Long-Term Debt

9 Months Ended

Sep. 30, 2011

Long-Term Debt

Long-Term Debt

5. Long-Term Debt

        Long-term debt consisted of the following (in thousands):

			September 30, 2011		December 31, 2010
Guitar Center
	Senior secured asset-based revolving facility		$	—	$	—
	Senior secured term loan			621,762		621,762
	Obligations under capital lease, payable in monthly installments through 2013			861		1,341
	Senior unsecured notes			375,000		375,000
				997,623		998,103
	Less current portion			645		641
		Guitar Center long-term debt, net of current portion		996,978		997,462
Holdings
	Senior unsecured PIK notes			564,673		564,673
	Holdings long-term debt, net of current portion		$	1,561,651	$	1,562,135

        Guitar Center long-term debt as of September 30, 2011 consisted of (1) a senior secured asset-based revolving facility, referred to as the asset-based facility, with a maximum availability of $373 million and no amounts drawn, (2) a senior secured term loan facility, referred to as the term loan, with an initial aggregate principal amount of $650 million, (3) a senior unsecured loan facility, referred to as the senior notes, with an aggregate principal amount of $375 million.

        Holdings long-term debt as of September 30, 2011 consisted of a senior subordinated unsecured payment-in-kind loan facility, referred to as the senior PIK notes, with an initial aggregate principal amount of $375 million.

        Guitar Center's term loan, asset-based facility and senior notes are guaranteed by substantially all of its subsidiaries. The subsidiary guarantors are 100% owned, all of the guarantees are full and unconditional and joint and several and Guitar Center, Inc. has no assets or operations independent from its subsidiaries within the meaning of Regulation S-X, Rule 3-10. Any non-guarantor subsidiaries are minor.

        For information about dividend restrictions among Holdings, Guitar Center and its guarantor subsidiaries, see Note 5 to the audited consolidated financial statements included in our registration statement on Form S-4, Amendment Number 2, filed with the SEC on September 8, 2011.

        On March 2, 2011, we entered into amendments and extensions to our asset-based facility, term loan, senior notes and senior PIK notes, referred to as the transactions.

        Lenders holding in excess of two-thirds of the commitments under our asset-based facility and in excess of 95% of our term loan facility elected to extend their commitments, and all of the holders of our senior notes and senior PIK notes consented to the transactions. The lenders were paid an aggregate of $8.1 million in arrangement, consent and extension fees as part of the transactions. Fees paid to lenders were capitalized as debt issuance costs and are included in other assets, net in the accompanying condensed consolidated balance sheets. We amortize debt issuance costs to interest expense over the term of the related debts, using the effective interest method. Certain costs paid to third parties totaling $0.8 million for Holdings and $0.5 million for Guitar Center related to this amendment were expensed and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2011.

        The transactions extended the terms of the facilities, modified pricing and amended the financial covenant and other terms of the facilities, including the following:

• Guitar Center Asset-Based Facility

  •

  reduced the maximum borrowing amount from $375 million to $373 million

  •

  extended the maturity from October 2013 to February 2016 with respect to $253 million of the maximum available borrowing amount

  •

  increased the undrawn pricing from 25 basis points to 50 basis points, and increased the pricing margin over LIBOR on drawn amounts by 150 basis points on the extended commitments

  •

  increased the pricing margin over prime rate borrowings by 175 basis points on the extended commitments

  •

  provided the lenders with a fee of 50 basis points if their commitment is reduced or 75 basis points if their full commitment was extended

• Guitar Center Term Loan Facility

  •

  extended the maturity from October 2014 to April 2017 with respect to $613.8 million of the outstanding principal balance

  •

  increased the pricing margin over LIBOR from 350 basis points to 525 basis points on the extended principal balance

  •

  increased the pricing margin over prime rate from 250 basis points to 425 basis points on the extended principal balance

  •

  provided the lenders with a fee of five basis points for consenting to the transaction and an additional 20 basis points for extending their commitments

  •

  amended the secured net leverage ratio covenant to 3.5x until June 30, 2014, and 3.25x from July 1, 2014 until June 30, 2015 and 3.0x from July 1, 2015 until maturity

  •

  included a prepayment premium on the extended loans if prepaid or repriced within one year of the transactions

• Guitar Center Senior Notes

  •

  extended the maturity from October 2015 to October 2017

  •

  increased the non-call period from October 2011 to October 2013

• Holdings Senior PIK Notes

  •

  extended the maturity from April 2016 to April 2018

  •

  allowed 50% of the four cash interest payments from April 2011 until October 2012 to be reinvested in newly issued senior notes, provided a consolidated net leverage ratio of 8.5x is maintained

  •

  increased the non-call period from October 2011 to October 2013

  •

  increased the prepayment premium based upon the number of reinvestment elections

        Loans held by lenders not agreeing to extend their loans in the transaction will continue at their existing pricing and maturity.

        On September 27, 2011, we obtained a $15 million commitment under the extended terms of the asset-based facility to substitute commitments that were not extended by other participating lenders in March 2011. An aggregate of $0.2 million was paid in arrangement, consent, extension, and third party fees as part of the transaction. Fees paid were capitalized and are amortized into interest expense using the effective interest method.

        We did not elect to reinvest any part of the April 2011 or October 2011 interest payments on the senior PIK note, but did make such an election for the interest payment due in April 2012.

        As of September 30, 2011, we were in compliance with all of our debt covenants.

        Future maturities of long-term debt as of September 30, 2011 are as follows (in thousands):

	Guitar Center		Holdings		Holdings Consolidated
Remainder of fiscal 2011	$	161	$	—	$	161
2012		646		—		646
2013		5,941		—		5,941
2014		14,314		—		14,314
2015		6,500		—		6,500
2016		6,500		—		6,500
Thereafter		963,561		564,673		1,528,234
	$	997,623	$	564,673	$	1,562,296

• Deferred Financing Fees

  Guitar Center

        Amortization of deferred financing fees included in interest expense was $0.6 million for the three months ended September 30, 2011 and $0.5 million for the same period in 2010. Amortization of deferred financing fees included in interest expense was $1.8 million for the nine months ended September 30, 2011 and $1.6 million for the same period in 2010. Unamortized deferred financing fees were $13.6 million at September 30, 2011 and $7.9 million at December 31, 2010. Related accumulated amortization was $9.6 million at September 30, 2011 and $7.7 million at December 31, 2010.

• Holdings

        Amortization of deferred financing fees included in interest expense was $0.7 million for the three months ended September 30, 2011 and $0.6 million for the same period in 2010. Amortization of deferred financing fees included in interest expense was $2.2 million for the nine months ended September 30, 2011 and $1.9 million for the same period in 2010. Unamortized deferred financing fees were $16.3 million at September 30, 2011 and $10.0 million at December 31, 2010. Related accumulated amortization was $12.1 million at September 30, 2011 and $9.9 million at December 31, 2010.