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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: May 28, 1999
(Date of earliest event reported)
GUITAR CENTER, INC.
(exact name of registrant as specified in its charter)
DELAWARE COMMISSION FILE: 95-4600862
(State or other jurisdiction 000-22207 (I.R.S. Employer
of incorporation or Identification No.)
organization)
5155 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(Address of Principal executive offices, including zip code)
(818) 735-8800
(Registrant's telephone number, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
MUSICIAN'S FRIEND, INC. TRANSACTION
On May 28, 1999, pursuant to an Agreement and Plan of Merger dated as
of May 13, 1999 (the "Merger Agreement"), by and among Guitar Center Inc., a
Delaware corporation ("Guitar Center" or the "Company"), EMIC Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of the Company
("EMIC"), Musician's Friend, Inc., a Delaware corporation ("MF"), and the
stockholders of MF, the Company acquired all of the capital stock of MF (the
"Merger"). Pursuant to the Merger Agreement, EMIC merged with and into MF, with
MF surviving, and the Company became the sole stockholder of MF. Prior to this
transaction, the Company had no pre-existing relationship with MF.
Pursuant to the terms of the Merger Agreement, at the effective time of
the Merger, each outstanding share of MF common stock was converted into the
right to receive approximately 10.02 shares of Guitar Center common stock. The
formula for calculation of the exchange ratio was determined through arms-length
negotiations. Upon closing, each option to purchase shares of MF common stock
outstanding under MF's 1998 Stock Option Plan and unexercised immediately prior
to the effective time of the Merger automatically became the right to purchase
10.02 shares of Guitar Center common stock. In accordance with these provisions,
at closing Guitar Center issued an aggregate of 1,959,970 shares of common stock
and assumed options to purchase 250,505 shares of common stock. The options have
exercise prices of $19.96 to $21.96 per share, with a weighted-average exercise
price of $20.31. Of the shares issued in exchange for MF common stock (the
"Merger Shares"), thirty percent were placed in escrow for general
indemnification purposes and for indemnification against damages related to
specific tax issues identified by the Company and MF.
The Merger Shares were issued to the eight former-stockholders of MF in
a private transaction exempt from registration under the Securities Act of 1933.
The Company intends to file a registration statement on Form S-8 relating to the
issuance of shares of Guitar Center common stock upon the exercise of the MF
employee stock options assumed in the Merger.
Also in connection with the closing of this transaction, the Company
refinanced MF's outstanding obligations under its secured credit facility in the
aggregate amount of approximately $17.3 million and incurred transaction
expenses of approximately $3.4 million. The source of these funds was borrowings
under the Company's 1997 Credit Agreement with Wells Fargo Bank. Effective June
1, 1999, Wells Fargo Bank increased the permissible borrowings under the
Company's 1997 Credit Agreement to $60 million from $40 million. This increase
was made on a temporary basis pending the completion of documentation of a
successor secured credit agreement between the Company and Wells Fargo Bank. MF
also has outstanding capital leases of approximately $1.0 million related to
computer equipment financings which will remain in place.
The Merger will be accounted for as a pooling of interests. Under the
pooling of interests method, the constituent companies are treated as if they
had been combined since formation. Accordingly, the Company's historical
financial results will be restated to include those of MF. Further, transaction
costs of approximately $3.4 million will be recognized in the quarter ending
June 30, 1999.
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Through the acquisition of the assets of MF, the Company acquired
control of physical assets consisting principally of inventory, leasehold
interests, a building located in Medford, Oregon used for office and warehouse
activities, and related fixtures and equipment. The Company's present intention
is to convert at least seven of the nine MF retail stores into the Guitar Center
format and to continue to operate the mail order and Internet business as
Musician's Friend, which will operate as a separate business unit and continue
to be headquartered in Medford, Oregon.
Also in connection with the closing of the MF transaction, the former
stockholders of MF and specified stockholders of the Company entered into an
Amended and Restated Registration Rights Agreement. In addition, four-year
employment agreements were entered into with several senior officers of MF,
including Rob Eastman who will act as Chief Executive Officer and Al Dinardi who
will act as President of the Musician's Friend subsidiary. It is presently
expected that Mr. Eastman will be invited to become a member of the Guitar
Center board of directors.
ITEM 5. OTHER EVENTS.
MANAGEMENT DISCUSSION OF THE MUSICIAN'S FRIEND, INC. TRANSACTION AND COMBINED
COMPANY OPERATIONS
On June 3, 1999, after the close of the stock market, senior management
of the Company discussed the MF transaction with research analysts. The comments
made by management to analysts and summarized below constitute forward-looking
statements and were and are made in express reliance on the safe harbor
provisions contained in Section 21E of the Securities Exchange Act of 1934. The
Company's statements were based on management's current expectations and are not
guarantees of actual performance. In fact, the realization of management's
expectations is subject to material risks and uncertainties as described below.
In its discussion with research analysts, management stated its views
regarding presently expected financial results as follows:
QUARTER ENDED JUNE 30, 1999: Revenue of $140.0 million to $143.5
million; diluted earnings per share of $0.10 to 0.11 (before MF transaction
costs). These forecasts reflect not only the adverse effects of the MF
transaction, but also reflect results of operations for the core Guitar Center
business which are tracking below management expectations on a quarter-to-date
basis. Management believes that the shortfall in core Guitar Center results,
presently estimated to be approximately $0.04 per share assuming June performs
to expectation, is attributable to a slowdown in sales of high-technology
products, cannibalization in some existing markets where additional Guitar
Center stores were opened, and a change in direct mail strategy implemented in
1999 that is being reversed. The short-fall in the core Guitar Center business
is related to revenues; merchandise margin as a percentage of sales is currently
meeting expectations.
In addition, under the pooling of interests accounting method,
transaction costs related to the MF transaction, presently estimated at
approximately $3.4, million must be recognized in the period the transaction
closed, which will result in quarterly net income that is approximately
break-even.
QUARTER ENDED SEPTEMBER 30, 1999: Revenue of $154.0 to $158.0 million;
diluted earnings per share of $0.15 to $0.16.
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QUARTER ENDED DECEMBER 31, 1999: Revenue of $193.0 to $198.0 million;
diluted earnings per share of $0.40 to $0.41.
In discussing the balance of 1999, management noted that a number of
new Guitar Center stores are expected to be opened during this period, including
three new stores expected to open in June (two in the Washington, D.C. area and
one in St. Louis). However, given the recent sales results in April and May
noted above, management stated that analysts should assume comparative stores
sales growth in single digits for the balance of the year.
QUARTER ENDED MARCH 31, 2000: Revenue of $189.0 to $193.5 million;
diluted earnings per share of $0.25 to $0.26.
QUARTER ENDED JUNE 30, 2000: Revenue of $175.0 to $178.0 million;
diluted earnings per share of $0.25 to $0.26.
QUARTER ENDED SEPTEMBER 30, 2000: Revenue of $186.0 to $191.0 million;
diluted earnings per share of $0.24 to $0.25.
QUARTER ENDED DECEMBER 31, 2000: Revenue of $236.0 to $241.0 million;
diluted earnings per share of $0.56 to $0.57.
All net income amounts noted above assume a statutory income tax rate
of 38%.
The ability of the Company to accomplish the financial results
described above is subject to material risk factors. These risks include the
risks associated with the acquisition of another business as well as general
business risks, including:
- the assimilation of personnel, vendors, operations, assets and
technology;
- the ability of Guitar Center to successfully operate catalog and
Internet operations;
- the ability to apply Guitar Center merchandising strategies to the
Musician's Friend operations; and
- the future performance of the core Guitar Center business.
The Company has historically operated only retail stores and has no
experience in the catalog or Internet businesses. Therefore, the Company will
be highly dependent on the key personnel of MF to operate this business.
However, the Company's plan assumes an improvement in the catalog and
Internet businesses due to growth in the market, increased acceptance of the
Internet for electronic commerce, the availability of adequate capital to
pursue business opportunities available to MF, the application of
merchandising strategies historically executed by Guitar Center, and that the
combined company will not be subjected to any liabilities or contingent
obligations that have not been provided for in the financial statements.
These may not be correct assumptions. Further, the Company intends to rebrand
at least seven of the nine MF stores to the Guitar Center format and has
assumed that this strategy will result in improved
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performance of those units, an assumption which may prove incorrect. In
short, the management's present views regarding future results assume that
the Company can improve the historical performance of MF significantly.
The statements of the Company's management also assume that the core
Guitar Center retail store business performs at or above present expectations of
management. As noted above, performance of the core Guitar Center stores is
below expectations quarter-to-date. The performance of the Guitar Center retail
business is subject to additional risk factors, including those specifically
identified under the caption "Business - Risks Related to the Business"
contained in Guitar Center's Form 10-K for the year ended December 31, 1998,
which are incorporated into this report by reference.
Investors should also recognize that the reliability of any forecasted
financial data diminishes the farther in the future that the data is projected.
The risk factors described above may not be an exclusive enumeration of
the risks faced by Guitar Center in acquiring the Musician's Friend business,
operating the combined business and attaining the future financial results
currently anticipated by management.
The statements made by management of the Company and summarized above
represent their views as of the date of the filing of this report, and it should
not be assumed that the statements made herein remain accurate as of any future
date. THE COMPANY 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.
* * * * * * *
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
It is impractical to provide the required financial statements at the
time of the filing of this report. The required financial statements for the
acquired business will be filed as an amendment to this Form 8-K within 60 days.
(b) PRO FORMA FINANCIAL INFORMATION.
It is impractical to provide the required pro forma information at the
time of the filing of this report. The required pro forma information will be
filed as an amendment to this Form 8-K within 60 days.
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SIGNATURES
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: June 3, 1999 By /S/ BRUCE ROSS
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NAME: Bruce Ross
TITLE: Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------- ------------
2.1* Agreement and Plan of Merger by
and among Guitar Center, Inc.,
EMIC Acquisition Corporation,
Musician's Friend, Inc. and the
Stockholders of the Company,
dated as of May 13, 1999
2.2 Amended and Restated Registration
Rights Agreement, dated as of May
28, 1999
*In accordance with Item 601 of Regulation S-K, schedules, exhibits and other
attachments to such agreement have not been filed since such items do not
contain information which is material to an investment decision and is not
otherwise disclosed in such agreement. The Company agrees to furnish
supplementally a copy of any omitted items to the Securities and Exchange
Commission upon request.
* * * * *
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