5. Long-Term Debt

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

	December 31,
	2012		2011
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	54		700
Senior unsecured notes	394,890		375,000
	1,016,706		997,462
Less current portion	5,941		646
Guitar Center long-term debt, net of current portion	1,010,765		996,816

Holdings
Senior unsecured PIK notes	564,673		564,673
Less current portion	129,784		—
Holdings long-term debt, net of current portion	434,889		564,673

Holdings consolidated long-term debt, net of current portion	$	1,445,654	$	1,561,489

Guitar Center long-term debt as of December 31, 2012 consisted of (1) a senior secured asset-based revolving facility, referred to as the asset-based facility, with a maximum availability of $373 million, (2) a senior secured term loan facility, referred to as the term loan, with an initial aggregate principal amount of $650 million and (3) a senior unsecured loan facility, referred to as the senior notes, with an initial aggregate principal amount of $375 million.

Holdings long-term debt as of December 31, 2012 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.

Amendments and Extensions of Long-Term Debt

On March 2, 2011, we entered into amendments and extensions to our asset-based facility, term loan, senior notes and senior PIK notes. The transactions extended the terms of the facilities, modified pricing and amended the financial covenant and other terms of the facilities. Loans held by lenders not agreeing to extend their loans in the transaction will continue at their original pricing and maturity.

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. We paid the lenders 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 our 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 our consolidated statements of comprehensive loss for the year ended December 31, 2011.

During the third quarter of 2011, we obtained an additional $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. We paid an aggregate of $0.2 million in arrangement, consent and extension fees as part of the transaction. Fees paid were capitalized and are amortized into interest expense using the effective interest method.

During the first quarter of 2012, we obtained an additional $55 million in commitments under the extended terms of the asset-based facility to substitute commitments that were not extended in March 2011. We paid an aggregate of $0.7 million in arrangement, consent and extension fees as part of the transactions. Fees paid were capitalized and are amortized into interest expense using the effective interest method.

Long-Term Debt

Guitar Center Asset-Based Facility

As of December 31, 2012, the asset-based facility had a maximum borrowing amount of $373 million, subject to a borrowing base which is calculated monthly based on specified percentages of eligible inventory, credit card receivables and trade receivables. Our obligations under this facility are secured by a first priority lien on all of our personal property, consisting of inventory, accounts receivable, cash and deposit accounts, as well as a second priority lien on our capital stock and assets.

The asset-based facility matures in February 2016 with respect to $323 million of the maximum borrowing amount and in October 2013 with respect to $50 million of the maximum borrowing amount. Outstanding principal is due and payable upon maturity. The asset-based facility requires mandatory pre-payment of principal in the event of extraordinary sales of assets or receipt of casualty or other insurance proceeds in excess of $2.5 million.

At our option, we can borrow under the asset-based facility at either the (a) London Inter-Bank Offered Rate, or LIBOR, plus a margin based on average borrowings that ranges from 2.75% to 3.25% on extended commitments and from 1.25% to 1.75% on non-extended commitments or (b) prime rate, plus a margin based on average borrowings that ranges from 1.75% to 2.25% on extended commitments and from 0% to 0.5% on non-extended commitments. Interest is payable on the agreed upon ending date of each related LIBOR borrowing agreement, and quarterly for prime rate borrowings.

We are required to pay a commitment fee to the lenders at a rate of 0.5% per annum for extended commitments and 0.25% per annum for non-extended commitments. The commitment fee is payable each quarter based upon the unused portion of the commitment amount. We are required to pay an annual agency fee of $200,000, payable each quarter in advance. We also are required to pay fees for outstanding letters of credit equal to the applicable LIBOR margin for standby letters of credit or 50% of the LIBOR margin rate for commercial letters of credit.

As of December 31, 2012, the borrowing base on the asset-based facility was $295.4 million, which supported $8.6 million of outstanding letters of credit and $286.8 million of undrawn availability. Average daily borrowings on the asset-based facility were $9.7 million during 2012. Borrowings on the asset-based facility during 2011 were not significant and we did not draw any amounts on the asset-based facility during 2010.

Guitar Center Term Loan

As of December 31, 2012, the outstanding principal balance on the term loan was $622 million, maturing in April 2017 with respect to $613.8 million of outstanding principal and in October 2014 with respect to $7.9 million of outstanding principal. Principal is repaid in quarterly installments of 0.25% of the initial principal amount, which commenced on December 31, 2008 and continues through March 2017, with the remaining outstanding balance due on the maturity date. Our obligations under this facility are secured by a first priority lien on our capital stock and assets and a second priority lien on all of the assets subject to a first priority lien securing the asset-based facility.

The term loan requires prepayment of principal in an amount of up to 50% of our excess cash flows, as defined in the credit agreement, which commenced in the calendar year ended December 31, 2008. The excess cash flow prepayment is applied to the quarterly scheduled principal payments in the order that they are otherwise required to be paid. We were not required to make an excess cash flow payment for 2012 or 2011.

The term loan bears interest at LIBOR plus a margin of 5.25% per annum with respect to the extended term loan and 3.50% per annum with respect to the non-extended term loan. We can elect to convert all or a portion of the balance due on the term loan to an interest rate based on the prime rate plus an applicable margin of 4.25% per annum with respect to the extended term loan and 2.5% per annum with respect to the non-extended term loan. Interest is payable on the agreed upon ending date of each related LIBOR borrowing agreement, and quarterly for prime rate borrowings. As of December 31, 2012, the applicable interest rate on the note was 5.56% on $613.8 million of outstanding principal and 3.71% on $7.9 million of outstanding principal.

We are required to pay an annual agency fee of $125,000, payable quarterly in advance.

Guitar Center Senior Notes

The senior unsecured notes bear interest at 11.50% per annum, payable semi-annually in April and October. As of December 31, 2012, the senior notes were in the principal amount of $394.9 million and mature in October 2017.

Holdings Senior PIK Notes

The senior PIK notes bear interest at 14.09% per annum. Interest on the senior PIK notes is payable semi-annually in April and October, except that until October 15, 2010, interest on the senior PIK notes was at our election payable either by increasing the principal amount of the senior PIK notes or by issuing additional senior PIK notes. As of December 31, 2012, payment-in-kind interest of $189.7 million had been added to the initial principal balance senior PIK notes, and the resulting outstanding principal amount was $564.7 million.

Under the amended terms of the senior PIK notes, we were permitted to require the holders of the senior PIK notes to reinvest 50% of the four semi-annual interest payments due between April 2011 and October 2012 in newly issued Guitar Center senior notes, provided a secured net leverage ratio of 8.5x was maintained. For periods after October 2012, interest on the senior PIK notes is payable only in cash.

We elected to require the holders of the senior PIK notes to reinvest 50% of the October 2012 interest payment in newly issued Guitar Center senior notes totaling $19.9 million. We did not make the reinvestment election for any part of the interest payments due in 2011 or in April 2012 on the senior PIK notes.

Covenants

These loan facilities contain covenants that, among other things, limit our ability to:

· pay dividends on, redeem or repurchase capital stock;

· make investments and other restricted payments;

· incur additional indebtedness or issue preferred stock;

· create liens;

· permit dividend or other payment restrictions on our restricted subsidiaries;

· sell all or substantially all of our assets or consolidate or merge with or into other companies; and

· engage in transactions with affiliates.

In addition, the asset-based facility requires us to maintain a minimum consolidated fixed charge coverage ratio during a cash dominion event when the excess availability in that facility falls below a minimum threshold or during certain events of default. The term loan requires us to maintain a maximum consolidated secured net leverage ratio and limits our ability to make capital expenditures.

As of December 31, 2012, we were in compliance with all of our debt covenants.

Future maturities

Future maturities of long-term debt as of December 31, 2012 were as follows (in thousands):

	Guitar Center		Holdings		Holdings Consolidated
2013 (1)	$	5,941	$	129,784	$	135,725
2014	14,314		—		14,314
2015	6,500		—		6,500
2016	6,500		—		6,500
2017	983,451		—		983,451
Thereafter	—		434,889		434,889
	$	1,016,706	$	564,673	$	1,581,379

(1) We anticipate making a one-time principal payment on the senior PIK notes in April 2013. This payment will be $129.8 million, which is the amount of previously capitalized PIK interest that is required to be paid to prevent the senior PIK notes from being treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code. This amount is included in current portion of long-term debt in Holdings’ consolidated balance sheet as of December 31, 2012. The remaining unpaid balance of the senior PIK notes matures in April 2018.

Certain dividend restrictions

The guarantors under the term loan, the asset-based facility and the senior notes are generally not restricted in their ability to dividend or otherwise distribute funds to Guitar Center except for restrictions imposed under applicable state corporate law. However, Guitar Center is limited in its ability to pay dividends or otherwise make distributions to Holdings under the term loan, the asset-based facility and the indenture governing the senior notes. Specifically, the term loan and the asset-based facility each prohibits Guitar Center from making any distributions to Holdings except for limited purposes, including, but not limited to: (i) the payment of interest on the senior PIK notes by Holdings so long as no payment or bankruptcy event of default exists; (ii) general corporate, overhead and similar expenses of Holdings incurred in the ordinary course of business, (iii) the payment of taxes by Holdings as the parent of a consolidated group that includes Holdings, Guitar Center and the guarantors, (iv) the partial redemption or prepayment of the senior PIK notes by Holdings to the extent necessary to make an “applicable high yield discount obligation” (AHYDO) “catch-up” payment thereon and (v) advisory fees not to exceed the amounts payable in respect thereof under the advisory agreement with Bain Capital as in effect on October 9, 2007 so long as certain events of default do not exist. Notwithstanding the foregoing, so long as no event of default existed or exists, Guitar Center may make distributions to Holdings in an aggregate amount not to exceed $25 million after March 2, 2011.

The senior notes indenture provides that Guitar Center can generally pay dividends and make other distributions to Holdings in an amount not to exceed (a) 50% of Guitar Center’s consolidated net income for the period beginning March 2, 2011 and ending as of the end of the last fiscal quarter before the proposed payment, plus (b) 100% of the net cash proceeds received by Guitar Center from the issuance and sale of capital stock, plus (c) 100% of cash contributions to Guitar Center’s capital, plus (d) to the extent not included in consolidated net income, 100% of the amount received in cash from the sale or other disposition of certain investments, provided that certain conditions are satisfied, including that Guitar Center would, at the time of the proposed payment and after giving pro forma effect thereto, have been permitted to incur at least $1.00 of additional indebtedness pursuant to the fixed charge coverage ratio test set forth in the indenture. Similar provisions regarding dividends and other distributions payable by Holdings are included in the senior PIK notes indenture.

Notwithstanding the foregoing, the senior notes indenture provides that Guitar Center can generally pay dividends and make other distributions to Holdings to, among other things, fund (A) interest payments on the senior PIK notes, (B) any mandatory redemption of a portion of the senior PIK notes pursuant to the senior PIK notes indenture, (C) an offer to purchase upon a change of control or asset sale to the extent required by the terms of the senior PIK notes indenture, (D) tax payments, (E) general corporate overhead and operating expenses and (F) fees of Holdings under the advisory agreement with Bain Capital.

Holdings has no assets or liabilities other than its net investment in Guitar Center, deferred financing fees related to the senior PIK notes and the outstanding balance on the senior PIK notes. It has no operating activities and its net loss consists of interest expense on the senior PIK notes.

Deferred Financing Fees

Amortization of deferred financing fees included in interest expense in the consolidated statements of comprehensive income or loss was as follows (in thousands):

	Year ended December 31,
	2012		2011
Holdings	$	3,191	$	2,896
Guitar Center	2,779		2,485

Unamortized deferred financing fees included in other assets in the consolidated balance sheets were as follows (in thousands):

	December 31,
	2012		2011
Holdings	$	13,097	$	15,524
Guitar Center	10,899		12,913