Nature of Business and Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Nature of Business and Significant Accounting Policies

Nature of Business and Significant Accounting Policies

1. Nature of Business and Significant Accounting Policies

• Nature of Business

        Guitar Center Holdings, Inc., is the parent company of wholly-owned Guitar Center, Inc., and its wholly-owned subsidiaries. All of the company's operating activities are conducted out of Guitar Center, Inc., and its subsidiaries. The parent company's business activities consist solely of debt and equity financing related to its acquisition of Guitar Center, Inc., in 2007.

        In these notes, we refer to the consolidated financial statements of Guitar Center Holdings, Inc., and its subsidiaries as "Holdings", except where the context requires otherwise when discussing the debt or equity of the Guitar Center Holdings, Inc., entity. We refer to the consolidated financial statements of Guitar Center, Inc., and its subsidiaries as "Guitar Center". The terms "we", "us", "our" and "the company" refer to Holdings and Guitar Center collectively.

        Guitar Center is the leading United States retailer of guitars, amplifiers, percussion instruments, keyboards and pro-audio and recording equipment. Our Guitar Center and Music &Arts segments are operated out of our retail store subsidiary and our Direct Response segment is operated out of our Direct Response subsidiaries.

        As of September 30, 2011, Guitar Center operated 221 Guitar Center stores across the United States, with 143 primary format stores, 74 secondary format stores and four tertiary format stores, along with the www.guitarcenter.com website. Music & Arts specializes in band and orchestra instruments for sale and rental, serving teachers, band directors, college professors and students. As of September 30, 2011, Music & Arts operated 102 stores in 19 states, along with the www.musicarts.com website. Our Direct Response segment is a leading direct response retailer of musical instruments in the United States, and its operations include the Musician's Friend and other branded websites and catalogs.

• Principles of Consolidation

        The accompanying consolidated financial statements of Holdings and Guitar Center include the accounts of the respective companies' wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

• Unaudited Interim Financial Information

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for reporting on Form 10-Q. Accordingly, these notes do not include all disclosures normally included in complete financial statements prepared in accordance with GAAP. We believe the disclosures made are adequate for an understanding of the changes in financial position and performance of the entity since the last annual reporting date. These unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our registration statement on Form S-4, Amendment Number 2, filed with the SEC on September 8, 2011.

        The accompanying unaudited condensed consolidated financial statements are prepared on the same basis as our annual consolidated financial statements. We believe the condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by GAAP. Interim period adjustments are normal and recurring in nature, except where indicated otherwise in these notes.

        Our business follows a seasonal pattern, peaking during the holiday selling season in November and December. Fourth quarter sales at our Guitar Center and Direct Response segments are typically significantly higher than in any other quarter. Accordingly, interim results may not be indicative of results for the entire fiscal year.

• Use of Estimates in the Preparation of Financial Statements

        The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

        We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances. In particular, we make judgments in areas such as allowances for doubtful accounts, depreciation and amortization, inventory valuation, self-insurance reserves, impairment of long-lived assets, goodwill and other intangible assets, litigation, provision for sales returns, vendor allowances, stock-based compensation and income taxes. Actual results could differ from these estimates.

• New Accounting Pronouncements

        In October 2009, the Financial Accounting Standards Board, or FASB, issued revised standards related to multiple-deliverable revenue arrangements. The revised standards apply to revenue arrangements that involve the delivery of multiple products or services over different time periods. The revised standards establish a hierarchy for determining the selling price of deliverables in a revenue arrangement, address how to separate deliverables and provide guidance on how to measure and allocate revenue to the deliverables in a multiple-deliverable arrangement. The revised standards enable vendors to recognize revenue in a manner that more closely reflects the economics of multiple-deliverable arrangements. In addition, the revised standards expand the disclosure requirements with the intent of providing users of financial statements with a greater understanding of how vendors allocate revenue in selling arrangements, judgments made in allocating revenue and how those judgments affect the timing and amount of revenue recognition.

        The revised standards are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We adopted the revised standards effective January 1, 2011. Adoption of the revised standards did not have a material impact on our financial statements.

        In December 2010, the FASB issued revised standards related to performing goodwill impairment testing for reporting units with zero or negative carrying amounts. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (step 1). If it does, the entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (step 2). The revised standards require that for reporting units with zero or negative carrying amounts, step 2 of the goodwill impairment test must be performed if it is more likely than not that a goodwill impairment exists, taking qualitative factors into account. The revised standards eliminate an entity's ability to assert that a reporting unit is not required to perform step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. The revised standards do not modify existing standards on how to determine the carrying amount or measure the fair value of the reporting unit.

        The revised standards are effective for fiscal years beginning after December 15, 2010, with early adoption prohibited. We adopted the revised standards effective January 1, 2011. The change had no effect on our financial statements.

        In May 2011, the FASB issued revised standards related to fair value measurements and disclosures. The revised standards clarify existing fair value measurement principles, modify the application of fair value measurement principles in certain circumstances, and expand the disclosure requirements related to fair value measurements.

        The revised standards are effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. We do not expect the revised standards to have a material effect on our financial statements.

        In June 2011, the FASB issued revised standards related to the presentation of comprehensive income. The revised standards eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of income and comprehensive income or in two separate but consecutive statements.

        The revised standard is effective for interim and annual reporting periods beginning after December 15, 2011 and must be applied retrospectively to all periods upon adoption. The adoption of the revised standard will change the presentation of our financial statements.

        In September 2011, the FASB issued revised standards related to testing goodwill for impairment. The new standards permit an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The revised standard is intended to simplify how entities test goodwill for impairment.

        The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We plan to adopt the revised standard for our annual goodwill impairment test performed during the fourth quarter of 2011. We do not expect the adoption of the revised standard to affect our financial statements.