
----------- -----------
Pro forma net income (loss) per share
Applicable to common stockholders $ (0.38) $ (3.70)
----------- -----------
----------- -----------
Weighted average shares outstanding 19,329 20,420
----------- -----------
----------- -----------
See accompanying notes to condensed financial statements.
4
GUITAR CENTER, INC.
CONDENSED STATEMENTS STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
Junior Additional Retained
Preferred Common Paid in Earnings
Stock Stock Warrants Capital (Deficit) Total
----------------------------------------------------------------------
Balance at December 31, 1996 $ 138,610 $ 36 $ 6,500 $ (6,966) $ (206,995) $ (68,815)
Sale of equity to management 307 - - 3 - 310
Conversion of junior preferred stock (138,917) 93 - 138,824 - -
Offering of common stock - 77 - 107,554 - 107,631
Repurchase of management common
stock - (13) - (18,404) - (18,417)
Senior preferred stock dividends paid - - - - (7,747) (7,747)
Accretion of senior preferred stock - - - - (30) (30)
Net income - - - - 395 395
---------------------------------------------------------------------
Balance at June 30, 1997 $ - $ 193 $ 6,500 $ 221,011 $ (214,377) $ 13,327
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to financial statements.
5
GUITAR CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
SIX MONTHS ENDED JUNE 30,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 395 $ (74,764)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,399 1,014
Deferred compensation - repurchase of options - 49,500
Amortization and write-off of deferred financing fees 1,242 -
Gain on sale of property (535) -
Changes in operating assets and liabilities, net of effects
from purchase of Rhythm City, Inc.:
Accounts receivable (591) (1,127)
Merchandise inventories (15,093) (8,317)
Prepaid expenses (1,869) (560)
Other assets (241) (190)
Accounts payable 2,673 (3,483)
Accrued expenses and other current liabilities 208 (8,831)
Other long term liabilities 194 217
----------- ---------
Net cash provided by (used in) operating activities (12,218) (46,541)
INVESTING ACTIVITIES
Proceeds from sale of property 893 -
Purchase of property and equipment (5,009) (3,523)
Payment for purchase of Rhythm City, Inc., net of cash
acquired (10,300) -
----------- ---------
Net cash used in investing activities (14,416) (3,523)
FINANCING ACTIVITIES
Net change in revolving debt facility (3,536) 5,421
Redemption of senior notes (33,333) -
Proceeds from sale of stock to management 310 -
Proceeds from issuance of long-term debt - 100,000
Proceeds from initial public offering 107,631 -
Distribution of prior stockholder interests - (113,102)
Issuance of common stock - 1,200
Issuance of junior preferred stock - 69,300
Issuance of senior preferred stock - 13,500
Issuance of warrants - 6,500
Redemption of management common stock (18,417) -
Redemption of senior preferred stock (22,963) -
Distributions to stockholder - (28,057)
----------- ---------
Net cash provided by financing activities 29,692 54,762
Net increase (decrease) in cash and cash equivalents 3,058 (4,698)
Cash and cash equivalents at beginning of year 47 1,796
---------- ---------
Cash and cash equivalents at end of period $ 3,105 $ 6,494
----------- ---------
----------- ---------
See accompanying notes to financial statements.
6
GUITAR CENTER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. General
In the opinion of management, the accompanying condensed consolidated
unaudited financial statements contain all adjustments necessary to
present fairly the financial position of Guitar Center, Inc., a Delaware
corporation, and its subsidiary ("Guitar Center" or the "Company"), as
of June 30, 1997, and the results of operations and cash flows for the
three and six months ended June 30, 1997 and 1996. The accompanying
financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The results of operations for the three and six months ended June 30,
1997 are not necessarily indicative of the results to be expected for
the full year.
2. Initial Public Offering
On March 19, 1997, the Company completed an initial public offering
(the "Offering") of the Company's common stock, $.01 par value
("Common Stock"), pursuant to which it sold 6,750,000 shares of Common
Stock and received approximately $94.4 million in net cash proceeds
(before deducting expenses associated with the Offering.) On April 15,
1997, the Company sold an additional 1,012,500 shares of Common Stock
in the Offering and received an additional $14.1 million in net cash
proceeds from the underwriters' exercise in full of their over-allotment
option. Upon consummation of the Offering, all of the outstanding shares
of the Company's 8% Junior Preferred Stock, $.01 par value ("Junior
Preferred Stock"), were automatically converted into shares of Common
Stock at a ratio of 6.667 shares of Common Stock for each share of
Junior Preferred Stock (the "Junior Preferred Stock Conversion"). No
accrued and unpaid dividends were paid on any shares of Junior
Preferred Stock. Approximately $23.0 million of the net proceeds from
the Offering were used to redeem, at a premium of 3%, all of the
outstanding shares of the Company's 14% Senior Preferred Stock, $.01 par
value ("Senior Preferred Stock"). As a result, the Company incurred a
charge to dividends in the first quarter of 1997 of $7.7 million for the
difference between the financial statement value of the Senior Preferred
Stock and the face amount thereof, plus premium. Approximately $9.7
million of the net proceeds from the Offering were used to repay all
amounts under the Company's existing bank facility (the "1996 Credit
Facility"). In addition, the Company used approximately $18.4 million
to redeem approximately 1,317,000 shares of Common Stock from management
(the "Management Tax Redemption"). The balance of the net proceeds was
retained for general corporate purposes, which has included the
acquisition of two musical instrument stores in the Atlanta, Georgia
market in April 1997.
Redemption of Debt
Immediately following the Offering, the Company called for redemption,
at a premium of 10%, an aggregate of $33.3 million principal amount of
11% Senior Notes due 2006 (the "Senior Notes"). On April 19, 1997,
Company used $37.9 million of the net proceeds from the Offering to
redeem such Senior Notes (the "Senior Note Redemption"), including
payment of all accrued and unpaid interest with respect to the Senior
Notes called for redemption. Accordingly, an extraordinary charge to
operations of $4.4 million, net of tax of $1.7 million, was incurred in
the second quarter of 1997 equal to the premium paid on the Senior Notes
plus the write off of one-third of the unamortized deferred financing
fees.
7
3. Income Taxes
Prior to June 5, 1996, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Pro forma
information has been provided to reflect the estimated statutory
provision for income taxes assuming the Company had been taxed as a
C corporation in 1996.
As a result of the $72.4 million loss incurred in fiscal 1996, the
Company has a tax net operating loss carryforward for federal income tax
purposes aggregating $64.2 million, which will expire if unused in 2011.
As of June 30, 1997, the Company had fully reserved the related deferred
tax asset of $22.5 million.
4. Pro Forma Net Income (Loss) Per Share
Pro Forma Net Income (Loss) Per Share has been computed by dividing pro
forma net income (loss) by the weighted average number of shares
outstanding during the period. The pro forma net income (loss) per
share gives effect to: (i) the issuance of Common Stock sold in the
Offering, including the underwriters' over-allotment option; (ii) the
issuance of Common Stock upon the conversion of all outstanding shares
of Junior Preferred Stock in connection with the Offering; (iii) the
assumed issuance of Common Stock upon the exercise of all outstanding
warrants and common stock equivalents; and (iv) the Management Tax
Redemption.
5. Adjusted Income Per Share
If the Offering, including the exercise of the underwriters'
over-allotment option, had been consummated on January 1, 1997, adjusted
income per share for the six months ended June 30, 1997 would be as
follows (in thousands, except per share amounts):
Income (loss) to common stockholders per financial
statements $ (7,352)
Reduction of interest on debt assumed repaid, net of tax (3,399)
Reduction of Senior Preferred Stock Dividends (7,747)
---------
Adjusted net income $ 3,794
---------
---------
Adjusted net income per share $ 0.19
---------
---------
Weighted average shares used in calculation 20,456
---------
---------
The adjusted income per share presentation set forth above gives effect
to the capitalization changes related to the Company's Offering and the
application of the proceeds therefrom. This data does not attempt to
give effect to any other pro forma adjustments, including (i) non-
recurring transaction expenses of $0.7 million (or $0.04 per share)
related to payroll taxes incurred as a result of the Junior Preferred
Stock Conversion; (ii) any pro forma adjustments related to the
reduction in the compensation of the Company's former Chairman of the
Board subsequent to the Company's recapitalization on June 5, 1996 or
any other similar changes in selling, general and administrative
expenses; or (iii) any pro forma income taxes at an estimated effective
rate of 38%. The foregoing data is presented solely to facilitate
further analysis of the Company based upon the assumptions indicated
above. Such data is not necessarily indicative of the Company's
results of operations had the Offering occurred in the earlier period
nor the results expected in the future.
8
6. Acquisition
On April 16, 1997, the Company acquired Rhythm City, Inc. ("Rhythm
City"), the operator of two musical instrument retail stores in the
Atlanta, Georgia market. Purchase consideration consisted of cash of
$10.3 million, subject to adjustment based on the actual level of
working capital on such date and other matters. The Company accounted
for the acquisition using the purchase method and will amortize the
resulting goodwill over twenty years. The purchase price included the
acquisition of the building and improvements of the flagship Rhythm City
store in Atlanta. All of the debt and other liabilities of Rhythm City
were either repaid or assumed by the sellers prior to closing.
7. Impact of Recently Issued Pronouncements
The Financial Accounting Standards Board has recently issued Statement
No. 128, "Earnings per share" ("FAS 128"), issued in March 1997 and
effective for fiscal years ending after December 15, 1997. The Company
will adopt FAS 128 in 1997. FAS 128 introduces and requires the
presentation of "Basic" earnings per share which represents net earnings
divided by the weighted average shares outstanding excluding all common
stock equivalents. A dual presentation of "Diluted" earnings per share
reflecting the dilutive effects of all common stock equivalents, will
also be required. The Diluted presentation is similar to the current
presentation of fully diluted earnings per share. Management believes
the adoption of FAS 128 will not have a material impact on the Company's
results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Guitar Center operated 35 stores in 19 major markets as of June 30,
1997. From 1992 to 1996, Guitar Center's net sales and operating income
before deferred compensation expense grew at compound annual growth rates of
25.6% and 43.0%, respectively, principally due to comparable store sales
growth averaging 14.8% per year and the opening of new stores. The increases
were principally attributable to increases in unit sales rather than
increases in prices or changes in product mix. Management believes such
volume increases are the result of the continued success of the Company's
implementation of its business strategy, continued strong growth in the music
products industry and increasing consumer awareness of the Guitar Center
name. The Company does not expect comparable store sales to continue to
increase at historical rates.
The Company opened seven stores in 1996 and, as of June 30, 1997, the
Company had opened five new stores in 1997. In April 1997, the Company
purchased two additional stores and presently expects to open one additional
store during the remainder of 1997. In preparation for these new stores,
management had dedicated a substantial amount of resources over the past
several years to building the infrastructure necessary to support a large,
national chain. Management believes the infrastructure is in place to
support its needs for the immediately foreseeable future, including its
present expansion plans. The Company will continue to pursue its strategy of
clustering stores in major markets to take advantage of operating and
advertising efficiencies and to build awareness of the Guitar Center name in
new markets. In some markets where the Company has pursued its clustering
strategy, there has been some transfer of sales from certain existing stores
to new locations. Generally, however, mature stores have demonstrated net
sales growth rates consistent with the Company's average. As the Company
enters new markets, management expects that its will initially incur higher
administrative and advertising costs per store than it currently experiences
in established markets.
The following table sets forth certain historical income statement
data as a percentage of net sales:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 27.3 27.3 27.2 28.3
Selling, general, and administrative
expenses 19.5 19.8 19.4 20.1
-------- ------- ------ -------
Operating income before deferred
compensation expense 7.8 7.5 7.8 8.2
Deferred compensation expense - 146.5 - 76.8
-------- ------- ------ -------
Operating income (loss) 7.8 (139.0) 7.8 (68.6)
Interest expense, net 3.0 12.4 3.9 6.6
Gain on sale of asset (0.7) - (0.4) -
Transaction expenses and other - 12.9 0.6 6.8
-------- ------- ------ -------
Income (loss) before income taxes and
extraordinary item 5.5 (164.3) 3.7 (82.0)
Income taxes 2.3 0.2 1.3 0.1
-------- ------- ------ -------
Net income (loss) before extraordinary
item 3.2% (164.5)% 2.4% (82.1)%
-------- ------- ------ -------
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
Net sales of the Company increased to $69.6 million for the three months
ended June 30, 1997, from $47.7 million for the comparable prior period, a 46.0%
increase. This growth was attributable to an increase of 12.5% in comparable
store net sales which contributed $5.9 million, or 26.9%, of the total increase.
New store net sales accounted for the balance of the increase in net store
sales.
Gross profit dollars for the three months ended June 30, 1997 compared
to 1996 increased 46.0% to $19.0 million from $13.0 million. Gross profit as
a percentage of net sales for the three months ended June 30, 1997 and 1996 was
27.3% in each period.
Selling, general and administrative expenses for the three months ended
June 30, 1997 compared to 1996 increased 44.1% to $13.6 million from $9.4
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 1997 as compared to 1996. As a percentage
of net sales, selling, general and administrative expenses decreased to 19.5%
from 19.8%. The change in percentage of sales reflects the relatively fixed
nature of certain general and administrative expenses and the effect of the
increase in sales volume.
Operating income before deferred compensation expense for the three
months ended June 30, 1997 was $5.4 million compared to operating income of
$3.6 million for the same three months of 1996, an increase of 51.1%. 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 before
deferred compensation expense for the three months ended June 30, 1997 was
7.8% compared to 7.5% in 1996. The increase is principally related to the
leveraging of fixed expenses.
Deferred compensation expense of $69.9 million for the three months
ended June 30, 1996 resulted from the purchase and exchange of management
stock options and the cancellation of the Company's prior stock option
program. These expenses were non-recurring and the deferred compensation
plan has been terminated.
Interest expense, net for the three months ended June 30, 1997 decreased
to $2.1 million from $5.9 million in the same period of 1996. The interest
expense for the second quarter of 1997 consisted of interest on the
Company's Senior Notes. On April 19, 1997, the Company redeemed, at a
premium, $33.3 million principal amount of the Senior Notes. For the
comparable period of 1996, interest included financing costs of $4.7 million
and $0.9 million of interest related to a bridge loan facility which was
repaid in full in 1996.
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 plus the write-off of one-third of the unamortized
deferred financing fees.
Net loss for the three months ended June 30, 1997 decreased to $(0.5)
million from $(78.5) million for the same period in 1996, principally as a
result of the effect of the deferred compensation expense as discussed above.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1996
Net sales of the Company increased to $129.4 million for the six months
ended June 30, 1997, from $91.0 million for the comparable prior period, a
42.2% increase. This growth was attributable to an
11
increase of 13.0% in comparable store net sales which contributed $11.7
million, or 30.4% 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, 1997 compared to
1996 increased 36.6% to $35.2 million from $25.8 million. Gross profit as a
percentage of net sales for six months ended June 30, 1997 compared to 1996
decreased to 27.2% from 28.3% in the six months ended June 30, 1996. The
decrease in gross profit percentage occurred during the first quarter of 1997
and principally resulted from the effects of 10 stores open less than 13 full
months. New stores typically experience lower gross profit margins than
existing stores. In addition, there was an increase in the mix of sales of
pro audio and recording products, which historically produce lower margins
than guitars, amplifiers and percussion equipment.
Selling, general and administrative expenses for the six months ended
June 30, 1997 compared to 1996 increased 37.2% to $25.1 million from $18.3
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 1997 as compared to 1996. As a
percentage of net sales, selling, general and administrative expenses
decreased to 19.4% from 20.1%. The change in percentage of sales reflects
the relatively fixed nature of certain general and administrative expenses
and the effect of the increase in sales volume.
Operating income before deferred compensation expense for the six months
ended June 30, 1997 was $10.1 million compared to operating income of $7.5
million for the same six months of 1996, an increase of 35.0%. 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 before deferred
compensation expense for the six months ended June 30, 1997 was 7.8% compared
to 8.2% in 1996. The decrease is principally related to the decrease in
gross profit experienced in the first quarter of 1997, partially offset by
the leveraging of fixed expenses.
Deferred compensation expense of $69.9 million for the three months
ended June 30, 1996 resulted from the purchase and exchange of management
stock options and the cancellation of the Company's prior stock option
program. These expenses were non-recurring and the deferred compensation
plan has been terminated.
Interest expense, net for the six months ended June 30, 1997 decreased
to $5.1 million from $6.0 million in the same period of 1996. The interest
expense for the six months ended June 30, 1997 consisted principally of
interest on the Company's Senior Notes. On April 19, 1997, the Company
redeemed, at a premium, $33.3 million principal amount of the Senior Notes.
For the comparable period of 1996, interest included financing costs of $4.7
million and $0.9 million of interest related to a bridge loan facility which
was repaid in full in 1996.
Non-recurring transaction expenses of $0.7 million relate to payroll
taxes in connection with the closing of the Offering and were incurred as a
result of management's conversion of their Junior Preferred Stock into shares
of Common Stock.
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 plus the write-off of one-third of the unamortized
deferred financing fees.
Net income (loss) for the six months ended June 30, 1997 increased to
$0.4 million from a loss of $(74.8) million for the same period in 1996,
principally as a result of the effect of the deferred compensation expense
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On March 19, 1997, the Company completed the Offering pursuant to which
it sold 6,750,000 shares of Common Stock and received approximately $94.4
million in net cash proceeds (before deducting
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expenses associated with the Offering.) On April 15, 1997, the Company sold
an additional 1,012,500 shares of Common Stock in the Offering and received
an additional $14.1 million in net cash proceeds from the underwriters'
exercise in full of their over-allotment option. Upon consummation of the
Offering, all of the outstanding shares of the Company's Junior Preferred
Stock were automatically converted into shares of Common Stock at a ratio of
6.667 shares of Common Stock for each share of Junior Preferred Stock. No
accrued and unpaid dividends were paid on any shares of Junior Preferred
Stock. Approximately $23.0 million of the net proceeds from the Offering
were used to redeem, at a premium of 3%, all of the outstanding shares of
Senior Preferred Stock. As a result, the Company incurred a charge to
dividends in the six months ended June 30, 1997 of $7.7 million for the
difference between the financial statement value of the Senior Preferred
Stock and the face amount thereof, plus premium. Approximately $9.7 million
of the net proceeds from the Offering were used to repay all amounts under
the Company's 1996 Credit Facility. In addition, the Company used
approximately $18.4 million to redeem approximately 1,317,000 shares of
Common Stock from management in the Management Tax Redemption. Immediately
following the Offering, the Company called for redemption, at a premium of
10%, an aggregate of $33.3 million principal amount of Senior Notes. On April
19, 1997, Company used $37.9 million of the net proceeds from the Offering to
redeem such Senior Notes, including payment of all accrued and unpaid
interest with respect to the Senior Notes called for redemption.
Accordingly, an extraordinary charge to the Company's results of operations
was recognized in the second quarter of 1997 equal to the premium paid on the
Senior Notes plus the write off of one-third of the unamortized deferred
financing fees. The balance of the net proceeds was retained for general
corporate purposes, which has included the acquisition of two musical
instrument stores in the Atlanta, Georgia market in April 1997.
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
their final maturity in 2006. The Company currently has no borrowings
outstanding under its 1996 Credit Facility. The agreement underlying the
1996 Credit Facility expires June 1, 2001 and includes certain restrictive
covenants, which, among other things, require the Company to maintain certain
financial ratios. The Company was in compliance with respect to such
requirements as of June 30, 1997. The Company may borrow up to $25 million
under the 1996 Credit Facility, as in place on the date of this Report. The
Company is currently negotiating a new secured bank facility to replace the
1996 Credit Facility, although no agreement has been reached as of the date
of this Report. If and when the Company enters into such successor facility,
it may permit borrowings in excess of the $25 million of borrowings permitted
under the 1996 Credit Facility.
As a result of the $72.4 million loss incurred in fiscal 1996, the
Company has a tax net operating loss carryforward for federal income tax
purposes aggregating $64.2 million, which will expire if unused in 2011. As
of June 30, 1997, the Company had fully reserved the related deferred tax
asset of $22.5 million.
For the six months ended June 30, 1997, cash used by operating
activities was $12.2 million. Cash used in investing activities totaled
$14.4 million, relating principally to the acquisition of two musical
instruments stores in Atlanta, Georgia and the opening of new stores. Cash
provided by financing activities totaled $29.7 million, which consisted
principally of proceeds from the Offering of $107.6 million, net of the
redemption of the Senior Preferred Stock of ($23.0 million), redemption of
Common Stock in the Management Tax Redemption ($18.4 million), redemption of
Senior Notes ($37.9) million and repayment of all amounts outstanding under
the 1996 Credit Facility ($9.7 million).
The Company intends to pursue an aggressive growth strategy by opening
additional stores in new and existing markets. During the quarter ended June
30, 1997, the Company opened two new stores. The Company also believes that
there may be attractive opportunities to expand by selectively acquiring
existing music products retailers. For example, as discussed above and
described in previous reports, in April 1997 the Company acquired a music
products retailer operating two stores in the Atlanta, Georgia market. 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
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a combination thereof. There can be no assurance that the Company will be
able to identify suitable acquisition candidates available for sale at
reasonable prices, consummate additional acquisitions or successfully
integrate any such acquired companies into its operations.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the next twelve months
including its present plans for expansion. The Company's capital resources
and liquidity are expected to be provided by the Company's net cash flow from
operations, funds retained from the net proceeds of the Offering and
borrowings under the 1996 Credit Facility or a replacement facility (if
implemented). Depending upon market conditions, the Company may also incur
additional indebtedness or issue equity securities. There can be no assurance
that such additional capital, if and when required, will be available on
terms acceptable to the Company, if at all.
SEASONALITY
The Company's results are not highly seasonal, although, as with most
retailers, sales in the fourth quarter are typically higher than any other
quarter.
INFLATION
The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its net
sales or profitability.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement
No. 128, "Earnings per share" ("FAS 128"), issued in March 1997 and effective
for fiscal years ending after December 15, 1997. The Company will adopt FAS
128 in 1997. FAS 128 introduces and requires the presentation of "Basic"
earnings per share which represents net earnings divided by the weighted
average shares outstanding excluding all common stock equivalents. A dual
presentation of "Diluted" earnings per share reflecting the dilutive effects
of all common stock equivalents, will also be required. The Diluted
presentation is similar to the current presentation of fully diluted earnings
per share. Management believes the adoption of FAS 128 will not have a
material impact on the Company's results of operations.
FORWARD LOOKING STATEMENTS; BUSINESS RISKS
This Report contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, gross
margin and expense trends, capital requirements and general industry and
business conditions applicable to the Company. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include changes in
external competitive market factors, 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 - Business Risks" on
pages 11 through 13 of the Company's 1996 Annual Report on Form 10-K.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit 11. Income (loss) per share.
Exhibit 27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
On April 16th, 1997, the Company filed a Current
Report on Form 8-K reporting its acquisition of
all of the capital stock of Rhythm City, Inc.
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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 30th day of April,
1997.
Guitar Center, Inc.
/s/ Bruce L. Ross
Bruce L. Ross, Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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