SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):November 14, 2002
GUITAR CENTER, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation) | 000-22207 (Commission File Number) | 95-4600862 (I.R.S. Employer Identification No.) | ||
5795 Lindero Canyon Road Westlake Village, California 91361 (Address of Principal executive offices, including zip code) | ||||
Registrant's telephone number, including area code:(818) 735-8800
| General Note: | All information provided in this Current Report on Form 8-K, whether set forth under the caption of Item 9 or incorporated therein from the exhibit filed herewith as Exhibit 99.1, is intended to be "furnished" and not "filed" under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in accordance with the instructions for Form 8-K and the applicable provisions of Regulation FD. Accordingly, the reporting person, Guitar Center, Inc. (the "Company"), hereby expressly intends that no contents of this report will be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section unless subsequent to the date of this report it incorporates the contents of this report into a filing under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act by an express reference identifying this particular report but not in any event by a generalized incorporation by reference which does not specifically identify this report. As also provided for in the instructions to Form 8-K, the Company expressly disclaims any admission that the information furnished herein, or any particular part of such information, is material. |
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
| (c) | Exhibits | |||
99.1 | Management Operating Model for 2003 as of November 14, 2002 |
ITEM 9. REGULATION FD DISCLOSURE
Management Discussion of Business Outlook for 2003
On November 14, 2002, after the close of the stock market, senior management of the Company will discuss their outlook for 2003 in an audio Webcast with interested investors, research analysts and members of the media. As previously announced by press release on November 7, 2002, the Webcast will be held at 2:00 p.m., Pacific Time, on November 14, 2002. To access the audio Webcast, visit the Company's Web site atwww.guitarcenter.com and click on the 2003 Guidance Discussion link or visit the Webcast link atwww.companyboardroom.com to listen to the live broadcast.
The principal purpose of the Webcast will be to provide management's views as to its operating plan for 2003. A summary of the operating plan which will be discussed on the Webcast is attached as Exhibit 99.1 and incorporated by reference herein. The contents of that exhibit and the comments made by management on the Webcast constitute forward-looking statements and were and are made in express reliance on the safe harbor provisions contained in Section 21E of the Exchange Act and Section 27A of the Securities Act. Such statements include, without limitation, statements relating to results deemed to be achievable by management in 2003, as well as with respect to trends in comparable sales performance, gross margin, average order size, investments to be made with respect to fulfillment and logistics, anticipated promotional activity, selling, general and administrative costs, and other factors affecting future sales and earnings and capital requirements. Sales and earnings trends are also affected by many other factors, including, among others, world and national political events, general economic conditions which recently have been weak, particularly in terms of consumer demand and general retail sales, the effectiveness of our promotion and merchandising strategies, and competitive factors applicable to our retail and direct response markets. Statements regarding new store openings are based largely on our current expectations and are necessarily subject to associated business risks related to, among other things, the timely construction, staffing and merchandising of those stores and other matters, some of which are outside of our control.
The statements furnished in this report and on the Webcast must be viewed in context and in light of the risks described above and under the caption "Risk Factors" below. In light of these risks, there can be no assurance that the forward-looking statements furnished in this report or on the Webcast will
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in fact be realized. The statements made by our management and furnished in this report and on the Webcast speak as of the date of this report only, and it should not be assumed that the statements made herein or therein remain accurate as of any future date.GUITAR CENTER DOES NOT PRESENTLY INTEND TO UPDATE THESE STATEMENTS AND UNDERTAKES NO DUTY TO ANY PERSON TO EFFECT ANY SUCH UPDATE UNDER ANY CIRCUMSTANCES.
Risk Factors
In evaluating the information furnished in this report or in the Webcast, investors should also carefully consider the following risk factors. There may be additional risks that we do not presently know of or that we currently consider immaterial. All of these risks could adversely affect our business, results of operations, liquidity and financial position.
Our actual operating results may differ significantly from our projections.
The projected operating and financial information furnished with this report or discussed on our Webcast represents our management's estimates as of the date of this report. The projections, which are forward looking statements, were prepared by our management and are qualified by, and subject to, the assumptions and the other information contained in this report or discussed on the Webcast. The projections were not prepared with a view toward compliance with published guidelines of the Securities and Exchange Commission, the American Institute of Certified Public Accountants, any regulatory or professional agency or body, or generally accepted accounting principles. In addition, neither our independent public accountants nor any other independent expert or outside party has compiled or examined the projections and, accordingly, no such person has expressed any opinion or any other form of assurance with respect thereto. Without limiting the generality of the immediately preceding sentence, our outside auditors expressly disclaim any association with the information furnished with this report or on the Webcast.
The projections are based upon a number of assumptions and estimates that, while presented with numerical specificity are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We have stated possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions of the projections being furnished by us will not materialize or will vary significantly from actual results. Accordingly, the projections are only an estimate of what management believes is realizable as of the date of this report. Actual results will vary from the projections and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is projected.IN LIGHT OF THE FOREGOING, INVESTORS ARE URGED TO PUT THE PROJECTIONS IN CONTEXT AND NOT TO PLACE UNDUE RELIANCE ON THEM.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this report could result in the actual operating results being different than the projections, and such differences may be adverse and material.
We may be unable to meet our Guitar Center and American Music retail store growth strategy, which could adversely affect our results of operations.
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Our retail store growth strategy includes opening new stores in new and existing markets and increasing sales at existing locations. As of September 30, 2002, we operated 104 Guitar Center stores and 21 American Music stores. We opened a total of 13 Guitar Center stores in 2001, and 14 stores in 2000. During the nine months ended September 30, 2002, we opened seven and relocated two Guitar Center stores and acquired a store in Raleigh, North Carolina, which we converted to our Guitar Center brand. In the fourth quarter of 2002, we have opened two large format stores and one store in a secondary market. We plan to open one additional large format store in the fourth quarter of 2002. In the second quarter of 2002, American Music completed the acquisition of M&M Music, a five-store band instrument retailer. We believe there exists a number of acquisition opportunities in the relatively fragmented band instruments market that could be a good fit into our American Music platform.
The success of our retail store expansion plan depends on many factors, including:
A number of these factors are, to a significant extent, beyond our control. As a result, we do not know whether we will be able to continue to open and/or acquire additional Guitar Center and American Music stores at the rates currently anticipated. If we are unable to achieve our retail store expansion goals, our results of operations could be adversely affected.
We face unique competitive and merchandising challenges in connection with our plans to open additional Guitar Center and American Music retail stores in new markets.
As part of our retail growth strategy, we plan to open and/or acquire additional Guitar Center and American Music stores in new markets. This expansion into new markets will present unique competitive and merchandising challenges, including:
Any of these factors may lead to a shortfall in revenues or an increase in costs with respect to the operation of these stores. If we are not able to operate these stores profitably, our results of operations would be adversely affected.
Our retail store expansion strategy, including our strategy of clustering stores, may adversely impact our comparable store sales.
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Historically, we have achieved significant sales growth in existing stores. Our quarterly comparable stores sales results have fluctuated significantly in the past. Sales growth for comparable periods, excluding net sales attributable to stores not open for 14 months, was as follows for our retail stores:
| | 2002 | 2001 | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Quarter 1 | 5 | % | 7 | % | 8 | % | 10 | % | ||
| Quarter 2 | 8 | % | 5 | % | 7 | % | 7 | % | ||
| Quarter 3 | 5 | % | 3 | % | 6 | % | 11 | % | ||
| Quarter 4 | — | 6 | % | 7 | % | 11 | % | |||
| Full Year | — | 6 | % | 7 | % | 10 | % | |||
We do not know whether our new stores will achieve sales or profitability levels similar to our existing stores. Our expansion strategy includes clustering stores in existing markets. Clustering has in the past and may in the future result in the transfer of sales to the new stores and a reduction in the profitability of an existing store. In addition, a variety of factors may affect our future comparable store sales results, including:
A shortfall in comparative sales growth in any period will likely cause a shortfall in earnings, and result in financial performance below that for which we have planned or the investment community expects.
Our growth plans depend on our completion of acquisitions, and these transactions involve special risks.
We believe that our expansion may be accelerated by the acquisition of existing music product retailers. For example, in April 2001 we acquired the business of American Music Group, a New York-based retailer of band instruments, a business in which we were not previously engaged. Further, our growth plans for the American Music business contemplate a significant number of relatively small acquisitions. We also regularly investigate acquisition opportunities complimentary to our Guitar Center and Musician's Friend businesses. Accordingly, in the ordinary course of our business, we regularly consider, evaluate and enter into negotiations related to potential acquisition opportunities. We may pay for these acquisitions in cash or securities, including equity securities, or a combination of both. We cannot assure you that attractive acquisition targets will be available at reasonable prices or that we will be successful in any such transaction. Acquisitions involve a number of special risks, including:
We depend on a relatively small number of manufacturers and suppliers who may not be able or desire to supply our requirements.
Brand recognition is of significant importance in the retail music products business. As a result, we depend on a relatively small number of manufacturers and suppliers for both our existing stores and
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the direct response unit as well as our expansion goals for each of these units. We do not have any long-term contracts with our suppliers, and any failure to maintain our relationships with our key brand name vendors would have a material adverse effect on our business. A number of the manufacturers of the products we sell are limited in size and manufacturing capacity and have significant capital or other constraints. These manufacturers may not be able or willing to meet our increasing requirements for inventory, and we cannot assure you that sufficient quantities or the appropriate mix of products will be available in the future to supply our existing stores and expansion plans. These capacity restraints could lead to extended lead times and shortages of desirable products. This risk is especially prevalent in new markets where our vendors have existing agreements with other dealers and thereby may be unwilling or unable for contractual or other reasons to meet our requirements. Additionally, many of our vendors receive product from overseas and depend on common carriers to transport merchandise into the country. We also rely on common carriers to transport product from our vendors to our central distribution center in Indiana, and from the distribution facility to our stores. Any disruption in the services of common carriers due to employee strikes or other unforeseen events could impact our ability to maintain sufficient quantities of inventory in our retail locations.
We face significant competition, and our efforts to increase our market share may be inhibited by retailers also trying to execute national expansion strategies.
The retail music products industry is fragmented and highly competitive. We compete with many different types of music product retailers, including conventional retailers, as well as other catalog and e-commerce retailers, who sell many or most of the items we sell. We believe that large format music product retailers such as our company will seek to expand through the acquisition of small, independently owned stores or franchises, and we anticipate increased competition in our existing markets and planned new markets from these consolidating retailers. These retailers may identify target companies or execute their acquisition strategies more effectively than our company. In addition, these retailers may have greater financial resources or other competitive advantages as compared to our company. Our expansion to new markets may be inhibited by these and other established competitors. In addition, one or more of our competitors may adopt a new, innovative store format or retail selling method. If we are not able to compete effectively, we may fail to achieve market position gains or may lose market share.
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Mars Music, Inc. filed for federal bankruptcy court protection on September 27, 2002 and is currently engaged in a court-approved liquidation of its inventory and closure of the remaining stores. We cannot predict what impact that liquidation process will have on our business in the near term. Many of the remaining Mars stores are in markets also served by our Guitar Center stores, and the liquidation represents competition for direct response sales by Musician's Friend.
We depend on key personnel including our senior management who are important to the success of our business.
Our success depends to a significant extent on the services of Larry Thomas, our Chairman and Co-CEO, Marty Albertson, our President, Co-CEO, Robert Eastman, the CEO of our wholly-owned subsidiary, Musician's Friend, Inc., and David Fleming, President and Chief Operating Officer of the American Music division, as well as our ability to attract and retain additional key personnel with the skills necessary to manage our existing business and growth plans. The loss of one or more of these individuals or other key personnel could have a material adverse effect on our business, results of operations, liquidity and financial position. During 2001, we entered into a five-year employment contract extension with each of Mr. Thomas and Mr. Albertson. Additionally, we carry key man insurance on the lives of Mr. Thomas and Mr. Albertson in the amounts of $5.0 million and $3.5 million, respectively. Historically, we have promoted employees from within our organization to fill senior operations, sales and store management positions. In order to achieve our growth plans, we will depend upon our ability to retain and promote existing personnel to senior management, and we must attract and retain new personnel with the skills and expertise to manage our business. If we cannot hire, retain and promote qualified personnel, our business, results of operations, financial condition and prospects could be adversely affected.
The implementation of our new distribution center for the Guitar Center retail stores presents operational risks and represents a significant investment.
During 2001, we began construction of a central distribution center in the Indianapolis, Indiana area for our Guitar Center retail store operations. The conveyor systems, the warehouse management system and all other technology systems and infrastructure are in place and commenced operations in July 2002. Migration from our former "drop-ship" model to a centralized distribution model is an important development in our operating strategy and will continue to require significant financial and managerial resources for the next several quarters. This program involves financial and operating risks that could include the need to expend greater funds than presently budgeted or disruptions in retail store operations and the loss of sales if inventory is not timely provided in the required quantities. Further, one of the key underlying economic assumptions of our distribution center project is that this program will permit us to reduce overall inventory levels as a percentage of sales thereby resulting in significantly reduced working capital requirements. Any failure to reach our inventory reduction targets will adversely affect our future financial performance and capital needs, potentially in a material manner. Failure to execute on these requirements could result in a poor or no return on our investment, disruption of our retail store business and a distraction of the efforts of our management team.
Our retail operations are concentrated in California, which ties our financial performance to events in that state.
As of September 30, 2002, our corporate headquarters as well as 21 of our 104 Guitar Center stores were located in California and stores located in that state generated 28.3% and 29.0% of our retail sales for 2001 and 2000, respectively. Although we have opened and acquired stores in other areas of the United States, a significant percentage of our net sales and results of operations will likely remain concentrated in California for the foreseeable future. As a result, our results of operations and financial condition are heavily dependent upon general consumer trends and other general economic
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conditions in California and are subject to other regional risks, including earthquakes. We do maintain certain earthquake insurance, but such policies carry significant deductibles and other restrictions.
Economic conditions or changing consumer preferences could also adversely impact us.
Our business is sensitive to consumer spending patterns, which can be affected by prevailing economic conditions. A downturn in economic conditions in one or more of our markets, such as occurred after September 11, 2001, could have a material adverse effect on our results of operations, financial condition, business and prospects. Recent weak economic conditions have created uncertainty as to the future direction of the economy which is likely to continue to impact hobbyists and other general consumers who purchase from Musician's Friend and American Music and, to a lesser extent, our Guitar Center stores. Although we attempt to stay informed of consumer preferences for musical products and accessories typically offered for sale in our stores, any sustained failure on our part to identify and respond to trends would have a material adverse effect on our results of operations, financial condition, business and prospects.
We must manage efficiently the expansion of our direct response business, including the musiciansfriend.com website, our systems that process orders in our direct response business, and our fulfillment resources in order to service our customers properly.
Our direct response business, particularly our e-commerce business, will require significant investments to respond to anticipated growth and competitive pressures. If we fail to rapidly upgrade our website in order to accommodate increased traffic, we may lose customers, which would reduce our net sales. Furthermore, if we fail to expand the computer systems that we use to process and ship customer orders and process payment and the fulfillment facilities we use to manage and ship our inventory, we may not be able to successfully distribute customer orders. We experienced some delays of this sort in 2001 in connection with the consolidation of our fulfillment centers. As a result, we could incur excessive shipping costs due to the need to split delayed shipments, increased marketing costs in the form of special offers to affected customers or the loss of customers altogether. We may experience difficulty in improving and maintaining such systems if our employees or contractors that develop or maintain our key systems become unavailable to us. We have experienced periodic service disruptions and interruptions, which we believe will continue to occur, while enhancing and expanding these systems.
We must efficiently integrate American Music and grow its band instrument business in order to earn an acceptable return on that investment.
In April 2001, we completed our acquisition of American Music Group, a New York-based retailer of band instruments. We have not previously participated in the band instrument segment of the music products business and have no experience in this distribution channel. We are integrating this business into our retail stores unit as a separate division and intend to use the acquired American Music business as a platform to grow in the band instruments business. Thus, we face the normal challenges of any acquisition, such as integration of personnel and systems as well as the need to learn, understand and further develop this business. We are installing new management information systems at American Music, which has proven to be a challenging project requiring more time and resources than originally anticipated. This implementation is an important project to facilitate further integrating of American Music with our other businesses and to provide a scaleable systems backbone to permit growth of this division. In addition, we started marketing through the American Music stores some Guitar Center products not previously carried by American Music. Failure to execute on these requirements and initiatives described above could result in a poor or no return on our investment, constitute a distraction of the efforts of our management team from the core Guitar Center and Musician's Friend brands and potentially require us to recognize an impairment in the significant amount of goodwill recorded in the acquisitions of American Music and M&M Music.
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Net sales of our e-commerce business could decrease if our online security measures fail.
Our relationships with our e-commerce customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card numbers, are ineffective. If, as a result, we lose customers, our net sales could decrease. We rely on security and authentication technology that we license from third parties. With this technology, we perform real-time credit card authorization and verification with our bank. We cannot predict whether events or developments will result in a compromise or breach of the technology we use to protect a customer's personal information. Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. We cannot assure that we can prevent all security breaches.
If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers.
If we face material delays in introducing new services, products and enhancements, our e-commerce customers may forego the use of our services and use those of our competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our online store. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing website and proprietary technology and systems may become obsolete. To develop our websites and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our website, our transaction processing systems and our computer network to meet customer requirements or emerging industry standards. In addition, the success of e-commerce may result in greater efficiency and lower prices, which could have an adverse effect on selling prices and margins in our retail store business and in our catalog business and generally constrain profitability in the specialty retail business.
Our hardware and software systems are vital to the efficient operation of our retail stores and direct response business, and damage to these systems could harm our business.
We rely on our computer hardware and software systems for the efficient operation of our retail stores and direct response business. Our information systems provide our management with real time inventory, sales and cost information that is essential to the operation of our business. Due to our number of stores, geographic diversity and other factors, we would be unable to generate this information in a timely and accurate manner in the event our hardware or software systems were unavailable. These systems are vulnerable to damage or interruption from a number of factors, including:
A significant information systems failure could reduce the quality or quantity of operating data available to our management. If this information were unavailable for any extended period of time, our management would be unable to efficiently run our business, which would result in a reduction in our net sales.
To attempt to mitigate these risks we have contracted services from third parties to provide backup systems for our Guitar Center retail stores in the event of a disaster. These services provide for our "mission critical" systems to be online within forty-eight hours following most disasters. Our Direct Response business does not have redundant Internet or operating systems and would be vulnerable to catastrophic events. In the event of a disaster, our Direct Response business would most likely experience delays in processing and shipping orders until we executed our failure recovery plans.
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We may need to change the manner in which we conduct our business if government regulation imposes additional costs and adversely affect our financial results.
The adoption or modification of laws or regulations, or revised interpretations of existing laws relating to the direct response industry could adversely affect the manner in which we currently conduct our catalog and e-commerce business. For example, laws related to the taxation of catalog, telephone and online commercial activity, including direct response sales, remain in flux. In addition, the growth and development of the market for online commerce may lead to more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on us. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, consumer privacy, sales-based and other taxation of e-commerce transactions and the like are interpreted and enforced. Any adverse change in any of these laws or in the enforcement, interpretation or scope of existing laws could have a material adverse effect on our results of operations, financial condition or prospects.
The results of operations of our Direct Response Division could be materially adversely affected should the distribution of catalogs and other direct mail become more costly or less effective.
Our Direct Response Division, Musician's Friend, relies on the United States Postal Service to distribute its catalogs and other direct mail communications to consumers. Should the United States Postal Service significantly tighten security guidelines or impose additional processes on mail to detect or respond to contamination, the expected result would be increased costs to shippers and lengthened delivery times, each of which will impose greater costs on us. There is also concern, not yet documented, that some consumers are disposing of direct mail pieces, such as catalogs, out of fear of contamination in the mail system. Any trend of this sort would reduce the number of catalogs in circulation, reduce response rates, raise costs and decrease margins.
We have a limited history of trading on the Nasdaq National Market, and our stock price could be volatile.
We began trading on the Nasdaq National Market on March 14, 1997. The market price of our shares of common stock has been subject to significant fluctuations in response to our operating results and other factors, including announcements by our competitors, and those fluctuations will likely continue in the future. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. These fluctuations, as well as a shortfall in sales or earnings compared to public market analysts' expectations, changes in analysts' recommendations or projections, and general economic and market conditions, may adversely affect the market price of our common stock.
The statements made by our management and furnished in this report and on the Webcast speak as of the date of this report only, and it should not be assumed that the statements made herein or therein remain accurate as of any future date.GUITAR CENTER DOES NOT PRESENTLY INTEND TO UPDATE THESE STATEMENTS AND UNDERTAKES NO DUTY TO ANY PERSON TO EFFECT ANY SUCH UPDATE UNDER ANY CIRCUMSTANCES. Accordingly, investors are urged not to place undue reliance on the forward-looking data provided in this report or on the Webcast.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized,
| GUITAR CENTER, INC. | ||||||
Date: November 14, 2002 | By | /s/ BRUCE ROSS | ||||
| Name: | Bruce Ross | |||||
| Title: | Executive Vice President and Chief Financial Officer | |||||
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| Exhibit No. | Description | |
|---|---|---|
| 99.1 | Management Operating Model for 2003 as of November 14, 2002 |
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II-1
