Form S-1

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

(Name, address including zip code, and telephone number, including area code, of agent for service)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, as amended, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

This is an initial public offering of common stock by Fender Musical Instruments Corporation. We are selling shares of common stock. The selling stockholders identified in this prospectus are selling shares of common stock. We will not receive any of the proceeds from the sale of the shares by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The estimated initial public offering price is between $ and $ per share.

We intend to apply to have our shares of common stock listed on the Nasdaq Global Market, subject to notice of issuance, under the symbol “FNDR.”

Delivery of the shares of common stock is expected to be made on or about , 2012. Certain of the selling stockholders identified in this prospectus have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions as set forth above, up to an additional shares of our common stock. We will not receive any of the proceeds from the sale of shares by these selling stockholders if the underwriters exercise their option to purchase additional shares of common stock.

Investing in our common stock involves substantial risk. Please read “Risk factors” beginning on page 15.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Prospectus summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including our consolidated financial statements and related notes, and our risk factors beginning on page 15, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “FMIC,” the “company,” “we,” “us” and “our” in this prospectus to refer to Fender Musical Instruments Corporation and its subsidiaries on a consolidated basis.

Our company

We are a leading, global musical instruments company whose portfolio of renowned, music lifestyle brands brings the passion of music to life. Since the founding of our predecessor company by Leo Fender in 1946, we have built a comprehensive portfolio of brands led by the iconic Fender brand and other renowned brands such as Squier, Jackson, Guild, Ovation and Latin Percussion, which we own, and Gretsch, EVH (Eddie Van Halen) and Takamine, for which we are the licensee. We believe that the Fender brand in particular is closely associated with the birth of rock ‘n roll and has a strong legacy in music and in popular culture. The authenticity and quality of our brands are highlighted by the numerous, well-known current and historical musicians and groups that are often associated with our products. While a number of our brands, including Fender, have broad appeal, other brands in our portfolio offer products with distinct sounds or styles targeted at musicians in particular genres, including rock ‘n roll, country, jazz, heavy metal, blues and world music.

We believe that we have assembled one of the broadest product portfolios in the musical instruments industry. Our product portfolio includes fretted instruments (comprised of electric, acoustic and bass guitars, banjos, ukuleles, mandolins and resonator guitars), guitar amplifiers, percussion instruments and accessories. We believe our guitars and guitar amplifiers revolutionized the way music is written, played and heard. We design and market our products to a variety of musicians from beginners to professionals across a broad range of prices.

In 2011, we had the #1 market share by revenue in the United States in electric, acoustic and bass guitars and electric and bass guitar amplifiers, according to an industry source. In addition, since the acquisition of Kaman Music Corporation (now known as KMC Musicorp), or KMC, in 2007, we have been one of the largest independent distributors of musical instrument accessories in the United States, according to an industry source. To support our brands and product leadership, we continue to bring new and innovative products to market that inspire our consumers and enhance brand loyalty.

We distribute our products globally in over 85 countries through one of the largest direct-to-retail sales forces in the musical instruments industry in the United States, Canada, Europe and Mexico, as well as through a network of distributors in selected international markets. We sell our products through independent and national music retailers, mass merchants, online and catalog retailers and third-party distributors. In fiscal 2011, we generated 58.7% of our gross sales before discounts and allowances from the independent channel (representing over 13,000 independently-owned music stores), 23.5% collectively from the national channel, mass merchants and online and catalog retailers, and 17.8% from third-party distributors. Gross

sales before discounts and allowances is comprised of our product sales but, unlike net sales, does not include licensing income and dealer freight collection, and is not net of cash discounts, sales return allowances and rebates.

Our strategically managed global supply chain is comprised of a network of our own manufacturing facilities in the United States and Mexico, distribution and warehouse facilities in North America (the United States and Canada) and Europe, and established sourcing relationships with original equipment manufacturers, or OEMs, and suppliers in Asia, Europe, North America and Mexico. We manufacture our premium products primarily in the United States.

Our portfolio of renowned brands, broad selection of high-quality products, longstanding culture of ongoing innovation and new product introductions, global supply chain and distribution network and strong consumer loyalty have been key drivers of our strong financial performance. Our net sales grew from $612.5 million in fiscal 2009 to $700.6 million in fiscal 2011, representing a compound annual growth rate, or CAGR, of 6.9%. Our net income was $10.8 million in fiscal 2009, compared to $19.0 million in fiscal 2011, representing a CAGR of 32.8%. Our adjusted EBITDA grew from $43.7 million in fiscal 2009 to $52.9 million in fiscal 2011, representing a CAGR of 10.0%. See “Summary consolidated financial data—Non-GAAP financial measures” for the definition of adjusted EBITDA and a reconciliation from net income (loss) to adjusted EBITDA.

Market opportunity

We operate in the global musical instruments and accessories industry, which generated approximately $15.8 billion in global retail sales and $6.4 billion in U.S. retail sales in 2010, according to an industry source. The categories of retail musical products that we address, including fretted instruments, instrument amplifiers, percussion products and general accessories, generated an estimated $4.7 billion in U.S retail sales in 2010, according to the same industry source.

We believe our opportunities for sales growth are supported by several long-term trends that we think will increase consumer demand for our products, including the continued popularity of guitar-based music and bands and visibility of guitars in popular culture; increasing accessibility as improvements in manufacturing techniques are resulting in high-quality instruments at relatively low retail prices; technological advancements that continue to enhance a consumer’s ability to access, learn, create, personalize and distribute music; and increasing popularity and gradual incorporation of guitar-based music in some large, emerging markets like China, India and Indonesia; and increasing availability of guitar-based music and alternative music education programs.

Our competitive strengths

Portfolio of iconic and renowned lifestyle brands and associations with leading musicians

We have a portfolio of some of the most recognized global music lifestyle brands and products. Our brands are used by many of the world’s best known musicians and groups, both current and historical. We believe that the use of our products by these professional musicians, whose popularity and actions often influence consumers, establishes the authenticity of our brands so consumers aspire to own our products and are inspired to create their own music using our products. We collaborate with many of these famous musicians through our Signature Artist Program, in which these musicians provide specifications for instruments bearing their signatures and endorse their signature instruments, which are then marketed and sold to our customers. We also have a dedicated Artist Relations group that works closely with professional musicians to meet their musical instrument needs, including through custom made products.

Industry leader with broad product portfolio

In 2011, we had the #1 market share by revenue in electric, acoustic and bass guitars and electric and bass guitar amplifiers, and were the leading U.S.-based supplier by revenue to the overall musical instruments industry, according to industry sources. We believe the broad and diversified range of products in our portfolio helps to mitigate the impact of economic cycles, as sales of some product categories are less affected than others by economic downturns. We have expanded our product portfolio through a combination of innovation, strategic acquisitions, joint ventures and licensing arrangements. We believe that our range of brands and products positions us to be a strategic and reliable supplier to our retail partners and consumers.

Heritage of innovation and new product introductions

With the creation of the Telecaster guitar and Stratocaster guitar over 50 years ago, we began a tradition of innovation that continues today. We have had a profound influence on the evolution of the music industry – for example, we produced the Precision Bass, the first commercially successful electric bass guitar, which we believe was a key enabler of rock ‘n roll music. We have demonstrated an ability to continuously develop and introduce innovative products and features that are designed to grow the market for our products and enhance our brands. An example is our Fender Mustang amplifier, which we introduced in fiscal 2010. This product includes the FUSE software platform, which lets musicians connect to an online community where they can play, edit and share their own music. In addition, we often collaborate with leading artists through our Signature Artist Program and incorporate their ideas into our designs. Our Custom Shop, where we design and build custom and limited edition electric and bass guitars, also serves as a laboratory for the generation of ideas that can be more widely incorporated in our products.

Leading global footprint

industry. By facilitating a positive in-store experience at our retail partners and providing customer service programs, we believe we further enhance our brands and build consumer loyalty. Our manufacturing platform provides scalability and volume flexibility as we have a balanced mix of products manufactured internally and sourced externally. This infrastructure allows us to rapidly respond to the changing needs of consumers in our key markets, while maintaining high quality.

Distinguished management team and skilled workforce

We have assembled a proven and talented management team led by Larry Thomas, our Chief Executive Officer. Our senior management team has an average of 21 years of musical instruments industry experience and brings together a deep knowledge of our industry, products, mission and culture, and an execution-oriented operating philosophy that are critical to our success. This extensive experience goes beyond senior management and deep into the organization. We believe that our company culture and the strength of our brands enable us to attract and retain highly-talented employees who share our passion for music and interact with our retail partners and consumers in an authentic and credible way.

Our strategy

Increase awareness and consumer loyalty as lifestyle brands

We intend to continue to develop our brands as lifestyle brands through a variety of activities. An important component of this strategy is to increase our brands’ presence outside of our normal retail channels, such as at global music festivals, where consumers can directly interact with our products. We intend to continue to increase our social media presence through tools such as Facebook and Twitter, and to engage directly with consumers through online lifestyle communities focused on artist-driven music content. In addition, we intend to tailor our marketing communications to cultivate our aspirational lifestyle brands’ images and also to develop products to meet specific consumer preferences. We believe that applying the marketing and branding strategies that have been successful with our Fender brand has the potential to increase consumer awareness of, and loyalty to, other high potential brands in our portfolio.

Expand our product offering through continued innovation

We intend to continue our tradition of innovation to bring new products and features to consumers, while maintaining the high standards of quality with which our brands are associated. Over the last two years, we have increased the pace at which we bring new products to market through more robust innovation processes and expanded the breadth of new products introduced. A recent example is our Fender Select line of premium, hand-crafted production guitars, which we introduced in January 2012. Our new product releases have the potential to produce a high margin revenue stream, as well as provide us with an opportunity to update and refresh our existing product lines. We believe that new product releases also create an aspirational desire for consumers to upgrade and purchase new products.

Accelerate our international growth

We intend to extend our reach to a broader global consumer base that might not otherwise be exposed to our products. Over the past 10 years, we have experienced strong international sales growth as we have entered new markets and introduced additional products into established international markets. We believe that international markets will provide growth opportunities in the near to intermediate term, and we intend to expand our reach in countries where we have not historically focused our sales efforts; increase sales of our KMC products outside the United States; and grow our direct-to-retail sales internationally in markets that we believe present opportunities for additional growth.

Expand our licensing and co-branding activities

We believe licensing our trademarks such as Fender and others builds awareness of our brands and furthers our strategy of reaching new consumers, while developing additional relationships with existing consumers through new products. These licensing agreements typically offer low investment costs and attractive margin opportunities without the risk of cannibalizing existing sales. We intend to expand our licensing activities to additional products in new and existing categories and further expand our licensing activities outside the United States. In addition, we intend to continue to pursue non-revenue generating co-branding initiatives, which we believe further increase our exposure and position our products as premier lifestyle brands by leveraging our partners’ resources and consumer reach beyond the musical instruments industry.

Continue to be a partner of choice for strategic relationships

Promote operational efficiencies

We intend to continue to drive operational efficiencies to improve our operating margin while maintaining or enhancing the quality of our products. In addition, we intend to continue investing in manufacturing technologies, such as robotic painting, to improve product quality, increase capacity and lower cost. We also plan to improve our wood storage, climate control and wood grading practices and expand our capability to manufacture the raw pieces of wood used in the manufacture of guitars. We continually evaluate shifting additional production to manufacturing facilities with lower or more stable costs. For example, our Ensenada, Mexico manufacturing facility provides us with high-quality products at stable, relatively low costs, and we intend to explore opportunities to move additional production to that facility.

Risks related to our business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors.” Some of these risks are:

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Recent difficult economic conditions have adversely affected consumer purchases of discretionary items, such as our products, and may continue to harm our business and results of operations.

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We derive a substantial portion of our net sales from Europe, and the financial crisis in Europe could significantly harm our business and results of operations.

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Our ability to increase our net sales will depend in large part on growth in the markets for our products.

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If we are not able to accurately forecast demand for our products, our business and results of operations would be harmed.

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If we are unable to anticipate and respond to changes in consumer demand and trends, our net sales, business and results of operations would suffer.

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Any delay in the delivery of our products to customers could harm our business and results of operations.

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We depend on OEMs for production of a significant portion of our products. If we are unable to maintain these manufacturing relationships or enter into additional or different arrangements as needed, our net sales would suffer.

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Any disruption we experience at our manufacturing facilities or our distribution system or any disruption at our OEMs could hurt our ability to deliver our products to customers.

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Our OEMs may not continue to produce products that are consistent with our standards, which could damage the value of our brands and harm our business and results of operations.

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Any disruption in the supply of raw materials and components we and third parties need to manufacture our products could harm our net sales.

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We may be subject to the enforcement of regulations and laws relating to the importation and use of certain raw material, which could adversely affect our ability to use certain raw materials and harm our business.

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We depend on our relationships with dealers and their ability to sell our products, and one dealer is responsible for a significant percentage of our net sales. Any disruption in these relationships could harm our net sales.

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For sales in some countries outside the United States, we rely in part on third party distributors and are subject to the risk that these distributors may not effectively sell our products.

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We are subject to credit risk associated with our largest customer.

Corporate information

We were incorporated in Delaware in January 1985. Our principal executive offices are located at 17600 North Perimeter Drive, Suite 100, Scottsdale, Arizona 85255. Our telephone number is (480) 596-9690. Our website address is www.fender.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.

We have a number of registered marks, including Fender^®, Stratocaster^®, Telecaster^®, Precision Bass^®, Jazz Bass^®, Squier^® and others, in several jurisdictions, including the United States, and we have also applied to register a number of other marks in various jurisdictions. This prospectus also contains trademarks and trade names of other companies. All trademarks and trade names appearing in this prospectus are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

The offering

Common stock offered by us

Common stock offered by the selling stockholders

Underwriters’ option to purchase additional shares

Certain of the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional shares.

Common stock to be outstanding after this offering

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $ million, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus. We intend to use approximately $100 million of the net proceeds to us to repay a portion of the amount outstanding under the term loan portion of our senior secured credit facility and to use the remainder of the net proceeds to us for working capital and other general corporate purposes. We may also use a portion of the net proceeds to us to acquire other businesses, products or technologies. We do not have agreements or commitments for any specific significant acquisitions at this time. We will not receive any proceeds from the sale of the shares sold by the selling stockholders. See “Use of proceeds.”

Directed share program

The underwriters have reserved for sale, at the initial public offering price, up to approximately shares of our common stock being offered for sale to certain persons and entities that have relationships with us. We will offer these shares to the extent permitted under applicable regulations in the United States and in various countries. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.

Conflicts of interest

We expect to use more than 5% of the net proceeds from the sale of our common stock to repay indebtedness under the term loan portion

of our senior secured credit facility owed by us to affiliates of certain of the underwriters who are lenders under the term loan portion of our senior secured credit facility. See “Use of proceeds.” Accordingly, this offering is being made in compliance with the requirements of Rule 5121 of the Financial Industry Regulatory Authority’s conduct rules. This rule provides generally that if at least 5% of the net proceeds from the sale of securities, not including underwriting compensation, is used to reduce or retire the balance of a loan or credit facility extended by the underwriters or their affiliates, a “qualified independent underwriter” meeting certain standards must participate in the preparation of this prospectus and exercise the usual standards of diligence with respect thereto. William Blair & Company, L.L.C. is assuming the responsibilities of acting as the qualified independent underwriter in conducting due diligence. See “Conflicts of interest” for a more detailed discussion of potential conflicts of interest.

Dividend policy

Currently, we do not anticipate paying cash dividends.

Proposed Nasdaq Global Market symbol

FNDR

The number of shares of our common stock to be outstanding following this offering is based on 196,112 shares of our common stock outstanding as of January 1, 2012, and excludes:

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67,511 shares of common stock issuable upon exercise of options outstanding as of January 1, 2012 at a weighted average exercise price of $953 per share;

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restricted stock units, representing the right, at the option of the company, to deliver 300 shares of common stock or an equivalent cash amount, of which 60 restricted stock units have vested as of January 1, 2012; and

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shares of our common stock reserved for future issuance under equity compensation plans, consisting of shares of common stock reserved for issuance under our 2012 Equity Compensation Plan, which will become effective upon completion of this offering, and 7,783 additional shares reserved for issuance under our 2007 Equity Compensation Plan. On the date of this prospectus, any remaining shares available for issuance under our 2007 Equity Compensation Plan will be added to the shares to be reserved under our 2012 Equity Compensation Plan and we will cease granting awards under our 2007 Equity Compensation Plan.

Unless otherwise indicated, this prospectus reflects and assumes the following:

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a -for- stock split of our classes of common stock, which occurred on , 2012;

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the effectiveness of amendments to our certificate of incorporation as of March 5, 2012, which redesignated our class A common stock as common stock on a share-for-share basis;

Summary consolidated financial data

The following table sets forth our summary consolidated financial data as of the dates and for the periods indicated. Our summary consolidated statement of operations for each of the years ended January 3, 2010, January 2, 2011, and January 1, 2012, and the summary consolidated balance sheet data as of January 1, 2012, have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus.

The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily be indicative of the results that may be expected for a full year. The following summaries of our consolidated financial data for the periods presented should be read in conjunction with “Risk factors”, “Selected consolidated financial data”, “Capitalization”, “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.


Fiscal year ended (in thousands, except share and per share data)	January 3, 2010			January 2, 2011			January 1, 2012

Consolidated statement of operations data:
Net sales	$	612,521		$	617,830		$	700,554
Cost of goods sold		420,919			447,250			483,020

Gross profit		191,602			170,580			217,534


Operating expenses:
Selling, general and administrative		125,711			121,651			137,128
Warehouse		25,878			27,713			28,426
Research and development		9,004			9,299			10,157
Impairment charges		1,200			—			—

Total operating expenses		161,793			158,663			175,711

Income from operations		29,809			11,917			41,823

Other income (expense):
Net foreign currency exchange (loss)		(3,602	)		(1,175	)		(3,807	)
Interest expense		(15,636	)		(12,688	)		(14,927	)
Other, net		1,723			(391	)		1,130

Total other income (expense)		(17,515	)		(14,254	)		(17,604	)

Income (loss) before income taxes		12,294			(2,337	)		24,219
Income tax expense (benefit)		1,507			(652	)		5,208

Net income (loss)		10,787			(1,685	)		19,011
Net income available to redeemable common stockholders		4,724			15,584			15,785

Net income (loss) available (attributable) to common stockholders	$	6,063		$	(17,269	)	$	3,226


Net income (loss) per common share available (attributable) to common stockholders:
Basic	$	51.89		$	(147.75	)	$	28.38
Diluted	$	43.70		$	(147.75	)	$	24.72

Weighted average common shares outstanding:
Basic		116,853			116,877			113,691
Diluted		138,744			116,877			130,508

Pro forma net income per common share (unaudited):
Basic							$	97.28
Diluted							$	89.57

Weighted average common shares used in computing pro forma net income per common share (unaudited) (1):
Basic								195,422
Diluted								212,239

(1)

Weighted average common shares used in computing pro forma net income per common share (unaudited) gives effect as of January 3, 2011 to (i) the automatic conversion of our class B common stock and class C common stock into an aggregate of 86,418 shares of common stock, which will occur upon the closing of this offering and (ii) the effectiveness of amendments to our certificate of incorporation as of March 5, 2012, which redesignated our class A common stock as common stock on a share-for-share basis.

Our consolidated balance sheet data as of January 1, 2012, is presented:

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on an actual basis;

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on a pro forma basis to reflect (i) the automatic conversion of our class B common stock and class C common stock into an aggregate of 86,418 shares of common stock upon the closing of the offering and (ii) the effectiveness of amendments to our certificate of incorporation as of March 5, 2012, which redesignated our class A common stock as common stock on a share-for-share basis; and

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on a pro forma as adjusted basis, reflecting the pro forma adjustments and the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, and the application of a portion of such proceeds to repay approximately $100 million of the amount outstanding under the term loan portion of our senior secured credit facilities.


As of January 1, 2012 (in thousands)	Actual			Pro forma (unaudited)		Pro forma as adjusted (unaudited)


Consolidated balance sheet data (1):
Cash and cash equivalents	$	12,971		$	12,971
Inventories		181,333			181,333
Working capital		190,569			190,569
Property and equipment—net		31,389			31,389
Total assets		366,580			366,580
Total debt and capital lease obligations, including current maturities		247,520			247,520
Redeemable common stock		99,789			—
Total stockholders’ (deficit) equity	$	(67,811	)	$	31,978

(1)

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity from this offering by $ , assuming an initial public offering price of $ per share and after deducting assumed underwriting discounts and commissions.

Non-GAAP financial measures

To provide investors with additional information about our financial results, we disclose within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided below a reconciliation between adjusted EBITDA and net income or loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this prospectus because we believe it allows investors to understand and evaluate our core operating performance and trends. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business.

Some limitations of adjusted EBITDA are:

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adjusted EBITDA does not include the impact of equity-based compensation;

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adjusted EBITDA does not include the impact of impairment charges;

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adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

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adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and

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other companies may calculate adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated:


Fiscal year ended (in thousands)	January 3, 2010		January 2, 2011			January 1, 2012

Reconciliation of net income (loss) to adjusted EBITDA
Net income (loss)	$	10,787	$	(1,685	)	$	19,011
Interest expense		15,636		12,688			14,927
Income tax expense (benefit)		1,507		(652	)		5,208
Depreciation and amortization		12,052		10,776			8,732
Impairment charges		1,200		—			—
Stock based compensation		2,592		1,741			5,049

Adjusted EBITDA	$	43,774	$	22,868		$	52,927

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, before deciding whether to purchase shares of our common stock. The risks described below are not the only ones that we face. Additional risks that are not yet known to us or that we currently believe to be immaterial also could impair our business or results of operations. If any of the following risks is realized, our business, results of operations and prospects could be harmed. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Recent difficult economic conditions have adversely affected consumer purchases of discretionary items, such as our products, and may continue to harm our business and results of operations.

Sales of musical instruments depend in significant part on discretionary consumer spending, which tends to decline during difficult economic conditions. Discretionary consumer spending also is affected by other factors, including changes in tax rates and tax credits, interest rates and the availability and terms of consumer credit. The recent recession in the United States and other countries in which we sell our products has adversely impacted consumers’ ability and willingness to spend discretionary income, and we believe it has adversely affected our net sales in recent years. A continuation or worsening of the current weakness in the economy would negatively affect consumer purchases of our products and would continue to harm our business and results of operations.

We derive a substantial portion of our net sales from Europe, and the financial crisis in Europe could significantly harm our business and results of operations.

In fiscal 2011, Europe accounted for approximately 27.3% of our net sales. The current financial crisis in Europe (including concerns that certain European countries may default in payments due on their national debt) and the resulting economic uncertainty in recent months has adversely affected, and may continue to adversely affect, sales of our products in Europe. To the extent that these adverse economic conditions in Europe continue or worsen, demand for our products by both consumers and retailers may decline, which could significantly harm our business and results of operations.

Our ability to increase our net sales will depend in large part on growth in the markets for our products.

Our ability to grow our net sales depends on growth in the markets for our products. In particular, growth in our core markets is primarily driven by individuals deciding to play fretted or percussion instruments, as well as by existing musicians purchasing additional instruments and accessories. We believe that the rate at which new fretted instrument or percussion players are created, as well as the extent to which musicians continue to play these instruments and purchase new products, depends on a number of factors, including:

Any changes in trends or preferences that negatively affect these or other factors may lead to a decline in the size of the market for our products. In addition, our ability to grow our business internationally may be limited to the extent that popular music genres in a particular country or region do not incorporate the types of products that we sell.

If we are not able to accurately forecast demand for our products, our business and results of operations would be harmed.

Our products typically have a lead time of 90 days and, in some cases, longer, to obtain sufficient inventory and to replenish supply. Accordingly, we make decisions that determine our inventory levels based on our expectations regarding demand for our products. Actual demand may differ significantly from demand levels that we project, and is particularly uncertain with respect to new products. If we underestimate demand for a new or existing product, we will not have sufficient inventory to meet this demand, which could result in delayed shipments to customers and lost sales. On the other hand, if we overestimate demand, we will have excess inventory of finished products as well as raw materials and work-in-progress. This excess inventory could become obsolete, could result in us incurring costs to manufacture those products earlier than we would otherwise have been required to do so or could result in us shifting production to other products for which we may not have materials in stock, all of which would harm our business and results of operations.

The current difficult, volatile economic conditions in the Unites States, Europe and other countries has made, and may continue to make, accurate forecasting particularly challenging. Any failure on our part to accurately forecast demand for our products could adversely affect our net sales, business and results of operations.

If we are unable to anticipate and respond to changes in consumer demand and trends, our net sales, business and results of operations would suffer.

Consumer preferences and demand, both within the markets for our various products and with respect to the musical instruments market as a whole, are subject to rapid change and are difficult to predict. Consumer preferences may shift away from fretted instruments or musical instruments in general, and towards other areas based on new products and trends or for other reasons. In addition, shifts of preferences as to style of music may impact demand for our products and can change our product mix. For example, shifts towards electronic music or music created using sampling or other digital technology, synthesizers or keyboards could reduce the demand for many of our products, as we do not sell significant quantities of synthesizers, keyboards or software-based musical instruments. Because our brand names are most closely associated with electric, acoustic and bass guitars, percussion instruments and guitar amplifiers, shifts in consumer preferences towards genres that typically do not incorporate these products,

such as rap or electronic music, also could reduce the demand for many of our products. In fiscal 2011, fretted instruments and guitar amplifiers represented 72.0% of our gross sales before discounts and allowances.

If we are not able to anticipate, identify and respond to changes in consumer preferences in a timely manner, or at all, our net sales could decline and our business and results of operations would be harmed.

Any delay in the delivery of our products to customers could harm our business and results of operations.

A critical component of our ability to complete sales to our customers is our ability to meet our customers’ demand in a timely manner. Any delay in the shipment of our products could result in lost sales. It is especially important that we meet our customers’ demand in a timely manner during the holiday selling season. In some instances, delays in filling our retail customers’ product orders has led to increased backlog as we work to fulfill these orders. Events that could result in shipment delays include:

Any of these or other events that disrupt the supply of our products to our customers could cause our net sales to decline and harm our business and results of operations.

We depend on OEMs located in Asia to manufacture a significant portion of our products. In fiscal 2011, products manufactured by OEMs accounted for approximately 64.0% of our gross sales before discounts and allowances, including distributed brands, and 36.0% of our gross sales before discounts and allowances of our owned brands. In certain of our product lines, we are dependent on a single manufacturer to produce those products. Due to lack of financial resources, disruptions at their facilities, labor shortages or disputes, difficulty or delay in obtaining raw materials, parts and components or otherwise, these manufacturers may not be able to provide us with manufacturing capacity to meet our needs. From time to time, some of our OEMs, including OEMs that are the sole manufacturer of specific product lines, have encountered financial difficulties or other problems, which have caused delays in the production and delivery of our products. If we were unable to obtain sufficient quantities of our products from these manufacturers in a timely manner, our business and results of operations would suffer.

We do not have long-term contracts with any of these OEMs, and there can be no assurance that we will be able to renew these contracts on favorable terms or at all. In addition, there can be no assurance that these OEMs will continue to devote sufficient time, attention and resources to our products or that these OEMs will not manufacture products for our competitors. It is also possible that financial difficulties could cause one or more our OEMs to discontinue their business. For example, in the fourth-quarter of fiscal 2011, Chushin Musical Instruments Mfg., Inc., which manufactured certain electric guitars for us, discontinued its business, and, as a result, we were required to source those guitars from other OEMs.

Manufacturing our products, especially our fretted instruments, requires a skilled and trained workforce, and we have invested significant resources in training our OEMs in the production of our products. If we were to have to obtain an additional OEM due to the loss of one of our existing OEMs, because we are not satisfied with one of our existing OEM’s performance, one of our existing OEMs discontinued its business, or otherwise, we would need to spend significant resources in locating and training a new OEM and there can be no assurance that we could locate such a manufacturer in a timely manner or at all. Any failure to locate a new OEM in a timely manner or at all could adversely affect our business and results of operations.

In addition, we have in the past replaced, and may in the future replace, OEMs for a variety of reasons, including cost, quality and capacity. The replacement of any OEM could lead to disruptions in our supply chain and lost sales.

Any disruption we experience at our manufacturing facilities or our distribution system or any disruption at our OEMs could hurt our ability to deliver our products to customers.

We rely on our manufacturing facilities in Arizona, California, Connecticut, South Carolina and Mexico, and OEMs in China, India, Indonesia, Japan, South Korea, Taiwan, Thailand and Vietnam to produce our products, and we rely on our distribution facilities in California, Kentucky, Tennessee, the Netherlands and Canada to manage our inventory and ship our products. Our manufacturing and distribution facilities include computer controlled equipment, and are subject to a number of risks related to security, computer viruses, software and hardware malfunctions, power interruptions, mechanical failures or other system failures. Our operations also could be interrupted by earthquakes, fires, floods, tornadoes or other natural disasters near our manufacturing facilities or distribution centers. One of our primary manufacturing facilities and our primary distribution facility are located in Southern California, an area that has experienced earthquakes and fires. A natural disaster or other catastrophic event could cause interruptions in the manufacture or distribution of our products and loss of inventory and could impair our ability to fulfill customer orders in a timely manner. Our manufacturing facility in Corona, California is also located in an area where many workers are represented by labor unions. If the employees in our Corona facility were to become unionized, we could be subject to labor disruptions and increased labor costs. We also operate a manufacturing facility in Ensenada, Mexico. Recently, Mexico has experienced a period of increasing criminal violence, primarily due to the activities of drug cartels and related organized crime. These activities and the possible escalation of violence associated with them could disrupt our manufacturing activities in Mexico and impair our ability to fulfill customer orders in a timely manner.

Our OEMs’ operations could similarly be disrupted, either temporarily or completely, by any of the events described above, as well as by other events, including poor financial condition, labor disputes, social unrest, quarantines or closures due to disease outbreak, or terrorism. Any

disruptions at our OEMs’ operations could delay the shipment of our products and could result in lost sales or price increases we must either absorb or pass on to our customers, which could adversely affect the demand for our products. For example, in fiscal 2011 one of our OEMs experienced severe flooding at one of its factories. This OEM requested price increases from us that we were not willing to fully absorb or seek to pass on to our customers. As a result, we are currently exploring alternative sources for the products manufactured by that OEM.

We are currently expanding our Mexican plant capability to operate as a cost-effective alternative to some of our OEM capacity in Asia. Although we have switched some production to Mexico on a limited basis, switching production to Mexico on a larger scale in the event of disruptions in Asia would take from several months to a year and could result in significant lost sales. Any disruption to an OEM that is the sole manufacturer of a particular product would have a significant impact on our net sales of that product. To the extent disruptions at an OEM occur for an extended time period, we may be required to obtain new manufacturers. This process would increase the complexity of our supply chain management and be time consuming and expensive, and would likely result in delays in deliveries of our products to our customers. Furthermore, there is no assurance that we could find new manufacturers who are satisfactory to us on commercially acceptable terms or at all. We maintain only a limited amount of business interruption insurance that would not be sufficient to cover us in the event of significant disruption at our facilities or at any of our OEMs.

Our operations depend on the timely performance of services by third parties, including the shipment of our products to and from our distribution facilities, as well as the shipment of supplies to our manufacturing operations. If we encounter problems with our manufacturing or distribution operations, our net sales and our business and results of operations could be harmed.

Our OEMs may not continue to produce products that are consistent with our standards, which could damage the value of our brands and harm our business and results of operations.

We rely on our OEMs to maintain production quality that meets our standards. Our OEMs may not continue to produce products that are consistent with our standards as a result of the use of lower-quality raw materials, changes in production methods, a shortage of qualified employees or poor financial condition. For example, as of December 31, 2011, more than 11,000 guitars manufactured by one of our OEMs had failed our quality control inspections because the OEM began using a lower-quality component without our permission, and several thousand additional guitars manufactured by that OEM may fail our inspections as well. Our quality control measures largely consist of inspecting samples of products shipped to us and visiting our OEMs. We do not, however, base any of our employees at these manufacturing sites. Our inspection methods may prove inadequate to detect defects in our products before they reach consumers. If OEMs do not maintain adequate quality control measures, or if the quality control inspection measures that we employ fail to detect quality control issues, our reputation and the value of our brands could be harmed, and we could incur increased returns and warranty expense, which would harm our business and operating results.

Any disruption in the supply of raw materials and components we and third parties need to manufacture our products could harm our net sales.

At our owned factories, the primary raw material used in our products is hardwood, principally poplar, ash, alder and hardwood maple. We also use rosewood in portions of approximately 45.0%

of our finished goods from these factories. In addition, we use a limited amount of other exotic and rare woods in our products. We depend on third party suppliers to supply these raw materials to us and our OEMs. In addition to raw materials, we also use third party suppliers for certain components needed for our fretted and percussion instruments and guitar amplifiers. These components include fretted instrument cases, tubes for our guitar amplifiers, strings for our fretted instruments, drum heads, printed circuit boards, guitar amplifier speakers, selected pick-ups, paint, machine heads, grill-cloths and plastic and metal components such as control knobs.

We do not have long-term contracts with our suppliers and, in some cases, rely on a single supplier for all of our requirements for a particular raw material or component. We are subject to the risk that these third party suppliers will not be able or willing to continue to provide us and our OEMs with raw materials and components that meet our specifications, quality standards and delivery schedules. Factors that could impact our suppliers’ willingness and ability to continue to provide us with the required materials and components include disruption at or affecting our suppliers’ facilities, such as work stoppages or natural disasters, adverse weather or other conditions that affect wood supply, the financial condition of our suppliers and deterioration in our and our OEMs’ relationships with these suppliers. In addition, we cannot be sure that we or our OEMs will be able to obtain these materials and components on satisfactory terms. For example, the supply of exotic woods, such as mahogany and rosewood, used in some of our guitars and bass guitars is becoming less available, which, over time, may increase cost or cause us to seek alternative materials that may not be consistent with current quality standards. Any increase in raw material and component costs could reduce our sales and harm our gross margins. In addition, any loss of a specific wood may permanently cause a change in one or more of our products that may not be accepted by end users or cause us to eliminate that product altogether.

Similarly, in the past, we relied on a single supplier of paint for the guitars manufactured at our Corona, California manufacturing facility. That supplier discontinued business in fiscal 2010. For a variety of reasons, including the specialized nature of the paint we require, replacing that supplier was costly and time consuming. As a result, we were unable to produce guitars at our Corona facility for a period of approximately four months in fiscal 2010, and full production did not resume for a further three months. This disruption significantly reduced our net sales and income from operations in fiscal 2010, and the associated delays created a backlog of orders. The disruption also led to increases in scrap and rework rates and costs associated with testing new paints and training personnel to use new paints during this period. Although we have since developed secondary sources for our primary paint coatings, the unavailability of paints or other key raw materials could adversely affect our business in the future.

We depend on a limited number of suppliers for tubes used in our guitar amplifiers and certain exotic woods that we use in a selection of our guitars. For example, we believe there are only three primary manufacturers for the tubes used in certain of our guitar amplifiers, located in China, Russia, and the Czech Republic. In some cases, these manufacturers are the sole source of certain types of tubes. If we are unable to find acceptable substitutes for these suppliers, we may be required to produce these tubes internally or change our designs. Similarly, through-hole componentry used in certain of our guitar amplifiers is becoming scarcer worldwide as most electronics manufacturers shift to surface-mount components. We do not have long-term agreements with these suppliers and we cannot be sure that they will continue to supply us or our OEMs with the materials needed to manufacture our products, on acceptable terms or at all.

If we are unable to sustain historical technologies, such as vacuum tubes, traditional tone woods and through-hole componentry, our business and results of operations could suffer.

Disruption in the supply of materials would impair our ability to sell our products and meet customer demand, and also could delay the launch of new products, any of which could harm our business and results of operations. If we were to have to change suppliers, the new supplier may not be able to provide us materials or components in a timely manner and in adequate quantities that are consistent with our quality standards and on satisfactory pricing terms. In addition, alternative sources of supply may not be available for raw materials that are scarce or components for which there are a limited number of suppliers.

We may be subject to the enforcement of regulations and laws relating to the importation and use of certain raw materials, which could adversely affect our ability to use certain raw materials and harm our business.

We are subject to a variety of customs and import regulations that, if not properly followed could delay or impact our importation of raw materials, which could adversely affect our business. For example, in June 2011, German officials began a criminal investigation pertaining to less than 500 Fender guitars containing Brazilian rosewood fingerboards to determine if they were improperly imported into Germany between approximately March 2010 and January 2011. We are investigating whether the necks of the subject products may be replaced with materials that are not subject to the import restriction at issue.

One of our competitors, Gibson Guitar Corp., is in litigation with the U.S. Fish & Wildlife Service, or Fish & Wildlife, for alleged violations of the Lacey Act, which regulates trade in wood and other plant products. Most recently in August 2011, Fish & Wildlife raided Gibson’s headquarters and seized rosewood from India, alleging that it was exported under an incorrect tariff code and that Gibson was not identified in importation paperwork. Although we believe our sourcing and importation practices are in compliance with the Lacey Act and other applicable regulations, Fish & Wildlife or other applicable regulators could take a different view, which could restrict or prevent our use of specific types of woods from specific countries/regions of the world, and/or subject us to fines and other penalties.

In the case of certain raw materials that we use in our products, including certain types of woods, we may be subject to pressure from environmental groups to use alternative types of materials. These alternative materials could reduce the quality of our products or could be more expensive, either of which could harm our business and results of operations. In addition, negative publicity regarding environmental matters also could harm our brands.

We may also be subject to the enforcement of other new or existing regulations and laws relating to the sourcing, transportation, distribution and use of raw materials and components, including wood, electrical components and adhesives, which could impact our ability to use certain raw materials or components and harm our business.

We sell our products at wholesale to dealers and, accordingly, depend on the willingness and ability of our dealers to market and sell our products to consumers. For fiscal 2009, fiscal 2010

and fiscal 2011, Guitar Center Inc., or Guitar Center, and its affiliates accounted for approximately 15.2%, 15.8% and 15.8% of our net sales, respectively. Sales of our products depend in part on dealers and distributors implementing effective retail sales initiatives that create and sustain demand for the products they purchase from us. If these initiatives are not successfully implemented or if any of our significant customers were to reduce the quantity of our products it sells, stop selling our products, focus selling efforts on our competitors’ products or generally reduce its operations due to financial difficulties or otherwise, our business and results of operations would suffer. For example, during fiscal 2009, Guitar Center and its affiliates reduced their purchases of our products, which in turn negatively affected our net sales. We do not have long-term contracts with dealers, including Guitar Center and its affiliates. Our dealers are generally not obligated to purchase specified amounts of our products, and they generally purchase products from us on a purchase order basis.

In addition, we rely on our dealers, especially specialty music dealers that provide individual sales assistance, to be knowledgeable about our products and their features. If we are not able to educate our dealers so that they may effectively sell our products, or if our dealers do not provide positive buying experiences for our consumers, our brands and business would be harmed.

For sales in some countries outside the United States, we rely in part on third party distributors and are subject to the risk that these distributors may not effectively sell our products.

For sales in some countries outside the United States, including markets in Asia and Latin America, we rely on independent distributors to sell our products to dealers. We do not control our independent distributors, and many of our contracts allow our distributors to offer our competitors’ products. Our competitors may incentivize distributors to favor their products. We generally do not have long-term contracts with these distributors and the substantial majority of our contracts do not contain meaningful minimum purchase commitments. Consequently, with little or no notice, many of these distributors may terminate their relationships with us or materially reduce the level of their purchases of our products. If we were to lose one or more of our distributors, we would need to obtain a new distributor to cover the particular location or product line, which may not be possible on favorable terms or at all. In the alternative, we would need to use our own sales force to replace the distributor. Expanding our sales force into new locations takes a significant amount of time and resources, and there is no assurance that we would be successful in such an expansion. In addition, we are party to two exclusive distribution agreements for the Japanese market with two of our significant stockholders that contain restrictions limiting our ability to terminate the agreements. Should we desire to replace these distributors with our own sales force, as we have done in Europe, or if we were to seek to retain a new distributor for the Japanese market, these agreements may prevent us from doing so.

Historically, a significant portion of our domestic net sales has been generated by our largest customer. As a result, we experience some concentration of credit risk in our accounts receivable, with Guitar Center and its affiliates representing an aggregate of $8.7 million, or approximately 13.8%, of our accounts receivable as of January 1, 2012. In November 2010, Moody’s Investors Service downgraded Guitar Center’s corporate family rating and probability of default rating to Caa2 (which Moody’s defines as “poor standing and subject to very high credit risk”) from Caa1, citing Guitar Center’s highly leveraged capital structure and heavy interest burden. Moody’s

affirmed Guitar Center’s Caa2 rating on February 29, 2012. These factors make Guitar Center more vulnerable to any deterioration in its financial performance, whether as a result of adverse economic conditions or otherwise. A substantial majority of our accounts receivable, including all of our accounts receivable from Guitar Center and its subsidiaries, are not covered by collateral or credit insurance.

If one or more of our significant customers were to experience serious financial difficulty, as a result of weak economic conditions or otherwise, and were to reduce its inventory in one or more of our products or limit or cease operations, our business and results of operations would be significantly harmed. Consolidation of our customers in the future or additional concentration of market share among our customers may also increase the concentration of our credit risk.

We participate in floor plan financing arrangements for many of our independent dealers under which a third party finances, or “floors,” the purchase of products from us. Under these arrangements, we are subject to credit risk in the event that the independent dealers do not repay amounts owed under these arrangements. In particular, under those floor plan arrangements that are recourse, we would be obligated to reimburse the third party financing sources either in full or in part in the event the independent dealers default on their obligations. Any failure of these independent dealers to satisfy their obligations, either as a result of deterioration in their financial condition or otherwise, could cause our bad debt expense to increase. In addition, one of the primary third party financing sources that finances floor plan arrangements ceased providing these arrangements in the United Kingdom in 2009, and any further reduction in the availability of floor plan financing may prevent dealers from carrying an adequate inventory of our products, which could reduce demand and reduce our net sales.

We operate in highly competitive markets, and, if we do not compete effectively, our business and results of operations will be harmed.

The markets in which we operate are highly competitive and are served by a variety of established companies with recognized brand names, as well as new market entrants. Companies in these markets compete based on a variety of factors, including price, style of instrument, sound and sound quality, features and brand recognition. Our ability to increase our net sales depends, in part, on our ability to compete effectively and maintain or increase our market share. We compete with different types of companies and based on different factors in each market. For example, in the market for beginner instruments competition is largely based on price as well as brand recognition. In the markets for higher-priced and professional instruments, competition tends to be based more on sound, sound quality and style of instrument. In certain areas of the markets in which we compete, some of our competitors may be more established, benefit from greater name recognition or have greater manufacturing and distribution channels and other resources than we do. If we are not able to compete effectively, we may lose market share, our net sales could decline or grow at a slower rate and our business and results of operations would be harmed.

If we fail to maintain the value of our brands, our business will be harmed.

Our success depends on the value of our brands. Fender and our other brand names are central to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on our ability to provide high-quality products that respond to consumer preferences in a timely manner, as well as on the

success of our marketing efforts. Our brands could be adversely affected if we fail to achieve these objectives or if we or others with whom we are associated take actions that harm our public image or reputation. In addition, our brands could be harmed if our products are not viewed as distinctive. If the value of our brands were to decline, our net sales would decline and our business and results of operations would be harmed.

If we are unable to protect our intellectual property rights, the value of our brands could decline and our business could suffer.

Our intellectual property is critical to the success of our business. We particularly rely on our trademarks for our brand recognition, and rely on trade dress, patents and other intellectual property rights to protect and maintain the distinctiveness of our products and their sound quality and style. Despite our efforts, the steps we have taken to protect our intellectual property may not be adequate to prevent infringement of our intellectual property. For example, we have been unable to obtain registered trademark protection in the United States for the specific category of musical instruments for the two dimensional guitar body designs commonly used on our iconic Stratocaster, Telecaster and Precision Bass guitars. In addition, the regulations of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. From time to time, we have discovered unauthorized products in the marketplace that are counterfeit reproductions of our products. Although we expend efforts to pursue counterfeiters, it is not practicable to pursue all counterfeiters. If we are unsuccessful in challenging a third party’s products on the basis of trademark infringement or if we are unable to dedicate sufficient resources to detecting and pursuing counterfeit products or otherwise do not aggressively pursue producers or sellers of counterfeit products, continued sales of these products could adversely impact our brands and our business and results of operations.

We have registered many of our brand names and some of our product designs as trademarks in the United States and in certain foreign countries. We may not, however, be successful in asserting trademark, trade name or trade dress protection with respect to our brand names and our product designs and third parties may seek to oppose or challenge our trademark registrations. For instance, as described further under “Business—Legal proceedings,” in connection with trademark registration opposition proceedings that we initiated against one of our competitors, Peavey Electronics Corporation, or Peavey, filed counterclaims against us, petitioning for cancellation of two of our registered headstock designs that are used in many of our electric guitars and bass guitars. If we are not successful in this cancellation proceeding, our ability to prevent other companies from copying the subject headstock designs may suffer. In addition, our pending patent applications may not result in the issuance of patents, and even issued patents may be contested, circumvented or invalidated and may not provide us with proprietary protection or competitive advantages.

Further, while we enter into non-disclosure agreements with employees, OEMs, distributors and others to protect our confidential information and trade secrets, we may be unable to prevent such parties from breaching these agreements with us and using our intellectual property in an unauthorized manner. If our efforts to protect our intellectual property are inadequate, or if a third party misappropriates our rights, the value of our brands could be harmed, which would adversely affect our business. Defending our intellectual property rights, including through litigation, can be very expensive and time consuming, and there is no assurance that we will be successful.

We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as our trademarks, to third parties. Despite our efforts to protect our trademarks, these licensees may take actions that diminish the value of our proprietary rights and harm our brands and reputation.

Claims by others that we infringe their intellectual property rights could harm our business.

From time to time, third parties claim that one or more of our products or the products that we distribute infringe their proprietary rights. Any claims of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages or that prevents us from offering one or more of our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on acceptable terms or at all. Alternatively, we may be required to alter our products to make them non-infringing, which could require significant effort and expense and ultimately may not be successful. Any of these events could harm our business and results of operations.

If we do not develop new or innovative products that meet evolving market needs, or if our new products do not achieve market acceptance, our business and results of operations will suffer.

We believe our long-term success will depend in part on our ability to continue to introduce new products that appeal to consumers and on our ability to develop new and innovative products that employ developing technologies and address evolving market needs. A significant portion of our sales in any year is from new or modified products that we have introduced in that year. For example, in fiscal 2011, 10.8% of our gross sales before discounts and allowances were attributable to products introduced in that year. In addition, modern technologies, such as digital signal processing technologies, are offering opportunities to develop instruments and guitar amplifiers that can address the needs of musicians in a wide variety of musical styles, and developments in technology offer opportunities to develop instruments and guitar amplifiers that provide higher sound quality at a lower cost. We have devoted, and continue to devote, significant resources to research and development. Our research and development expenses totaled $10.2 million in fiscal 2011. Our business and results of operations will, however, suffer if we are unable to develop innovative new products that achieve market acceptance.

Our operating results are subject to quarterly variations in our net sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock.

We have experienced, and expect to continue to experience, substantial quarterly variations in our net sales and net income. Our quarterly results of operations fluctuate, in some cases significantly, as a result of a variety of other factors, including, among other things:

As a result of these quarterly fluctuations, comparisons of our operating results between different quarters within a single year are not necessarily meaningful and may not be accurate indicators of our future performance. Any quarterly fluctuations that we report in the future may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly.

The loss of one or more members of our senior management team would adversely affect our business and our ability to execute our business strategy.

Our future success depends in large part on our ability to retain members of our senior management team, including our Chief Executive Officer, Larry Thomas, and to attract and retain other qualified managerial personnel. Mr. Thomas’ current employment agreement with us expires on March 31, 2015. Our management and other employees can terminate their employment with us at any time, and we do not maintain key person life insurance on employees other than Mr. Thomas. The proceeds of that policy would likely be inadequate to compensate us for the loss of Mr. Thomas’ services. While we have begun developing a management succession plan, it remains in the early stages of development and there can be no assurance that we will implement a successful management succession plan. The unexpected loss of one or more members of our senior management team could harm our business and our ability to execute our business strategy.

We depend on skilled craftspeople and engineers to develop and create our products, and an educated sales force to sell our products, and the failure to attract and retain such individuals could adversely affect our business.

Although portions of our manufacturing processes are automated, certain of our products, particularly our high-end guitars, continue to require a significant amount of skilled labor and handiwork. We rely on skilled and well-trained engineers and craftspeople both for the design and production of our products, as well as in our research and development functions. Our inability to attract or retain qualified employees in our design, production or research and development functions or elsewhere in our company could result in diminished quality of our product and delinquent production schedules, impede our ability to develop new products and harm our business and results of operations. In addition, we rely on a skilled sales force that is knowledgeable about our products. If we are not able to retain or attract qualified individuals to our sales force, or if we are not able to grow our sales force when needed, our ability to maintain or increase our net sales would suffer.

Many of the skills we require are not widely taught in traditional universities or schools. For example, vacuum tube and transistor based electronics design is no longer widely taught. Similarly, the skills required to construct and repair fretted instruments are only taught in highly-specialized trade schools. For these reasons, many of the skills required to manufacture our products are taught to new employees by more experienced staff. If we are unable to retain and promote talent within these areas of expertise who can teach their skills to new employees, we may be unable to sustain our historical technologies, and the long-term success of our business could be adversely affected.

The artists who play our instruments are an important aspect of our brands’ images. The loss of the support of artists for our products or the inability to attract new artists may harm our business.

If our products are not used by current or future artists and famous musicians, our brands could lose value and our net sales could decline. Similarly, our Signature Artist program is a significant component of our marketing program. Through this program, famous musicians provide specifications for instruments bearing their signature, endorse their signature instrument and permit us to use their images in selected advertisements or on our websites, typically in exchange for royalties based on sales of their signature instruments. We do not have long-term contracts with any of these musicians, and these musicians are not restricted from endorsing our competitors’ products or required to use our products exclusively. If we are unable to maintain our current relationships with these artists, if these artists are no longer popular or if we are unable to continue to attract the endorsement of new artists in the future, the value of our brands and our net sales could decline.

If we are not able to maintain our relationships with third parties for whom we act as distributor or sales representative, our business and results of operations would be harmed.

We derive a portion of our net sales from product lines for which we act as distributor or sales representative. These arrangements include products such as Gretsch guitars and drums, Sabian cymbals, EVH guitars and guitar amplifiers and Takamine guitars. Some of the agreements governing these arrangements are for a fixed term and are renewable only upon the agreement of both parties. In other cases, the agreements have fixed terms and automatically renew unless notice is given a specified period of time in advance of the expiration of the current term. In addition, some of these agreements may be terminated in the event we do not satisfy certain performance conditions, including minimum purchase, sale and royalty requirements, and in the event of a change in control of FMIC.

If we are unable to renew these agreements on acceptable terms or at all or if we take actions that permit these agreements to be terminated, we may lose access to those product lines, which could adversely affect our business and results of operations. In some instances, including with respect to the distribution of Takamine guitars, we do not have agreements, other than purchase orders, that govern the distributor relationship. In such instances, this lack of an agreement means that should a dispute develop between us and the licensor, we could quickly lose the business associated with that product line.

We rely on information technology systems in all aspects of our business, and any failure or interruption in our information technology systems could disrupt and harm our business.

We rely on information technology systems in all aspects of our business, including for order processing, inventory and supply chain management, control of our distribution channels, communications and customer billing. If any aspect of these information technology systems were to suffer security breaches, hardware or software malfunctions or other disruptions or failures, our ability to meet customers’ expectations, retain critical data and otherwise operate our business could suffer. If a breach of security were to occur, sensitive customer transactional data could be misappropriated, and we could be exposed to liability and our reputation could be harmed. We are in the process of modifying our online payment processing technology to be in compliance with the applicable Payment Card Industry data security standards, or PCI DSS, but

are not yet PCI DSS compliant. If we are not successful in implementing the applicable PCI DSS or fail to respond successfully to these additional risks, our business and operating results could be adversely affected.

In addition, maintenance and upgrades of our systems could result in significant capital expenditures. Some of these systems are legacy systems that are no longer supported by the original vendor of the product. Accordingly, we are required to perform maintenance and upgrades of these systems ourselves, which can be time consuming and expensive, and, depending on the required maintenance or upgrade, we may not be able to perform these functions effectively or at all.

We currently utilize three separate enterprise resource planning systems. One of these systems is no longer supported externally. In addition, there is no assurance that these systems will continue to work together to enable us to operate our business in an efficient manner. We are planning to integrate these systems. Integration of the systems would be time consuming and costly and may disrupt our business. If we attempt to integrate these systems, or implement new enterprise resource planning systems, but are unable to do so effectively or at all, our ability to meet customer expectations and to manage our business operations could suffer.

We use third party data centers to co-locate or host some of our systems and to provide key data processing and hosting functions. We do not control the operation of these facilities. These facilities, as well as our own facilities over which we retain control, could suffer damage or interruption from earthquakes, floods, fires, terrorist attacks, power losses, telecommunications failures and similar events, and could also be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these events, a decision by a third party to close facilities without adequate notice or other unanticipated problems could result in significant disruption to our business operations.

Actions taken by our suppliers, OEMs, licensees and others may harm our reputation and net sales.

We do not control our suppliers, OEMs or licensees of our trademarks or their labor, environmental or other practices. A violation of labor, environmental or other laws by our suppliers, OEMs or licensees, or a failure of these parties to follow generally accepted ethical business practices, could create negative publicity and harm our reputation. In addition, we may be required to seek alternative suppliers, OEMs or licensees if these violations or failures were to occur. We do not inspect or audit compliance by our suppliers, OEMs or licensees with these laws or practices, and we do not have a formal supplier code of conduct. We generally ask our suppliers to represent to us that they are fully in compliance with applicable labor, health and environmental laws but, other than seeking these representations, we do not generally monitor this compliance. In certain instances, our channel distribution partners have inspected our OEMs and have found violations of these channel partners’ internal codes of conduct relating to certain labor and environmental matters that have needed to be remedied. Other consumer products companies have faced significant criticism for the actions of their OEMs, and we could face such problems ourselves. Any of these events could reduce demand for our products, harm our ability to meet demand if we need to locate alternative suppliers or OEMs and harm our reputation, business and results of operations.

Currency exchange rate fluctuations could result in lower net sales and decreased gross margins.

Foreign currency fluctuations have had and could in the future have an adverse effect on our business and results of operations. A significant portion of our products are sold outside of the United States in foreign currencies. Our expenses are chiefly denominated in U.S. dollars, while a significant percentage of our net sales from sales in euros and the British pound. This exposes us to the risk that a strengthening U.S. dollar could cause our net sales to decline relative to our costs, thereby decreasing our gross margins.

We engage in hedging activities to mitigate the impact of the translation of foreign currencies on our financial results. Our hedging activities are designed to reduce, but do not eliminate, the effects of foreign currency fluctuations. Factors that could affect the effectiveness of our hedging activities include accuracy of sales forecasts, volatility of currency markets and the availability of hedging instruments. In particular, the current economic volatility in Europe makes it more difficult to forecast sales in Europe and put in place effective hedging activities in relation to our exposure to the euro. In recent months there have been concerns over the future of the euro single currency. Any breakup of the eurozone would adversely affect our foreign currency exposure and the effectiveness of our hedging activities. Since our hedging activities are designed to reduce volatility, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar.

Our international operations and the operations of our OEMs are subject to additional risks that are beyond our control and that could harm our business.

We have international operations and also use OEMs located in Asia to manufacture some of our products. Accordingly, we are subject to a number of risks related to conducting business internationally, any of which could harm our business, including:

We are subject to taxation in the United States and various other foreign jurisdictions in which we do business. Some of these foreign jurisdictions have higher statutory tax rates than those in the United States, and certain of our international earnings are also taxable in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense reserves and income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

In the past, we have expanded our operations in part through acquisitions, license agreements and distribution arrangements, and may continue to do so in the future. These transactions subject us to risks that, if not properly managed, could harm our business and results of operations.

We have in the past grown our business in part through strategic acquisitions, license agreements and distribution arrangements and expect to continue to do so in the future as part of our strategy to grow our business and expand our product lines. In December 2007 we acquired KMC, which was our largest acquisition to date. Our recent acquisitions, as well as any future acquisitions, entail a number of risks that may prevent us from achieving the expected benefits from the acquisitions, including:

Since the acquisition of KMC, we have consolidated some of our existing manufacturing and other operations with those of KMC. We have migrated sales and distribution of KMC products in Europe to our existing European sales and distribution platforms. KMC is, however, still responsible for its international sales and distribution operations outside of Europe. We also are evaluating our current warehouse facilities in an effort to streamline our inventory and distribution functions and shorten the time it takes to deliver our products to customers. These and other activities designed to integrate KMC operations with our existing operations are disruptive and require significant management time and attention, and a number of these activities have only recently been completed or are continuing. To the extent we cannot complete these integration activities effectively and on a timely basis, we will not achieve the benefits we intend to realize from the KMC acquisition and our business and results of operations would be harmed.

The pursuit of future acquisitions also may divert management’s time and attention from our operations. In addition, to the extent that we are not able to identify or complete additional acquisitions on satisfactory terms or at all, our ability to grow our business and expand our product lines may be adversely affected. If we are not able to effectively manage these or any other risks relating to past or future acquisitions, our business and results of operations could be harmed.

From time to time, we make investments in certain joint ventures or other entities in which we have a minority or non-controlling interest. These investments may involve risks, including that our interests are not aligned with those of our partners. These joint ventures or other entities may take actions that could harm the value of our investment or our reputation, or otherwise harm our business and results of operations.

Our products may expose us to liability from claims by consumers for damages, including bodily injury or property damage. These claims, whether meritorious or not, could harm our reputation and net sales, be costly to defend and could harm our business and results of operations. In addition, even if no bodily injury or property damage occurs from a defect, if our products do not function properly, we may be obligated to replace these products at no additional charge, which also could harm our business and results of operations. Although we maintain general product liability insurance, there can be no assurance that we will be adequately covered against claims or that we will not have to obtain additional coverage in the future, which may not be available on acceptable terms or at all.

Our operations may subject us to liabilities for environmental or other regulatory matters, the costs of which could be material.

Our manufacturing operations in the United States and Mexico involve the use, handling, storage and disposal of hazardous substances, including, for example, the paint used for our guitars, and we are subject to numerous environmental, health and safety laws and regulations, including those regulating the handling, storage and disposal of hazardous substances and discharges to

the air, soil and water, as well as the investigation and remediation of contaminated sites. Many of these laws impose strict, retroactive, joint and several liability upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with respect to third party sites to which we sent waste for disposal in the past. From time to time, we have been required to make payments or modify our operations and facilities as a result of environmental matters. For example, in fiscal 2009, we reached a settlement with the Environmental Protection Agency pursuant to which we agreed to pay approximately $79,000 in penalties due to improper waste storage and inadequate personnel training at our Corona, California facility. If we were to become liable in the future with respect to the release of any hazardous substance or contamination of any site, we may be subject to significant fines and cleanup costs. In addition, these or other events, including changes in environmental, health and safety laws, may require us to modify our operations or facilities, which could be costly.

In addition to risks relating to traditional environmental law and regulations, we also face increasing complexity in the design and manufacture of our products as we must adjust to new and upcoming requirements relating to the materials composition of many of our products, including worker safety laws. We have incurred costs to comply with these regulations in the past and will incur additional costs in the future. In addition, compliance with these regulations could disrupt our operations and logistics. We will need to ensure that we can design and manufacture compliant products and that we can be assured a supply of compliant components from our suppliers. These and other environmental regulations may require us to redesign our products to utilize new components that are compatible with these regulations, which may result in additional costs to us or cause us to eliminate the products from our portfolio.

Many of our products are also subject to regulations, including with respect to certifications and safety testing. In the second quarter of fiscal 2010, we received a letter of inquiry from the Federal Communications Commission, or FCC, asking for information about Fender electronic digital device products subject to part 15 of the FCC’s rules governing radio frequency devices. As regulations of our products and operations increase, there is a risk that we are not aware of, and not in full compliance with, all regulations to which we may be subject globally.

Our secured credit facilities contain restrictive and financial covenants, and if we are unable to comply with these covenants, we will be in default, which could result in acceleration of our outstanding indebtedness.

As of January 1, 2012, on an as adjusted basis after giving effect to the application of a portion of the net proceeds to us of this offering, we would have approximately $146.2 million outstanding under our secured credit facilities. Our secured credit facilities contain covenants that require us to maintain certain specified financial ratios and restrict our ability to pay dividends with respect to our capital stock, encumber our assets, incur additional indebtedness, engage in certain business combinations or undertake various other corporate activities. In addition, we have pledged substantially all of our assets and properties under these facilities. These restrictive and financial covenants, as well as the pledge, reduce our operating flexibility and may prevent us from engaging in certain transactions that may be beneficial to us. In addition, our ability to comply with these covenants could be affected by events beyond our control.

If we are unable to comply with any of these covenants, we will be in default, which could result in the acceleration of our outstanding indebtedness. In such event, we would most likely need to

raise funds from alternative sources, which funds may not be available to us on acceptable terms or at all. Alternatively, such an event could require us to sell our assets and otherwise curtail our operations in order to pay our lenders, which could harm our business and results of operations.

If we are required to refinance our credit facilities, due to an acceleration of indebtedness as a result of an event of default, a change of control of our company, an acceleration of the revolver portion of our credit facilities as a result of the term loan portion not being refinanced, extended or repaid by March 9, 2014, or otherwise, we do not believe that we would be able to receive terms that are as favorable to us as those under our current facilities, either with respect to interest rate or operating and financial covenants.

In addition, our indebtedness and our need to allocate a portion of our cash flows to repayments under our credit facilities could have important consequences, including:

Our debt obligations under our secured credit facilities have variable interest rates, which makes us more vulnerable to increases in interest rates and could cause our interest expense to increase and decrease cash available for operations and other purposes.

We have $246.2 million of debt, bearing interest at a variable rate, outstanding under our credit facilities as of January 1, 2012. Recent interest rates in the United States have been at historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. Although from time to time we enter into agreements to hedge a portion of our interest rate exposure, these agreements may be costly and may not protect against all interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. Based on the $246.2 million of variable interest rate indebtedness that was outstanding as of January 1, 2012, a hypothetical 100 basis point increase or decrease in the interest rate on our long-term debt would have resulted in an approximately $1.0 million change to our interest expense for fiscal 2011.

We will incur significant increased costs as a result of being a public company, and our management will be required to devote substantial time to compliance efforts.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq Stock Market’s Global Market, or Nasdaq, impose additional requirements on public companies, including enhanced corporate governance practices and reporting requirements. We also will be required to establish and maintain internal control over financial reporting and disclosure controls and procedures. In particular, under the current rules of the SEC, beginning with fiscal 2013, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our independent

registered public accounting firm also will be required to report on our internal control over financing reporting. We expect to incur substantial accounting and auditing expenses and expend significant management time in complying with the requirements of Section 404. In addition, we could be required to expend significant management time and financial resources to correct any material weaknesses in our internal control over financial reporting that may be identified. If our management is unable to certify the effectiveness of our internal control over financial reporting, our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or material weaknesses in our internal control over financial reporting were identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could seriously harm our business and reduce our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on Nasdaq or any other stock exchange on which our common stock may be listed. Delisting of our common stock on any exchange would reduce the liquidity of the market for our common stock, which would reduce the price of our stock and increase the volatility of our stock price.

Our management and other personnel will need to devote a substantial amount of time to these public company requirements, and there is no assurance that we will be able to comply with these requirements in a timely manner or at all. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. These rules and regulations also could make it more difficult for us to attract and retain qualified persons to serve on our board of directors and board committees or as executive officers. Some members of our management team have limited or no experience in managing a public company, which may require those members to devote additional time to familiarize themselves with public company requirements and may increase the risk that we will not be able to comply with those requirements in a timely manner or at all.

The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the initial public offering price.

Our common stock has no prior trading history. The trading price of our common stock could be volatile, and you could lose all or part of your investment in our common stock. Factors affecting the trading price of our common stock could include:

In addition, in recent years, the stock market has experienced significant price fluctuations. Fluctuations in the stock market generally or with respect to companies in our industry could cause the trading price of our common stock to fluctuate for reasons unrelated to our business, operating results or financial condition. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. A suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.

A market for our securities may not develop or be maintained and our stock price may decline after the offering.

Prior to this offering, there has been no public market for shares of our common stock. An active public trading market for our common stock may not develop or, if it develops, may not be maintained, after this offering. Our company, the selling stockholders and the representatives of the underwriters will negotiate to determine the initial public offering price, and the initial public offering price does not necessarily reflect the price at which investors will be willing to buy and sell our shares following this offering. The initial public offering price may be higher than the trading price of our common stock following this offering. As a result, you could lose all or part of your investment.

Future sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.

If our existing stockholders sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of January 1, 2012, upon completion of this offering, we will have shares of common stock outstanding after this offering. Of these shares, shares of common stock will be freely tradable, without restriction, in the public market. Our executive officers, directors and the holders of substantially all of our shares of common stock have entered, or will enter, into contractual lock-up agreements with the underwriters pursuant to which they have agreed, subject to certain exceptions, not to sell or otherwise transfer any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of the final prospectus for this offering, subject to extension under some circumstances. J.P. Morgan Securities LLC and William Blair & Company, L.L.C. may, however, permit these holders to sell shares prior to the expiration of the lock-up agreements. For additional information, see “Shares eligible for future sale” and “Underwriting.”

Upon the expiration of the contractual lock-up agreements pertaining to this offering, up to an additional shares will be eligible for sale in the public market, of which are held by directors, executive officers and other affiliates and will be subject to volume and manner of sale limitations under Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act. Certain of our existing stockholders have demand and piggyback rights to require us to register with the SEC up to shares of our common stock, subject to contractual lock-up agreements. See “Description of capital stock—Registration rights” for more information. If we register any of these shares of common stock, those stockholders would be able to sell those shares freely in the public market.

In addition, the shares that are either subject to outstanding options or that may be granted in the future under our equity incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the contractual lock-up agreements and Rules 144 and 701 under the Securities Act. The following table shows when the shares of our common stock that are not being sold in this offering, but which will be outstanding when this offering is complete, will be eligible for sale in the public market:

After this offering, we intend to register the shares of our common stock that we have issued or may issue under our equity plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.

In addition, our amended and restated certificate of incorporation to be effective immediately prior to the completion of this offering authorizes us to issue shares of common stock, of which shares will be outstanding after this offering.

If any of these additional shares described are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. For additional information, see “Shares eligible for future sale.”

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If securities and industry analysts do not commence and continue coverage of our company, the trading price for our stock would suffer. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business or our industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Weston Presidio and our directors and officers and insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon completion of this offering, funds and a director affiliated with the growth capital firm Weston Presidio will beneficially own % of our outstanding common stock, and our other directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For information regarding the ownership of our outstanding stock by Weston Presidio and our executive officers and directors and their affiliates, see “Principal and selling stockholders.”

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company.

Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, these provisions:

For more information regarding these and other provisions, see “Description of capital stock—Anti-takeover effects of our certificate of incorporation and bylaws and Delaware law.”

This prospectus contains forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these terms and other comparable terminology. Forward-looking statements include, but are not limited to, statements about:

Actual events or results may differ materially from expected events or results. All forward-looking statements involve risks, assumptions and uncertainties. See “Risk factors” and elsewhere in this prospectus for additional discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. There may also be risks of which we are currently unaware, or that we currently regard as immaterial based on the information available to us, that later prove to be material. In addition, new risks may emerge from time to time, and it is not possible for management to predict or identify all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors may cause actual events or results to differ materially from those contained in any forward-looking statements. In light of these risks, assumptions and uncertainties the forward-looking events discussed in this prospectus might not occur. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $ , assuming an initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease the net proceeds to us from this offering (after deducting assumed underwriting discounts and commissions) by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease the net proceeds to us from this offering (after deducting assumed underwriting discounts and commissions) by $ , assuming an initial public offering price of $ per share. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

We intend to use approximately $100 million of the net proceeds to us from this offering to repay a portion of the amount outstanding under the term loan portion of our senior secured credit facility. As of January 1, 2012, the interest rate on the term loan portion of our senior secured credit facility, which is scheduled to mature in June 2014, was 2.55%. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Long-term debt” for more information. We have used borrowings under our credit facility for working capital purposes, capital expenditures and to fund acquisitions of businesses and assets, including the acquisition of KMC. We intend to use the remainder of the net proceeds to us for working capital and other general corporate purposes. We may also use a portion of the net proceeds to us to acquire other businesses, products or technologies. We do not have agreements or commitments for any specific significant acquisitions at this time.

We have not declared or paid cash dividends on our common stock within the past two fiscal years. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our senior secured credit facility limits our ability to pay dividends to our stockholders. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” for additional information.

The following table sets forth our cash and cash equivalents, short-term debt and capitalization as of January 1, 2012:

You should read this table in conjunction with the sections of this prospectus titled “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus.

The number of shares of our common stock to be outstanding following this offering is based on 196,112 shares of our common stock outstanding as of January 1, 2012, and excludes:

See “Management—Equity benefit plans” for a description of our equity plans.

Our pro forma net tangible book value as of January 1, 2012, was negative $6.8 million, or approximately negative $34.71 per share. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding after giving effect to (i) the automatic conversion of all outstanding shares of class B common stock and class C common stock into shares of common stock upon the closing of this offering and (ii) the effectiveness of amendments to our certificate of incorporation as of March 5, 2012, which redesignated our class A common stock as common stock on a share-for-share basis.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by new investors in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the pro forma adjustments described above and receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us and reflecting the application of a portion of the net proceeds to us from the offering to repay approximately $100 million of the amount outstanding under the term loan portion of our senior secured credit facility, our pro forma as adjusted net tangible book value as of January 1, 2012 would have been $ million, or $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors in this offering, as illustrated in the following table:

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease our pro forma as adjusted net tangible book value per share after giving effect to this offering by $ and increase or decrease dilution per share to new investors in this offering by $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting assumed underwriting discounts and commissions payable by us.

The following table presents on a pro forma as adjusted basis as of , after giving effect to the differences between the existing stockholders and the new investors in this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease the total consideration paid by new investors in this offering and the total consideration paid by all stockholders by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease the total consideration paid by new investors in this offering and the total consideration paid by all stockholders by $ , assuming an initial public offering price of $ per share and after deducting assumed underwriting discounts and commissions.

Sales of shares of common stock by the selling stockholders in our initial public offering will reduce the number of shares of common stock held by existing stockholders to , or approximately % of the total shares of common stock outstanding after our initial public offering, and will increase the number of shares held by new investors to , or approximately % of the total shares of common stock outstanding after our initial public offering.

If the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own % and new investors in this offering would own % of the total number of shares of our common stock outstanding after this offering.

As of January 1, 2012, there were options outstanding to purchase 67,511 shares of our common stock and restricted stock units outstanding representing the right, at our option, to deliver 300 shares of common stock to the holders of such units. To the extent outstanding options are exercised or we deliver shares of common stock to holders of outstanding stock units, there will be further dilution to new investors. For a description of our equity plans, see “Management—Equity benefit plans.”

The following selected consolidated financial data for each of the years ended January 3, 2010, January 2, 2011, and January 1, 2012, and the selected consolidated balance sheet data as of January 2, 2011, and January 1, 2012, have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated financial data for each of the years ended December 30, 2007, and December 28, 2008, and the balance sheet data as of December 30, 2007, December 28, 2008, and January 3, 2010, have been derived from our audited consolidated financial statements, which are not included in this prospectus.

We operate and report financial information on a 52 or 53 week year with the fiscal year ending on the Sunday closest to the end of December. Fiscal 2007 contained 52 weeks of operations, fiscal 2008 contained 52 weeks of operations, fiscal 2009 contained 53 weeks of operations, fiscal 2010 contained 52 weeks of operations and fiscal 2011 contained 52 weeks of operations.

The historical results presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period may not necessarily be indicative of the results that may be expected for a full year. You should read the selected consolidated financial and operating data for the periods presented in conjunction with “Risk factors,” “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected consolidated financial data” and our consolidated financial statements and the related notes and other financial information, which are included elsewhere in this prospectus. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the “Risk factors” and “Special note regarding forward-looking statements” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We operate and report financial information on a 52 or 53 week fiscal year ending on the Sunday closest to the end of December. The reporting periods contained in our audited consolidated financial statements included in this prospectus contain 52 weeks of operations in fiscal 2011, 52 weeks of operations in fiscal 2010 and 53 weeks of operations in fiscal 2009. Historical results are not necessarily indicative of the results to be expected for any future period, and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

We are one of the world’s leading marketers, manufacturers and distributors of musical instruments and accessories. We design, develop, manufacture and purchase musical instruments, accessories and related products for sale and distribution to wholesale and retail outlets throughout the world. We have built a comprehensive portfolio of brands led by the iconic Fender brand and other renowned brands such as Squier, Jackson, Guild, Ovation and Latin Percussion, which we own, and Gretsch, EVH (Eddie Van Halen) and Takamine, for which we are the licensee. We act as an exclusive manufacturer and/or distributor for brands such as Gretsch, EVH and Takamine. For some of the brands we distribute, we pay the licensors a royalty payment based on sales we generate on those brands. For the remaining brands that we distribute, we purchase products from manufacturers or OEMs, and resell those products to our customers. Through these brands, we reach a broad range of musicians, from beginners to professionals, across many genres of music.

Our revenues are derived primarily from the sale of fretted instruments, guitar amplifiers, percussion and accessories. For fiscal 2011, approximately 59.9% of our gross sales before discounts and allowances were generated from the sale of fretted instruments, 12.1% from guitar amplifiers, 9.1% from percussion and 18.9% from accessories. Gross sales before discounts and allowances is comprised of product sales but, unlike net sales, does not include licensing income and dealer freight collection, and is not net of cash discounts, sales return allowances and rebates. We distribute our products through the following five sales channels:

We are organized into two reporting segments: Fender Musical Instruments, or FMI, and KMC Musicorp, or KMC. While both FMI and KMC include the sale and distribution of fretted instruments, guitar amplifiers, percussion and accessories, FMI markets to both domestic and international customers and KMC primarily focuses on distribution of accessories and certain musical instruments in North America. For fiscal 2011, FMI represented 73.1% and KMC represented 26.9% of our net sales, respectively.

Our products are manufactured by us at our owned or leased manufacturing facilities or by OEMs. We believe this combination of facilities provides us with increased manufacturing capacity and the flexibility and scale to more efficiently and quickly respond to consumer demand. We have manufacturing operations in Corona, California; New Hartford, Connecticut; Ensenada, Mexico; Scottsdale, Arizona; and Ridgeland, South Carolina. We manufacture our premium products primarily in the United States. Products manufactured by our OEMs are typically sold at lower price points.

Our products are sold in the United States and approximately 85 countries around the world, with net sales outside of the United States representing approximately 46.7% of our net sales in fiscal 2011. Geographically, we segregate our business into the following three regions:

Our predecessor company was founded in 1946 by Leo Fender. In 1965, Leo Fender sold Fender Electric Instrument Company to Columbia Records Distribution Corp., a division of Columbia Broadcasting System, Inc., or CBS. The business reemerged as a stand-alone company when the late William Schultz and current Board member, William (Bill) Mendello, formed Fender Musical Instruments Corporation to purchase the business from CBS in 1985. On December 31, 2007, we acquired Kaman Music Corporation, now known as KMC Musicorp, a distributor of musical instruments and accessories.

We intend to focus on generating sales through our existing sales channels. As we grow and expand our business, we anticipate an increasing percentage of our new sales will come from our international dealers and distributors.

Europe represented approximately 27.3% of our net sales in fiscal 2011 and has been the geographic area where we have historically realized higher gross margins. Europe has been a critical part of our growth, and we intend to continue to increase our presence in the European market through expansion of our accessories business and by increasing the portion of net sales we generate by selling product directly to European retailers. However, in the near term, we expect the percentage of our net sales generated from Europe to decline due to current difficult European economic and market conditions.

During fiscal 2012, we intend to create a specialty sales force in North America to focus on selling our non-Fender branded instruments and accessories. We intend to apply the sales, marketing and branding strategies that have been successful with our Fender brand to these other brands to enhance their future earnings contribution.

We generated less than 1% of our net sales through licensing fees and royalties in fiscal 2011. As this is an area where we see a significant growth opportunity, we plan to increase our licensing fee and royalty revenue as a percentage of our net sales through expansion into new product categories and geographies.

We have a global manufacturing footprint through our owned facilities and OEM partners that is focused on delivering high-quality products at a competitive price. Our products manufactured in our Corona, California factory are priced at a premium and we believe offer us a distinct competitive advantage. In fiscal 2011, we began increasing our level of capital investment in both our Corona, California and Ensenada, Mexico facilities to improve productivity. We intend to continue these capital investments as we believe these investments will ultimately allow us to achieve higher overall gross margins, although in the near term the benefits of these investments may not be reflected in our financial results.

For fiscal 2011, approximately 52.2% of our finished goods were purchased and sourced from OEMs. Accordingly, our operating results are affected by conditions in the geographic regions in which these OEMs are located, including, in many cases, rising labor rates, commodity price fluctuations and currency fluctuations. We continually evaluate shifting additional production to manufacturing facilities with lower or more stable costs. For example, our Ensenada, Mexico manufacturing facility provides us with high-quality products at stable, relatively low costs, and we intend to explore opportunities to move additional production to that facility.

We intend to increase our investment in research and development in absolute dollars to develop new products, including our specialty products. We also plan to invest in our marketing efforts by increasing our focus on direct to consumer marketing initiatives.

During the second quarter of fiscal 2010, we experienced a supply issue with our main paint supplier, who ceased operation due to financial difficulty. This paint supply issue caused us to temporarily stop the production of a number of our electric and bass guitars manufactured in Corona, California in April 2010. We resumed full production at this facility by the end of fiscal 2010. As of January 2, 2011, we had approximately $26.2 million of cancellable backlog. We believe that a substantial majority of this backlog related to this production problem and

contributed to higher sales in the first and second quarters of fiscal 2011 as we filled the backlog. Following this disruption, we increased our focus on evaluating our sources of supply across our manufacturing operations to develop second sources of supplies where feasible. Nevertheless, we could face other manufacturing difficulties that could similarly harm our results in the future.

Our gross profit equals our net sales minus cost of goods sold. Our gross margin measures our gross profit as a percentage of net sales.

Our gross margins fluctuate based on product and geographic mix as certain of our products are sold at higher gross margins than others. Generally, we earn higher gross margins on our Fender brand electric guitars. We typically earn lower gross margins on products we purchase from others and distribute. Gross margins have typically been higher in North America and Europe than in other international markets where the majority of our net sales are through distributors.

In the near term, we anticipate our gross margins to be in line with our historical results. We believe our gross margins in the intermediate to long term will benefit from our strategies of increasing our direct sales to retailers in international markets and earning additional royalty income by expanding our licensing business. Furthermore, we are also increasing our investment in our manufacturing facilities to improve our operating efficiencies and gross margins.

Our selling, general and administrative expenses consist primarily of personnel and facility costs related to our executive, sales, marketing, finance, customer service, information technology, human resources and administrative personnel, including wages, stock based compensation and employee benefits. Other significant selling, general and administrative expenses include advertising and promotions related to in-store advertising, trade shows, travel and entertainment and promotional products. We also record professional and contract service expenses, rent and lease expenses associated with corporate locations and equipment, and legal expenses in selling, general and administrative expenses. In the long term, we expect selling, general and administrative expenses to stay relatively flat as a percentage of sales. However in the near term, we expect selling, general and administrative expenses to increase as a percentage of sales as we

expand into new international markets, invest in additional marketing initiatives and incur expenses associated with becoming a public company.

Our warehouse expenses consist primarily of personnel costs, including wages and employee benefits, and facility costs. These warehouse costs represent our handling costs to store, move and prepare products for shipment from our warehouse facilities. Additionally, we incur outside service expenses related to the use of a third party warehouse distribution management service for our European distribution of products. We expect our warehouse expenses to stay relatively flat as a percentage of sales in both the near and long term.

Our research and development expenses consist primarily of personnel costs, including wages, stock based compensation and employee benefits, for our research and development teams. We also incur costs associated with professional services when we require external expertise on various projects such as advanced electronics for our guitar amplifiers. We expense research and development costs as incurred. We expect our research and development expenses to increase slightly as a percentage of sales in the near and long term as a result of investment in product innovation.

Impairment charges consist of charges we record when we have determined that the carrying value of our goodwill, long-lived assets, or indefinite-lived intangible assets exceeds the fair value. We conduct an annual impairment test of goodwill and other intangibles at the end of each fiscal year or more frequently if there are any impairment indicators identified during the year. We also continually evaluate whether events and circumstances have occurred that indicate the remaining useful life of amortizable intangible assets may warrant revision.

We define income from operations as gross profit less our operating expenses. We use operating income as an indicator of the profitability of our business and our ability to manage costs.

Net foreign currency exchange gain (loss) consists of gains and losses resulting from foreign exchange hedging activity, the foreign currency effect of the remeasurement of certain assets and liabilities of our foreign subsidiaries that are denominated in currencies other than the functional currency of the subsidiary and foreign exchange transaction gains and losses.

We use derivatives, including foreign currency forward contracts and options, to hedge against certain of the foreign exchange risks to which we are exposed. Certain derivatives are designated and qualify as cash flow hedges. Cash flow hedges are generally hedges against the foreign currency risk arising from changes in cash flows from forecasted foreign currency transactions, forecasted cash flows arising from an asset or liability that is carried on our consolidated balance sheets, or foreign currency firm commitments that are not recognized on our consolidated balance sheets. In order to qualify for accounting as a cash flow hedge, a derivative must satisfy a

number of criteria, including the requirement that the derivative is deemed to be highly effective in hedging the related foreign currency risk. Changes in the fair value of cash flow hedges are divided into an effective and an ineffective portion. The effective portion of a change in value of a cash flow hedge is generally the change in value of the derivative to the extent that it offsets, but does not exceed, the change in value of the item being hedged. Any excess in the change in fair value of the derivative over the change in fair value of the item being hedged is deemed to

be the ineffective portion. The effective portion of changes in the fair value of cash flow hedges is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period that the hedged item affects earnings. Any ineffective portion of the change in fair value of the cash flow hedge is recorded directly in net foreign currency gain (loss) in the consolidated statement of operations and comprehensive income (loss). Certain of our derivatives used to manage the foreign currency exposures are not designated as cash flows hedges because they do not satisfy the requirements of cash flow hedges or because we have not elected to apply hedge accounting to them. Changes in the fair value of the derivatives not designated as cash flow hedges are recorded directly in net foreign currency gain (loss) in earnings. The fair value of our derivative instruments is determined either using market quotes or valuation models that are based upon the net present value of estimated future cash flows that incorporate current market data inputs. We hold derivative instruments for hedging purposes only, not for speculative or trading purposes.

We operate outside the United States primarily through wholly-owned subsidiaries in Europe, Canada and Mexico. We have determined that the functional currency of each of our foreign subsidiaries, with the exception of our Mexican and Dutch subsidiaries, is the local currency of each such subsidiary, and that the functional currency of our Mexican and Dutch subsidiaries is the U.S. dollar. For each of our subsidiaries, monetary assets and liabilities (such as cash, marketable securities, accounts receivable and accounts payable) that are denominated in a currency that is not the functional currency of that subsidiary are remeasured and translated into the subsidiary’s functional currency using current exchange rates. Gains and losses resulting from this remeasurement process are included in net foreign currency exchange gain (loss).

Interest expense consists of interest on our term loan and revolver, amortization of deferred loan costs and net settlements on interest rate swap agreements. We use interest rate swap agreements to manage our exposure to interest rate fluctuations by effectively fixing the interest rate on a portion of our floating-rate debt. We expect our interest expense to decrease following this offering both in absolute terms and as a percentage of net sales as we repay a portion of the amount outstanding under the term loan portion of our senior secured credit facility with a portion of the net proceeds to us from this offering.

Other, net consists of miscellaneous income and expenses and interest income from financing charges to customers.

We are subject to income taxes in the United States and various other foreign jurisdictions in which we do business. Some of these foreign jurisdictions have higher statutory tax rates than those in the United States, and certain of our international earnings are also taxable in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service, or IRS, and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these

examinations to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense reserves and income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of January 1, 2012, we did not have any valuation allowances recorded as we expect to fully utilize all of our deferred tax assets. As of January 1, 2012, we did not have any net operating loss or tax credit carry-forwards. For fiscal 2009, 2010 and 2011, we had effective tax rates of 12.3%, 27.9% and 21.5%, respectively. We expect our effective tax rate to increase to the mid 30% range in the long term as we do not expect the recurrence of certain tax refunds and credits that we have had in the recent past.

The following table sets forth selected items in our consolidated statements of operations in dollars and as a percentage of net sales for the periods presented:

Net sales increased by $82.7 million, or 13.4%, to $700.6 million in fiscal 2011 from $617.8 million in fiscal 2010. The increase was primarily driven by an increase in overall effective prices and a reduction in discounts for our products, success in new product introductions, continued strong growth in international markets and overall market conditions, and the resolution of a paint supplier issue fiscal in 2010. During the second quarter of fiscal 2010, we experienced a supply issue with our main paint supplier who ceased operations as a result of its financial difficulty. This impacted the production of our electric and bass guitars manufactured in Corona, California as discussed in our “—Opportunities, challenges and risks” section above. As of January 2, 2011, we had approximately $26.2 million of cancellable backlog. We believe a substantial majority of this backlog related to this production problem and contributed to higher sales in the first and second quarters of fiscal 2011 as we filled the backlog.

Net sales from FMI increased by $77.8 million, or 17.9%, to $512.0 million in fiscal 2011 from $434.3 million in fiscal 2010. We experienced growth in net sales in both domestic and international markets in fiscal 2011, including 15.6% growth in North America, international growth of 31.0% and European growth of 15.7%. We estimate that less than 5.0% of our FMI fiscal 2011 sales resulted from filling the backlog from fiscal 2010, as described above. Further impacting net sales performance was an $11.9 million increase in overall effective prices and reduction in discounts for our products in fiscal 2011. The effects of foreign currency movements favorably contributed approximately $7.6 million to net sales in fiscal 2011 compared to fiscal 2010.

Net sales from KMC increased by $4.9 million, or 2.7%, to $188.5 million in fiscal 2011 from $183.6 million in fiscal 2010. The increase was primarily driven by the growth in the North America mass merchant channel, which increased by $4.0 million with increased online retail sales.

Gross profit increased by $47.0 million, or 27.5%, to $217.5 million in fiscal 2011 from $170.6 million in fiscal 2010. Gross margin of 31.1% in fiscal 2011 increased 350 basis points from fiscal 2010 gross margin of 27.6%. The increase in gross profit was driven by a volume increase and favorable product mix of $25.4 million. We estimate that approximately 40.0% of this volume and mix increase was due to the resolution of the previously discussed paint supply issue. In addition, the increase in gross profit was due in part to an increase in overall effective prices and reduction in discounts for our products in fiscal 2011 of $11.5 million and improved factory operating efficiency gains in fiscal 2011 of $3.7 million. In addition, the fiscal 2010 paint supply issue contributed to manufacturing variances and idle facility charges of $4.5 million in fiscal 2010 that did not occur in fiscal 2011. Further favorably impacting fiscal 2011 gross profit was a decrease in workers’ compensation expense from fiscal 2010 of $0.8 million as well as a favorable adjustment for a government refund related to customs and duties charges of $0.5 million in fiscal 2011. The effects of foreign currency movements contributed approximately $3.7 million of the increase in gross profit in fiscal 2011 compared to fiscal 2010. These increases were partially offset by increases in our material costs of $3.9 million in fiscal 2011 compared to fiscal 2010.

FMI gross profit increased by $47.3 million, or 39.8%, to $166.2 million in fiscal 2011 from $118.9 million in fiscal 2010. Gross margin of 32.5% in fiscal 2011 increased 510 basis points from fiscal 2010 gross margin of 27.4%. The increase in gross profit was driven by a volume increase and favorable product mix of $26.1 million in fiscal 2011, an increase in overall effective prices and reduction in discounts for our products of $11.8 million and improved factory operating efficiency gains of $3.7 million. We estimate that approximately 40.0% of this volume and mix increase was due to the resolution of the previously discussed paint supply issue. In addition, the paint supply issue contributed to manufacturing variances and idle facility charges of $4.5 million in fiscal 2010 that did not occur in fiscal 2011. Gross profit in fiscal 2011 was also favorably impacted by a decrease in workers’ compensation expense of $0.8 million compared to fiscal 2010 and a favorable adjustment for a government refund related to customs and duties charges of $0.5 million in fiscal 2011. The effects of foreign currency movements contributed approximately $3.7 million of the increase in gross profit in fiscal 2011 compared to fiscal 2010. These increases were partially offset by increases in our material costs of $3.9 million in fiscal 2011 compared to fiscal 2010.

KMC gross profit decreased by $0.4 million, or 0.7%, to $51.3 million in fiscal 2011 from $51.7 million in fiscal 2010. Gross margin of 27.2% in fiscal 2011 decreased 100 basis points compared to fiscal 2010 gross margin of 28.2%. The decrease in gross profit was primarily driven by product and channel mix along with higher freight allowance programs.

Selling, general and administrative expenses increased by $15.5 million, or 12.7%, to $137.1 million in fiscal 2011 compared to $121.7 million in fiscal 2010. Approximately $11.5 million of the increase in selling, general and administrative expense was the result of an increase in our labor-related expenses. The remaining increase in selling, general and administrative expenses in fiscal 2011 was the result of travel and entertainment expenses of $2.8 million related to strategic marketing initiatives to expand and strengthen our customer base and relationships and a $1.0 million increase in our legal costs primarily as the result of a settlement payment made to resolve a dispute with a supplier.

The increase in our labor expense resulted from the reinstatement of our annual merit, 401(k) employer matching contribution and management bonus programs during fiscal 2011 which resulted in an increase of approximately $7.3 million in labor expenses as compared to fiscal 2010. Additionally, stock options issued during fiscal 2011 resulted in an increase in our stock based compensation expense by approximately $3.1 million compared to fiscal 2010. The remaining increase in labor-related costs was the result of increased employee benefits and insurance rates, commissions and the use of temporary labor services.

Warehouse expenses increased by $0.7 million, or 2.6%, to $28.4 million in fiscal 2011 compared to $27.7 million in fiscal 2010. The increase was primarily due to an increase in labor-related expenses of approximately $0.9 million as a result of temporary labor and overtime worked by warehouse personnel and additional outside services costs of $0.6 million related to our third party distribution center in Europe. The increase was partially offset by decreases in our rent expense of $0.5 million and depreciation of $0.5 million in fiscal 2011 compared to fiscal 2010.

Research and development expenses increased by $0.9 million, or 9.2%, to $10.2 million in fiscal 2011 compared to $9.3 million in fiscal 2010. The overall increase was primarily related to an increase in labor costs of $0.5 million as the result of the reinstatement of our employee benefit plans as noted above and increased professional services of $0.2 million related to new product development projects.

As a result of the factors discussed above, our consolidated income from operations increased $29.9 million to $41.8 million in fiscal 2011 compared to $11.9 million in fiscal 2010. As a percentage of net sales, income from operations increased to 6.0% in fiscal 2011 from 1.9% in fiscal 2010.

Interest expense increased by $2.2 million, or 17.6%, to $14.9 million in fiscal 2011 compared to $12.7 million in fiscal 2010. The increase was primarily related to additional interest expense of $2.9 million resulting from our interest rate swap agreement, net of a decrease in interest expense under our term loan and revolver of $0.3 million.

Our net foreign currency exchange loss increased by $2.6 million, to $3.8 million in fiscal 2011 from $1.2 million in fiscal 2010. The increase was the result of an increase in losses primarily related to our Euro and Mexican Peso denominated foreign exchange hedging activity of approximately $3.4 million, net of a decrease in losses from our Canadian Dollar, Japanese Yen and British Pound denominated foreign exchange hedging activity of approximately $0.8 million.

Other, net increased by $1.5 million to $1.1 million of income in fiscal 2011 compared to $0.4 million in expense in fiscal 2010. The change in other, net was primarily due to the write-off of inventory management software of approximately $0.8 million in fiscal 2010 and higher interest income of $0.3 million earned in fiscal 2011.

Income tax expense increased by $5.9 million to $5.2 million in fiscal 2011 compared to an income tax benefit of $0.7 million in fiscal 2010. Effective tax rates were 21.5% and 27.9% for fiscal 2011 and fiscal 2010, respectively.

The effective tax rate in fiscal 2011 was impacted by a favorable resolution of a tax dispute resulting in a refund of $1.9 million and the utilization of research and development tax credits of approximately $1.0 million. This accounted for approximately 12.0 percentage points of the effective tax rate. Excluding these items, the effective tax rate for fiscal 2011 would have been approximately 34.0%. The effective tax rate in fiscal 2010 was impacted by a change in our position regarding undistributed earnings of our European subsidiaries which we began to remit

to the United States in fiscal 2010, resulting in additional tax expense of $0.5 million. Additionally, the add-back of meals and entertainment expenses, which historically has not been material to our total tax expense, resulted in additional tax expense of $0.2 million. Offsetting these amounts were additional tax benefits of $0.6 million primarily related to the difference in domestic and foreign tax rates and dividends, net of foreign tax credits, paid to us from foreign subsidiaries. Excluding these items, the effective tax rate for fiscal 2010 would have been approximately 35.0%.

As a result of the factors above, net income increased $20.7 million to $19.0 million in fiscal 2011 compared to a net loss of $1.7 million in fiscal 2010.

Net sales remained relatively flat at $617.8 million in fiscal 2010 compared to $612.5 million in fiscal 2009. The slight increase was primarily the result of higher sales volume of $20.7 million in fiscal 2010, which increased despite the unfavorable impact of the paint supply issue discussed in the “—Opportunities, challenges and risks” section above. We did not face any similar supply issues in fiscal 2009. This sales volume increase was offset by the effects of unfavorable currency movements of $7.6 million in fiscal 2010, $6.6 million paid in higher rebates for sales volume growth and higher sales allowances due to customer mix in fiscal 2010 compared to fiscal 2009 and a $1.2 million increase in discounting on both discontinued product and freight in fiscal 2010 compared to fiscal 2009.

Net sales from FMI increased by $9.2 million, or 2.2%, to $434.3 million in fiscal 2010 compared to $425.1 million in fiscal 2009. The increase was primarily the result of higher sales volume of $25.0 million in fiscal 2010, which increased despite the unfavorable impact of the paint supply issue discussed above. This sales volume increase was partially offset by the effects of unfavorable currency movements of $9.3 million and a decrease in net sales in fiscal 2010 as a result of $6.6 million paid in higher rebates for sales volume growth and higher sales allowances due to customer mix in fiscal 2010 compared to fiscal 2009.

Net sales from KMC decreased by $3.9 million, or 2.1%, to $183.6 million in fiscal 2010 compared to $187.4 million in fiscal 2009. The decrease was primarily related to lower sales volume of $4.6 million in fiscal 2010 and an increase in price discounting on both discontinued product and freight of $1.2 million in fiscal 2010 compared to fiscal 2009. These decreases were partially offset by the effects of favorable currency movement of $1.7 million in fiscal 2010.

Gross profit decreased by $21.0 million, or 11.0%, to $170.6 million in fiscal 2010 compared to $191.6 million in fiscal 2009. Gross margin of 27.6% in fiscal 2010 declined 370 basis points from fiscal 2009 gross margin of 31.3%. A majority of the gross profit decrease in fiscal 2010 was attributable to the paint supply issue. Additionally, the decrease resulted from idle facility charges of $3.5 million, a decrease in gross profit in fiscal 2010 as a result of $6.6 million paid in higher rebates for sales volume growth and higher sales allowances due to customer mix in fiscal 2010 compared to fiscal 2009, and a $1.2 million increase in discounting on both discontinued

product and freight in fiscal 2010 compared to fiscal 2009. Gross profit was also lower due to the effects of unfavorable currency movements of $0.7 million. These decreases were partially offset by a volume increase, which contributed $3.9 million of gross profit in fiscal 2010.

FMI gross profit declined by $20.0 million or 14.4%, to $118.9 million in fiscal 2010 from $138.9 million in fiscal 2009. Gross margin of 27.4% declined 530 basis points compared to fiscal 2009 of 32.7%. A majority of the gross profit decrease in fiscal 2010 was attributable to the paint supply issue. Additionally, the decrease resulted from idle facility charges of $3.5 million and a decrease in gross profit in fiscal 2010 as a result of the $6.6 million paid in higher rebates for sales volume growth and higher sales allowances due to customer mix in fiscal 2010 compared to fiscal 2009. Gross profit in fiscal 2010 was also lower due to the effects of unfavorable currency movements of $2.9 million. These decreases in FMI gross profit were partially offset by a volume increase, which contributed $5.5 million of gross profit in fiscal 2010.

KMC gross profit declined by $1.0 million, or 1.8%, to $51.7 million in fiscal 2010 compared to $52.7 million in fiscal 2009. Gross margin of 28.2% decreased 10 basis points compared to fiscal 2009 gross margin of 28.1%. The decrease was primarily related to lower sales volume and sales through lower margin channels in fiscal 2010 of $3.1 million, and $1.2 million in greater price discounts given on discontinued products and freight in fiscal 2010 compared to fiscal 2009. Partially offsetting this reduction in gross profit was $2.1 million related to the effect of favorable currency movements in fiscal 2010.

Selling, general and administrative expenses decreased by $4.1 million, or 3.2%, to $121.7 million in fiscal 2010 compared to $125.7 million in fiscal 2009. The overall decrease was due primarily to a decrease in labor-related expense of $3.2 million in fiscal 2010, of which $2.2 million was related to lower wages, $0.9 million was related to the discontinuation of our 401(k) employer matching contribution and $0.2 million related to lower temporary labor expenses. The decrease in wages was due to lower head count in fiscal 2010. The remaining decrease was primarily related to lower depreciation and amortization compared to fiscal 2009.

Warehouse expenses increased by $1.8 million, or 7.1%, to $27.7 million in fiscal 2010 compared to $25.9 million in fiscal 2009. This increase was primarily due to an increase in warehouse building rent of approximately $2.7 million, partially offset by a decline in outside services costs of $0.5 million. The increase in building rent was due to the expansion of our Ontario, California warehouse as we added approximately 300,000 additional square footage of leased space. The decrease in outside services was related to lower amounts paid to our third party warehouse provider in Europe due to lower volume.

Research and development expenses increased by $0.3 million, or 3.3%, to $9.3 million in fiscal 2010 compared to $9.0 million in fiscal 2009. The increase in research and development expenses was primarily due to increased labor-related expenses of $0.3 million as a result of higher benefit charges and an increased use of temporary labor.

We recorded $1.2 million in impairment charges in fiscal 2009. No impairment charges were recorded in fiscal 2010. In fiscal 2009, due to the deterioration in economic conditions, and the reduction of forecasted sales and estimated cash flows, it was determined that several of our indefinite-lived trademarks were impaired. As a result, we recorded an impairment charge of $1.0 million in fiscal 2009 related to indefinite-lived trademarks. We also determined that certain customer list intangible assets were impaired and, as a result, recorded $0.2 million in impairment charges related to these assets in fiscal 2009.

As a result of the factors discussed above, income from operations decreased by $17.9 million, or 60.0%, to $11.9 million in fiscal 2010 from $29.8 million in fiscal 2009. Income from operations as a percentage of net sales decreased 3.0 percentage points to 1.9% in fiscal 2010 from 4.9% in fiscal 2009.

Our net foreign currency exchange loss decreased by $2.4 million, to $1.2 million in fiscal 2010 compared to $3.6 million in fiscal 2009. The decrease was primarily the result of a decrease in losses from our Euro denominated foreign exchange hedging activity of approximately $1.9 million and a decrease of approximately $0.7 million in losses related to the foreign currency effect of the remeasurement of certain assets and liabilities of our foreign subsidiaries.

Interest expense decreased by $2.9 million, or 18.9%, to $12.7 million in fiscal 2010 from $15.6 million in fiscal 2009 primarily due to a mandatory pre-payment under our term loan agreement of approximately $34.3 million made in May 2010 lowering the weighted average term loan balance to $271.1 million in fiscal 2010 from $295.5 million in fiscal 2009, or a decrease in the weighted average term loan balance of approximately 8.3%. Also, a decrease in the London Interbank Offered Rate, or LIBOR, decreased the interest rate under our credit facility in fiscal 2010 and contributed to the overall decrease in interest expense.

Other, net decreased by $2.1 million to an expense of $0.4 million in fiscal 2010 compared to income of $1.7 million in fiscal 2009. The $0.4 million net expense in fiscal 2010 was primarily due to a write-off of inventory management software of approximately $0.8 million, partially offset by interest income and other miscellaneous income of $0.4 million. The other income earned in fiscal 2009 was due to a settlement reached with the IRS for audits conducted for our 2005 through 2008 tax years. The audit resulted in a tax refund on which we earned approximately $1.0 million in interest income.

Income tax expense decreased by $2.2 million to $0.7 million in tax benefit in fiscal 2010 from $1.5 million in tax expense in fiscal 2009. The effective tax rates were 27.9% in fiscal 2010 and 12.3% in fiscal 2009.

The effective tax rate in fiscal 2010 was impacted by a change in our position regarding undistributed earnings of our European subsidiaries which we began to remit to the United States in fiscal 2010, resulting in additional tax expense of $0.5 million. Additionally, the add-back of meals and entertainment expenses, which historically has not been material to our total tax expense, resulted in additional tax expense of $0.2 million. Offsetting these amounts were additional tax benefits of $0.6 million primarily related to the difference in domestic and foreign tax rates and dividends, net of foreign tax credits, paid to us from foreign subsidiaries. Excluding these items, the effective tax rate for fiscal 2010 would have been approximately 35.0%.

The effective tax rate in fiscal 2009 was impacted by a favorable resolution of a tax dispute of $2.5 million. Excluding this item, our effective tax rate in fiscal 2009 would have been 32.4%.

As a result of the factors discussed above, we incurred a net loss of $1.7 million and net income of $10.8 million in fiscal 2010 and fiscal 2009, respectively.

The following table sets forth our unaudited quarterly consolidated statement of operations data for the eight fiscal quarters ended January 1, 2012. The information from each quarter is derived from our unaudited interim consolidated financial statements, which we have prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus. This information includes all adjustments, consisting of normal, recurring adjustments, that management considers necessary for the fair presentation of such data. The quarterly data should be read together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our historical unaudited quarterly consolidated results of operations are not necessarily indicative of results for any future fiscal quarters or fiscal years.

We have historically experienced relatively low seasonal variations in our net sales and operating income. However, as we further expand our net sales into international markets and grow our business, we may experience greater levels of seasonality in our results of operations.

Our primary cash needs are to support inventory purchases, working capital and capital expenditures. Historically, we have generally financed these needs with operating cash flows and borrowings under our credit facilities. These sources of liquidity may be impacted by fluctuations in demand for our products, ongoing investments in our infrastructure, fluctuations in foreign currencies and expenditures on marketing and advertising. A summary of our operating, investing and financing activities are shown in the following table:

We expect that proceeds from this offering, cash on hand, cash flow from operations and availability under our credit facilities will be sufficient to fund our operations for at least the next 18 months.

Cash provided by operating activities primarily consists of net income, adjusted for certain non-cash items including provision for allowances for accounts receivable (including product returns and cash discounts), depreciation and amortization, stock based compensation, deferred income taxes, amortization of loan costs, impairment charges and the effect of changes in working capital and other activities.

In fiscal 2011, net cash provided by operating activities was $29.2 million and consisted of net income of $19.0 million plus non-cash items of $39.9 million less changes in working capital and other activities of $29.7 million. Non-cash items consisted primarily of provision of allowances for accounts receivable (including product returns and cash discounts) of $14.9 million, depreciation and amortization of $8.7 million, stock based compensation of $5.0 million and amortization of a de-designated interest rate swap derivative of $4.2 million. Cash used for working capital and other activities consisted primarily of an increase in accounts receivable of $19.7 million as a result of increased sales volume, an increase in inventory of $17.6 million related to development of new products and the resolution of the paint supply issue we experienced in fiscal 2010, and an increase in prepaid expenses and other current assets of $8.4 million related to the expansion of our foreign currency derivative portfolio and an increase in the fair value of such derivatives, partially offset by an increase in accounts payable and accrued expenses of $17.2 million primarily related to the timing of payments made to our vendors and suppliers.

In fiscal 2010, net cash provided by operating activities was $4.4 million and consisted of a net loss of $1.7 million plus $28.4 million of non-cash items less $22.3 million for changes in working capital and other activities. Non-cash items consisted primarily of provision of allowances for accounts receivable (including product returns and cash discounts) of $13.5 million, depreciation and amortization of $10.8 million and stock based compensation of $1.7 million. Cash used for working capital and other activities consisted primarily of an increase in accounts receivable of $16.1 million as a result increased sales volume compared to fiscal 2009, an increase in inventory of $18.1 million as we were making efforts to increase our inventory levels to support sales demand and an increase in prepaid expenses and other current assets of $2.3 million, partially offset by an increase in accounts payable and accrued expenses of $16.3 million as the result of an increase in purchases from suppliers compared to fiscal 2009.

In fiscal 2009, net cash provided by operating activities was $80.6 million and consisted of net income of $10.8 million plus non-cash items of $30.8 million and changes in working capital and other activities of $38.9 million. Non-cash items consisted primarily of provision of allowances for accounts receivable (including product returns and cash discounts) of $11.9 million, depreciation and amortization of $12.1 million and stock based compensation of $2.6 million. Cash provided by working capital and other activities consisted primarily of a decrease in inventory of $56.8 million primarily due to our efforts to reduce inventory levels in connection with declining economic conditions and a decrease in accounts receivable of $13.5 million related to decreased sales volume, partially offset by a decrease in accounts payable and accrued expenses of $30.2 million as the result of reductions in our inventory purchases.

In fiscal 2011, cash used in investing activities was primarily the result of capital expenditures of $8.4 million primarily related to investments in our manufacturing facilities and information technology, as well as the acquisition of trademarks of $2.0 million. In fiscal 2010 and fiscal 2009, net cash used in investing activities consisted almost entirely of capital expenditures of $5.3 million in both years primarily related to investments in our manufacturing facilities and information technology. We estimate that our capital expenditures for fiscal 2012 will be approximately $10.0 million to $12.0 million, primarily related to improvements in our manufacturing facilities, warehouses and information technology systems.

Net cash used in financing activities primarily relates to the repayment of debt related to our term and revolving facility credit agreements. Net cash used in financing activities was $21.6 million in fiscal 2011, $27.4 million in fiscal 2010, and $50.3 million in fiscal 2009 primarily related to payments, net of issuances, of debt.

On June 7, 2007, we entered into a Term Facility Credit Agreement, or the Term Loan, and a Revolving Facility Credit Agreement, or the Revolver, with a syndicate of lenders, which we refer to collectively as the Credit Facilities. The Credit Facilities provide for committed senior secured financing of $400 million, consisting of the following: the Term Loan in an aggregate original

principal amount of $300 million; and the Revolver, available for loans and letters of credit, with an aggregate revolving commitment of up to $100 million based on borrowing-based eligibility criteria as described below.

The Term Loan consists of an initial loan of $200 million, which was drawn at closing, and a delayed draw loan of $100 million, which was drawn in connection with our acquisition of KMC on December 31, 2007. We may request one or more additional tranches of debt under the Term Loan of up to $75 million, subject to a consolidated senior secured debt ratio requirement. The $200 million initial loan is repayable in quarterly installments of $500,000 through June 9, 2014, the maturity date of the Term Loan, at which time the remaining principal balance is due. The $100 million delayed draw is repayable in quarterly installments of $250,000 through the maturity date, at which time the remaining principal balance is due.

The Term Loan bears interest based, at our option, at either (1) LIBOR plus an applicable margin of 2.25% per annum, or (2) an alternate base rate plus an applicable margin of 1.25% per annum. If our consolidated senior secured debt ratio is less than or equal to 3.5 to 1.0, the applicable margin applied to either the LIBOR or the alternative base rate is reduced to 2.00% and 1.00%, respectively. As of January 1, 2012, the interest rate on the Term Loan was 2.55%.

The Revolver, which was amended in April 2011, matures on April 27, 2016, if the Term Loan has been refinanced, extended or repaid in full by March 9, 2014; otherwise the Revolver matures on March 9, 2014. Borrowing eligibility under the Revolver is subject to a monthly borrowing base calculation based on (i) certain percentages of eligible accounts receivable and inventory, less (ii) certain reserve items, including outstanding letters of credit and other reserves. We may at any time, on not more than four occasions, request an increase to the Revolver of up to an aggregate amount of $50.0 million. The Revolver bears interest at a rate based on either (1) LIBOR plus an applicable margin, or (2) an alternate base rate. The margin applied to LIBOR is either 2.00% or 2.25%, depending on our commitment utilization percentage under the Revolver. As of January 1, 2012, we had no outstanding balance on the Revolver and our availability under the Revolver was approximately $92.9 million.

All borrowings and other extensions of credit under the Credit Facilities are subject to the satisfaction of customary conditions, including absence of defaults and accuracy in material respects of representations and warranties. In addition, the Credit Facilities contain customary restrictive covenants for facilities and transactions of this type, including, among others, certain limitations on:

As of January 1, 2012, we were in compliance with these covenants. Our U.S. assets and a portion of the stock of our foreign subsidiaries have been pledged as collateral and secure our indebtedness under the Credit Facilities.

The Credit Facilities require mandatory prepayments in amounts equal to (1) 100% of the net cash proceeds of any indebtedness incurred in violation of the Credit Facilities; (2) the net proceeds from the sale or other disposition of property in excess of specified values (other than in the ordinary course of business and subject to other exceptions) by us or our subsidiaries, unless we intend and expect to use all or a portion of the proceeds to acquire or repair assets used in the business; and (3) with respect to the Term Loan only, a percentage ranging from 0% to 50%, depending on our consolidated leverage ratio, of excess cash flow, as defined in the Credit Facilities. Our consolidated leverage ratio was 4.1 as of January 1, 2012. As of January 3, 2010, we had a mandatory prepayment due on the Term Loan of approximately $34.3 million. This payment was made in May 2010. No mandatory prepayment was required as of January 2, 2011. As of January 1, 2012, we had a mandatory prepayment due on the Term Loan of approximately $3.6 million. This payment will be made in March 2012 with cash on hand.

We may voluntarily prepay loans under the Credit Facilities, in whole or in part, without premium or penalty. Any voluntary prepayment of loans will be subject to reimbursement of the lenders’ breakage costs in the case of a prepayment of Eurodollar rate borrowings other than on the last day of the relevant interest period. We intend to use a portion of the proceeds from this offering to prepay a portion of our outstanding loans under the Credit Facility. See the “Use of proceeds” section for further discussion.

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and expenses, and disclosure of contingent assets and liabilities. Management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis. Actual results could be significantly different from these estimates. We believe that the following discussion addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.

We recognize revenue when products are delivered, collection of the receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Our revenue is reported on a net sales basis, which is computed by deducting from our gross sales actual cash discounts, allowances established for anticipated sales returns and rebates earned by our customers. Provisions for discounts, rebates, sales incentives, returns and other adjustments are provided for in the period the related sales are recorded based on an assessment of historical trends and current projections of future results.

Our estimated allowance for sales returns is a subjective critical estimate that has a direct impact on reported net sales. This allowance is calculated based on a history of actual returns, estimated

future returns and any significant future known or anticipated events. Consideration of these factors results in an estimated allowance for sales returns. We allow returns from our customers if properly requested and approved.

We establish reserves for cash discounts, product returns and allowances for doubtful accounts. The allowance for doubtful accounts is based on trade receivables that are not probable of collection. The allowance for doubtful accounts is determined using estimated losses on accounts receivable based on historical write-offs and evaluation of the aging of the receivables as well as the specific circumstances associated with the credit risk and materiality of the receivable balance. The reserves for cash discounts and product returns are based on historical experience. We assess the adequacy of our reserves at least quarterly and we adjust our estimates as needed.

We value our inventories at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. We record inventory write-downs for estimated obsolescence or unmarketable inventories based on our forecast of future demand. If our inventory on hand is in excess of our forecast of future demand, the excess amounts are written down.

We also review inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our products less the estimated cost to convert inventory on hand into a finished product.

Property and equipment are stated at cost and depreciated/amortized using the straight-line method over the following estimated useful lives:

Our estimates relating to the anticipated useful lives of our property and equipment is a subjective critical estimate that directly impacts the value of our assets reflected on our consolidated balance sheets. Should these estimates prove inaccurate, we may be required to write down the excess value of these assets.

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. Indefinite-lived intangible assets consist of trademarks. Goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment tests at least annually at a reporting unit level. We conduct the annual impairment test of goodwill and other intangibles at the end of each fiscal year or more frequently if there are any impairment

indicators identified during the year. To determine if goodwill and other intangibles are impaired, we use our best judgment and estimates and we review various factors, such as discounted cash flows analysis and comparable acquisition analysis. Trademarks are valued using the relief from royalty method of the income approach. We conducted our most recent annual impairment tests during the fourth quarter of fiscal 2011, and concluded that there were no impairment charges to record in fiscal 2011.

We evaluate the recoverability of our intangible assets and other long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These trigger events or changes in circumstances include, but are not limited to, a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition, significant adverse changes in legal factors or in the business climate that could affect the value of our long-lived assets, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of our long-lived assets, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Our long-lived assets consist of property and equipment and amortizable intangible assets. When factors indicate that the assets should be evaluated for possible impairment, we evaluate the recoverability of such assets by comparing the carrying amount of the asset or group of assets to the estimated undiscounted future cash flows expected to result from the use of the asset or group of assets and their eventual disposition. If the undiscounted cash flows are less than the carrying value of the asset or group of assets being evaluated, an impairment loss is recorded. The loss is measured as the difference between the fair value and the carrying value of the asset or group of assets being evaluated. Fair value is determined using the excess earnings method of the income approach.

We accrue warranty reserves at the time products are sold. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, based on actual warranty experience as it becomes available and other known factors that may impact our evaluation of historical data. We review the adequacy of our reserves at least quarterly and adjust our estimates as needed.

We maintain an insured large deductible program for workers’ compensation, whereby we have a liability of up to $350,000 per claim, with any amounts in excess of this limit covered by stop-loss excess insurance coverage. In addition, we maintain a self-insurance program for medical and dental insurance, whereby we have a liability of up to $125,000 per member, with any amounts in excess of this limit covered by stop-loss excess insurance coverage. Estimated costs under these programs, including incurred but not reported claims, are recorded as expenses based upon actuarially determined liabilities, which are based on historical experience and trends

of paid and incurred claims. Accounting for insurance liabilities that are self-insured involves uncertainty because estimates and judgments are used to determine the liability to be recorded for reported claims and claims incurred but not reported. If the current claim trends were to differ significantly from our historic claim experience, a corresponding adjustment would be made to the self-insurance reserves.

As a global company, we are exposed in the normal course of business to foreign currency and interest rate risks that could affect our net assets, financial position, results of operations and cash flows. We use derivative instruments to hedge against certain of these risks, and hold derivative instruments for hedging purposes only, not for speculative or trading purposes.

We record all derivative instruments on the balance sheet at fair value. Changes in the fair value of the derivative instruments are recognized in earnings unless we elect to designate the derivative in a hedging relationship and apply hedge accounting and the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Certain of the derivatives contracts we have entered into are designated as cash flow hedges. We have not used derivative contracts designated as fair value hedges or as hedges of the foreign currency exposure of a net investment in a foreign subsidiary, although we could elect to do so in the future. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply, or we elect not to apply hedge accounting.

We sell our products internationally, and, in many of those markets, primarily Europe, the sales are made in the foreign country’s local currency. In addition, many of the purchases by the company and its subsidiaries from international vendors are denominated in currencies that are different from the relevant functional currency. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. Our most significant foreign currency risk relates to the Euro, the British Pound, the Japanese Yen, the Canadian Dollar and the Mexican Peso. We use foreign currency derivatives to hedge a portion of these exposures. The foreign currency derivatives are entered into with banks and allow us to exchange a specified amount of foreign currency with U.S. dollars at a future date, based on a fixed exchange rate.

Certain foreign currency derivatives have been designated as cash flow hedges. The effective portion of changes in the fair value of foreign currency derivatives designated and that qualify as

cash flow hedges is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into net sales in the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the foreign currency derivative is recorded directly in earnings.

In addition, certain of our foreign currency derivatives used to manage the exposure related to our international sales and purchases are not designated as cash flows hedges. These hedges are economic hedges of identified risks to us to which we have elected not to apply hedge accounting. Hedges not designated as cash flows hedges are recorded at fair value on our consolidated balance sheets and any changes in fair value are recorded directly in earnings.

Certain of our subsidiaries’ assets (primarily accounts receivables) are denominated in currencies other than the functional currency of the particular subsidiary. Changes in the exchange rate between the subsidiary’s functional currency and the currency in which the asset is denominated can create fluctuations in our reported consolidated financial position, results of operations and cash flows. Accordingly, we enter into foreign currency derivatives to hedge a portion of the balance sheet exposure against the short-term effect of currency exchange rate fluctuations. We do not apply hedge accounting to these foreign currency derivatives and their gains and losses will offset all or part of the transaction gains and losses that are recognized in earnings on the related foreign currency asset. Any changes in the fair value of these foreign currency derivatives are recorded directly in earnings.

We use interest rate swap agreements to manage our exposure to interest rate fluctuations by effectively fixing the interest rate on a portion of our floating-rate debt. The effective portion of the change in fair value of the interest rate swap designated as a cash flow hedge is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified to interest expense in the period the hedged forecasted transactions affect earnings. Any ineffective portion of the interest rate swap is recorded directly in earnings.

We utilize the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon our assessment of the technical merits of the relevant tax position, based on the relevant tax law and the specific facts and circumstances as of each reporting period. Changes in law or in the relevant facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

Significant management judgment is required in determining our income tax expense and our deferred tax assets and liabilities. We make these estimates and judgments about our future taxable income based on assumptions that are consistent with our future plans.

We account for stock based compensation using the fair value measurement guidance. We may grant stock options for a fixed number of shares to certain employees, directors and non-employees with an exercise price equal to or greater than the estimated fair value of the shares at the date of grant. We also may grant restricted stock and restricted stock units with fair value determined on or around the date of grant.

The fair value for stock options is estimated at the date of grant using a Black-Scholes option pricing model. We recognize compensation expense over the option vesting period, net of estimated forfeiture rates, for each separately vesting portion (or tranche) of the award as if the award is, in substance, multiple awards. If actual forfeitures differ from management estimates, additional adjustments to compensation expense may be required in future periods.

Expected dividend yield: The expected dividend yield is based on our historical practice of not paying dividends.

Risk free interest rate: The risk free interest rate for the expected term of the option is based on the U.S. Treasury yield curves.

Expected average volatility: We use an average of historical volatility of similar publicly traded companies over the expected term.

Expected term: The expected term represents the period of time that options granted are expected to be outstanding.

Stock based compensation expense related to stock options was $5.0 million, $1.6 million and $2.3 million for fiscal 2011, 2010 and 2009, respectively. We also recognized stock based compensation expense related to restricted stock units of $89,000, $178,000 and $289,000 for fiscal 2011, 2010 and 2009, respectively. As of January 1, 2012, our total amount of unamortized stock based compensation was $9.7 million. This expense will be recognized over the remaining weighted average vesting period of these securities of 1.6 years.

If different assumptions are used, stock based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock based compensation expense and the actual factors which become known over time, we may change the input factors used in determining stock based compensation costs for future grants. Any such changes may materially impact our results of operations in the period

such changes are made. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock based compensation expense recognized in future periods will likely increase.

We have historically granted stock options with exercise prices equal to the fair value of our common stock as determined by our Board of Directors, based in part on valuation studies performed by an independent third party valuation firm. In determining its valuation analysis, the valuation firm engaged in discussions with management, analyzed our historical and forecasted financial performance, reviewed our corporate documents and considered a number of objective and subjective factors, including trends in our industry and the lack of liquidity of our capital stock. The valuation firm established an enterprise value using generally accepted valuation methodologies, including discounted cash flow analysis, comparable public company analysis and, when data deemed relevant was available, comparable acquisitions analysis. These methodologies are discussed in greater detail below. Total equity value was determined by adding cash and deducting debt from the enterprise value. The equity value was allocated among the securities that comprise the capital structure using an option-pricing method, which takes into account the liquidity preference of our class C common stock and the rights of holders of our class B common stock and class C common stock to convert their shares into common stock upon an initial public offering. The option-pricing method also considers volatility, term and risk-free interest rate inputs. The term input was established based on management’s expectations of a liquidity event and the risk-free interest rate corresponds to the term. The volatility of our equity was estimated by examining the standard deviation of publicly traded companies that were deemed to be comparable. Had different estimates of volatility been used, the allocations among the classes of securities that comprise our capital structure would have been different and would have resulted in different valuations. In allocating equity value among the securities that comprise our capital structure, the valuation firm also applied discounts for non-voting shares and lack of marketability.

The discounted cash flow analysis used in determining our enterprise value was based on the estimated present value of future cash flows our business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is known as the terminal value. The terminal value was determined by applying an EBITDA multiple range based on a review of the multiples calculated in the comparable public company analysis and comparable acquisition analysis, as described below. The estimated present value was calculated using a discount rate based on our estimated weighted average cost of capital, which accounts for the time value of money and the degree of risks inherent in our business.

The comparable public company analysis used in determining our enterprise value involved analyzing transaction and financial data of publicly-traded companies to develop multiples of financial metrics. The valuation firm then applied these multiples to our own financial metrics to develop an indication of our enterprise value. The multiples that were used to value FMIC were (i) enterprise value for the latest twelve-month period and estimated enterprise value for the current and subsequent fiscal years, to (ii) EBITDA. Comparable companies were selected based on a number of criteria, including the comparability of their operations, size and growth prospects to ours. The valuation firm considered peer companies in the musical instruments industry, as well as companies that are associated with lifestyle brands.

The valuation firm also used, when appropriate, a comparable acquisition analysis to determine our enterprise value, which involved analyzing sales of controlling interests in comparable

companies in the musical instruments industry. For comparable transactions, the valuation firm calculated multiples of the latest-twelve-month enterprise value to EBITDA.

Valuations or our common stock were performed as of January 1, 2012, June 1, 2011, January 2, 2011, January 3, 2010 and December 28, 2008. The following table summarizes, by grant date, the number of stock options and restricted stock units granted since January 1, 2009, and the associated per share exercise price, which was not less than the estimated fair value of our common stock for each of these grants.

In determining the estimated fair value of our common stock for stock options and RSUs granted on May 5, 2010, and August 1, 2010, our Board of Directors considered, in part, a valuation performed by the independent third party valuation firm as of January 3, 2010. The increase in the estimated fair value per share of common stock from June 2009 to May 2010 was primarily due to an increase in our cash balance and a decrease in our debt balance, both of which directly increased our equity value. The higher cash and lower debt balances more than offset a decline in enterprise value that resulted from weaker historical performance and a decline in forecasted financial performance.

In determining the estimated fair value per share of our common stock granted on June 9, 2011, August 15, 2011, and October 3, 2011, our Board of Directors considered, in part, a valuation performed by the independent third party valuation firm as of June 1, 2011. The increase in the estimated fair value per share of common stock from August 2010 to June 2011 was primarily due to an increase in our enterprise value attributable to stronger forecasts and improved historical performance. The estimated fair value per share was also favorably impacted by a shorter expected holding period of our equity, which resulted in a lower discount for lack of marketability. The discounted cash flow analysis indicated an increase in enterprise value due to higher revenue growth projections, offset in part by a slight increase in the discount rate due to a higher equity risk premium. The comparable public company analysis indicated an increase in enterprise value due to in increase in the forecast multiples of our musical instruments industry peers and lifestyle brand peers, and higher EBITDA performance for comparable companies for both the historical and forecast periods. The comparable acquisitions analysis was considered for this valuation but not utilized due to the lack of transactions in the musical instruments industry since 2007.

As of January 1, 2012, we had outstanding options to purchase 67,511 shares of common stock at a weighted average exercise price of $953 per share, of which 30,738 represented vested options to purchase shares with a weighted average exercise price of $929 per share.

The following table summarizes our contractual obligations as of January 1, 2012, and the effect such obligations will have on our liquidity and cash flows in future periods.

Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages in Asian labor markets and the cost of raw materials, could have an adverse impact on our business, financial condition and results of operations.

We sell our products internationally and in most markets those sales are made in the foreign country’s local currency. In addition, while our expenses are primarily in U.S. dollars, we incur certain manufacturing costs and purchase certain finished goods in foreign currencies. As a result of these exposures, our earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. Our most significant foreign currency risk relates to the Euro, the British Pound, the Japanese Yen, the Canadian Dollar and the Mexican Peso. We utilize foreign currency derivatives contracts to mitigate the effect of the Euro, the British Pound, the Japanese Yen, the Canadian Dollar and the Mexican Peso fluctuations on earnings. All hedging transactions are authorized and executed pursuant to regularly-reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. The foreign currency derivatives contracts are entered into with banks and allow us to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate. At January 1, 2012, the notional U.S. dollar value of outstanding Euro, British Pound, Japanese Yen, Canadian Dollar and Mexican Peso foreign currency derivatives contracts was

approximately $193.7 million. We estimate that a uniform 10% weakening in the value of the U.S. dollar relative to the currencies underlying these contracts would result in a decrease in the fair value of the contracts of approximately $12.5 million as of January 1, 2012.

We are subject to interest rate risk in connection with our long-term debt. As of January 1, 2012, our outstanding debt balance consisted of $246.2 million due on our Term Loan. There was no outstanding balance due on our Amended Revolver at January 1, 2012. We estimate that a 100 basis point increase in the interest rate on our long-term debt would have increased our interest expense by approximately $1.0 million for fiscal 2011. The balance of our long-term debt at January 1, 2012, is not indicative of future balances that may be subject to fluctuations in interest rates.

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 provides additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for our interim and annual periods beginning after December 15, 2011. Based on our evaluation of this ASU, the adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. An entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for us beginning December 31, 2012, and requires retrospective application. As this guidance only amends the presentation of the components of comprehensive income, the adoption will not have an impact on our consolidated financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 allows entities testing goodwill for impairment the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform the two-step impairment test currently required. The updated guidance is effective for our interim and annual periods beginning after December 15, 2011; however, early adoption is permitted. Based on our evaluation of this ASU, the adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.

We are a leading, global musical instruments company whose portfolio of renowned, music lifestyle brands brings the passion of music to life. Since the founding of our predecessor company by Leo Fender in 1946, we have built a comprehensive portfolio of brands led by the iconic Fender brand and other renowned brands such as Squier, Jackson, Guild, Ovation and Latin Percussion, which we own, and Gretsch, EVH (Eddie Van Halen) and Takamine, for which we are the licensee. We believe that the Fender brand in particular is closely associated with the birth of rock ‘n roll and has a strong legacy in music and in popular culture. The authenticity and quality of our brands are highlighted by the numerous, well known, current and historical musicians and groups that are often associated with our products. While a number of our brands, including Fender, have broad appeal, other brands in our portfolio offer products with distinct sounds or styles targeted at musicians in particular genres, including rock ‘n roll, country, jazz, heavy metal, blues and world music.

We believe that we have assembled one of the broadest product portfolios in the musical instruments industry. Our product portfolio includes fretted instruments (comprised of electric, acoustic and bass guitars, banjos, ukuleles, mandolins and resonator guitars), guitar amplifiers, percussion instruments and accessories. We believe our guitars and guitar amplifiers, including the iconic Stratocaster guitar, the Telecaster guitar, the Precision Bass and Jazz Bass guitars and the Fender Bassman and Twin Reverb guitar amplifiers, revolutionized the way music is written, played and heard. We design and market our products to a variety of musicians from beginners to professionals across a broad range of prices.

We distribute our products globally in over 85 countries through one of the largest direct-to-retail sales forces in the musical instruments industry in the United States, Canada, Europe and Mexico, as well as through a network of distributors in selected international markets. We sell our products through independent and national music retailers, mass merchants, online and catalog retailers and third party distributors. In fiscal 2011, we generated 58.7% of our gross sales before discounts and allowances from the independent channel (representing over 13,000 independently owned music stores), 23.5% collectively from the national channel, mass merchants and online and catalog retailers and 17.8% from third party distributors. Gross sales before discounts and allowances is comprised of product sales but, unlike net sales, does not include licensing income and dealer freight collection, and is not net of cash discounts, sales return allowances and rebates.

relationships with OEMs and suppliers in Asia, Europe, North America and Mexico. We manufacture our premium products primarily in the United States.

Our portfolio of renowned brands, broad selection of quality products, longstanding culture of ongoing innovation and new product development, global supply chain and distribution network and strong consumer loyalty have been key drivers of our strong financial performance. Our net sales grew from $612.5 million in fiscal 2009 to $700.6 million in fiscal 2011, representing a compound annual growth rate, or CAGR, of 6.9%. Our net income was $10.8 million in fiscal 2009, compared to $19.0 million in fiscal 2011, representing a CAGR of 32.8%. Our adjusted EBITDA grew from $43.7 million in fiscal 2009 to $52.9 million in fiscal 2011, representing a CAGR of 10.0%. See “Summary consolidated financial data—Non-GAAP financial measures” for the definition of adjusted EBITDA and a reconciliation from net income (loss) to adjusted EBITDA.

After producing his first amplifier in 1945, Leo Fender founded Fender Electric Instrument Company in 1946 in Fullerton, California. In 1951, he introduced the Telecaster, the first single-cut, solid-body guitar to be mass produced and the Precision Bass, the first commercially successful electric bass guitar. These initial products combined simplicity and technology with manufacturing techniques that we believe transformed the solid body electric guitars and bass guitars into commercially viable products. In 1952, Leo Fender introduced the Fender Bassman, one of our flagship guitar amplifiers, and in 1954, Mr. Fender introduced the now iconic Stratocaster guitar. The Fender Stratocaster was the only instrument named as one of the “American Icons that have transformed our world” in the 35^th Anniversary issue of Rolling Stone magazine published in May 2003.

In 1965, Leo Fender sold Fender Electric Instrument Company to Columbia Records Distribution Corp., a division of Columbia Broadcasting System, Inc., or CBS. The business reemerged as a stand-alone company when the late William Schultz and current Board member, William (“Bill”) Mendello, formed Fender Musical Instruments Corporation to purchase the business from CBS in 1985. Under the leadership of William Schultz, Bill Mendello and current Chief Executive Officer, Larry Thomas, we have grown to become a global leader in the musical instruments industry. Since 1985, we have rebuilt our infrastructure, augmented our brands and product offerings and expanded the reach of our products, both domestically and internationally.

We operate in the global musical instruments and accessories industry, which generated approximately $15.8 billion in global retail sales and $6.4 billion in U.S. retail sales in 2010, according to an industry source. The categories of our retail musical products, including fretted instruments, instrument amplifiers, percussion products and general accessories, generated an estimated $4.7 billion in U.S retail sales in 2010, according to the same industry source.

The following chart illustrates U.S. retail sales by product type in 2010, according to an industry source:

We believe opportunities for sales growth are supported by several long-term trends that we think will increase consumer demand for our products, including:

Portfolio of iconic and renowned lifestyle brands and associations with leading musicians

We have a portfolio of some of the most recognized global music lifestyle brands and products. In addition to the iconic Fender brand, our comprehensive brand portfolio includes brands such as Squier, Gretsch, Jackson, Charvel, EVH, Starcaster, Hamer, Guild, Ovation, Takamine, SWR, Genz Benz, Latin Percussion, Toca, Gibraltar, Sabian and Groove Tubes that we have developed, acquired or licensed, or for which we are the exclusive distributor in select territories. With this portfolio, we believe we are well-positioned to address different consumer segments through brands such as Fender that have broad appeal, and other brands that offer products with distinct sounds or styles that are important in specific genres of music, and products at a range of price points. Our brands are used by many of the world’s best known musicians and groups, both current and historical. We believe that the use of our products by these professional musicians, whose popularity and actions often influence consumers, establishes the authenticity of our brands so consumers aspire to own our products and are inspired to create their own music using our products. We collaborate with many of these famous musicians through our Signature Artist Program, in which these musicians provide specifications for instruments bearing their signatures and endorse their signature instruments, which are then marketed and sold to our customers. We also have a dedicated Artist Relations group that works closely with professional musicians to meet their musical instrument needs, including through custom made products.

In 2011, we had the #1 market share by revenue in electric, acoustic and bass guitars and electric and bass guitar amplifiers, and were the leading U.S.-based supplier to the overall musical instruments industry, according to industry sources. We believe the broad and diversified range of products in our portfolio helps to mitigate the impact of economic cycles, as sales of some product categories are less affected than others by economic downturns. We have expanded our product portfolio through a combination of innovation, strategic acquisitions and licensing arrangements. We believe that our range of brands and products positions us to be a strategic and reliable supplier to our retail partners and consumers.

We began a tradition of innovation over 60 years ago, which has had a profound influence on the music industry, with:

These products remain some of our best-selling products today. Our ability to develop and introduce innovative products and features has continued with:

In addition, we often collaborate with leading artists through our Signature Artist Program and incorporate their ideas into our designs. Our Custom Shop, where we design and build custom and limited edition electric and bass guitars, also serves as a laboratory for the generation of ideas that can be more widely incorporated in our products.

We have developed global design, production and distribution capabilities and longstanding customer relationships that we believe would be difficult to replicate. We believe the scale and quality of our direct-to-retail sales force and distributor network enhance the loyalty of our retail partners and position us to become an increasingly important manufacturer and supplier in the industry. By facilitating a positive in-store experience at our retail partners and providing a variety of customer service programs, we believe we further enhance our brands and build consumer loyalty. Our manufacturing platform provides scalability and volume flexibility as we have a balanced mix of products manufactured internally and sourced externally. This infrastructure allows us to rapidly respond to the changing needs of consumers in our key markets, while maintaining high quality.

We have assembled a proven and talented management team led by Larry Thomas, our Chief Executive Officer. Complementing Mr. Thomas are James Broenen, our Chief Financial Officer and Corporate Treasurer, and Mark Van Vleet, our Chief Legal Officer, Corporate Secretary and Senior Vice President of Business Development, who have joined our company in the past five and ten years, respectively, as well as Edward Miller, President of KMC, who has been affiliated with KMC since 1972, Gordon Raison, our Managing Director of Europe, who has been with our company for five years, and Andrew Rossi, our Senior Vice President of Global Sales, who has been with our company for 20 years. Our senior management team has an average of 21 years of musical instruments industry experience and brings together a deep knowledge of our industry, products, mission and culture, and an execution-oriented operating philosophy that are critical to our success. This extensive experience goes beyond senior management and deep into the organization. We believe that our company culture and the strength of our brands enable us to attract and retain highly talented employees who share our passion for music and interact with our retail partners and consumers in an authentic and credible way.

We intend to continue our tradition of innovation to bring new products and features to consumers, while maintaining the high standards of quality with which our brands are associated. Over the last two years we have increased the pace at which we bring new products to market through more robust innovation processes and have expanded the breadth of new products introduced. A recent example is our Fender Select line of premium, hand-crafted production guitars, which we introduced in January 2012. These new product releases can produce a high margin revenue stream, as well as provide us with an opportunity to update and refresh our existing product lines. We believe that new product releases also create an aspirational desire for consumers to upgrade and purchase new products.

We intend to extend our reach to a broader global consumer base that might not otherwise be exposed to our products. In fiscal 2011, net sales outside of the United States constituted approximately 46.7% of our net sales. Over the past 10 years, we have experienced strong international sales growth as we have entered new markets and introduced additional products into established international markets. We believe that international markets will provide growth opportunities in the near to intermediate term. We have a three-pronged strategy related to growing internationally: expanding our reach into countries where we have not historically focused our sales efforts; increasing sales of our KMC products outside the United States, where KMC has not historically had a significant presence; and implementing and growing a direct-to-retail channel model internationally in markets where we already have a presence and in which we believe we have an opportunity for additional growth.

We believe licensing our trademarks such as Fender and others builds brand awareness and furthers our strategy of reaching new consumers, while developing additional relationships with

existing consumers through new products. These licensing agreements typically offer low investment costs and attractive margin opportunities without the risk of cannibalizing existing sales. We believe we have a significant opportunity to expand this aspect of our business given that royalty income from licensing accounted for less than 1% of our net sales during fiscal 2011. In addition, these activities provide us with a valuable source of advertising. We intend to expand beyond our existing licensed products to additional products in existing categories and new categories, including apparel, consumer electronics, mobile communication, home décor and bags and luggage. We also intend to further expand our licensing program to markets beyond the United States. In addition, we believe our non-revenue generating co-branding initiatives, such as those with Apple Inc., Hard Rock Cafe International, Inc. and SAP Global Marketing, Inc., position our products as premier lifestyle brands by leveraging our partners’ resources and consumer reach beyond the musical instruments industry.

We believe that our experience in successful acquisitions and partnerships, our reputation for enhancing brands and our global scale make us an attractive partner within the musical instruments industry. We intend to build on our experience in acquisitions and strategic relationships by continuing to evaluate potential acquisition opportunities, license agreements, distribution arrangements and other strategic relationships. We evaluate these opportunities based on the potential to leverage our marketing, sales, distribution, sourcing and manufacturing capabilities to add value and contribute to growth with new brands and products. Over the last 15 years, we have successfully executed a variety of acquisitions, including the acquisitions of Guild, Jackson, Charvel, SWR, Tacoma, KMC and Groove Tubes, and entering into manufacturing and/or distribution relationships with Gretsch, EVH and Sabian. We believe that our success with strategic relationships is due, in part, to our ability to work with family-owned companies to provide financial liquidity while also protecting the brand heritage and family name, such as in our licensing agreement with Gretsch Guitars, a 129-year-old family-owned company, for its guitars and drums. In other instances, we have been able to structure arrangements with companies that seek to leverage our broad distribution network. We also are the exclusive U.S. distributor for Sabian and the distributor in the United States and in select other countries for Takamine.

We market products under a broad portfolio of brands, which we believe appeals to all levels of musicians, from beginners to professional musicians and enthusiasts, and reaches across music styles and genres, including rock ‘n roll, country, jazz, punk, heavy metal, blues and world music. We indicate in the table below those brands that we own. We market the remaining brands through licensing and other agreements with third parties pursuant to which we act as manufacturer, sales representative and/or exclusive distributor in selected geographic territories.

We became affiliated with many of the brands listed above through acquisitions and other strategic relationships. For more than 15 years, our management team has demonstrated the ability to execute these transactions and integrate these new brands into our U.S. and international operations, while also leveraging our existing manufacturing and sales and distribution capabilities to help improve or enhance net sales and profitability of the acquired brands. Examples of our acquisitions include Guild in 1995, Jackson and Charvel in 2002, SWR in 2003, Tacoma in 2004 and Groove Tubes in 2008. In December 2007, we acquired KMC, through which we gained ownership of, or distribution rights for, over 100 brands, including the Ovation, Latin Percussion, Toca, Gibraltar, Genz Benz and Hamer brands, which we own, and Sabian, Gretsch drums and Takamine, for which we act as distributor. This acquisition, our single largest, enabled us to significantly expand our product offerings, particularly in percussion and accessories. Since this acquisition, we have been one of the largest independent distributors of musical instrument accessories in the United States, according to an industry source.

The table below sets forth the percentage of gross sales before discounts and allowances represented by our primary product categories in fiscal 2011:

We primarily sell our products through five sales channels—the independent channel, the national channel, the mass merchant channel, the online and catalog channel and the distributor channel.

Contracts with our mass merchant customers are generally short term, may be terminated by either party on short notice and do not obligate our mass merchant customers to purchase a fixed amount of our products. Some of these contracts entitle our mass merchant customers to our most favorable prices, benefits or allowances that we offer to similarly-situated dealers.

Our contracts with our distributors generally prohibit them from selling competing products other than certain competing products authorized by us. The distribution agreements are generally short term, typically with durations of one year or less and terminable by either party on short notice. Two of our stockholders act as our distributors in Japan. See “Transactions with related persons.”

In fiscal 2011, we generated 58.7% of gross sales before discounts and allowances from the independent channel, 23.5% collectively from the national channel, mass merchants and online and catalog retailers and 17.8% from third party distributors.

We recently realigned our brand management strategy and created five global brand management positions for Fender/Squier, Specialty Brands (Gretsch, Jackson, Charvel, EVH, SWR and Genz-Benz), Acoustic Guitars (Fender, Squier, Guild, Takamine and Ovation), Percussion (Gretsch, LP, Toca, Gibraltar and Sabian) and Accessories. These global brand managers manage their brands and products under their brands across all markets and channels.

Our sales efforts are focused on building close relationships with musical instrument distributors and retailers and educating their sales forces about our products. In addition, we maintain sales management and sales teams organized to focus on particular retail channels, which we believe enables them to create strong customer relationships in each channel.

Our marketing and advertising programs are focused on enhancing relationships with consumers by increasing the exposure of our core brands to the population in general and reinforcing the positive lifestyle appeal of our brands. We also implement marketing and advertising programs relating to our specialty and niche brands targeted towards musicians active in the genres with which those brands are identified. Our marketing and advertising campaigns cover a wide variety of activities, including the Signature Artist Program, licensing and co-branding efforts, media advertising and our websites and other social media and consumer activation activities, such as hosting after-hours parties near the Lollapalooza music festival featuring bands and artists playing our products. We also conduct various promotions in cooperation with our retailers, including artist appearances, product education clinics and other special events. We provide point-of-purchase advertising materials, display and merchandising fixtures and other materials designed to highlight our products at the retail level.

Our Signature Artist Program is a key component of our marketing strategy. Through this program, over 100 famous musicians across a variety of popular music styles provide specifications for unique instruments bearing their signatures and permit us to use their images in selected advertisements or on our websites, typically in exchange for royalties based on sales of their signature instruments. Some of our Signature Series artists also attend tradeshows to help market our products. In addition, some of our artists play their signature instruments at concerts and personal appearances, adding to the exposure of our products in live music venues. These musicians also mention their support of our brands in interviews, and are often seen with our brands in print publications where album or performance reviews include photographs of these artists and their instruments during performances. We believe that by associating our brands with these artists, we further enhance how consumers perceive our brands.

To support our Signature Artist Program as well as our entire artist outreach effort, our Artist Relations group focuses on fostering and maintaining relationships with professional musicians, including signature, emerging and well-known artists supporting our brands. This group coordinates closely with other parts of our organization, including our product marketing group and the Custom Shop, to provide customized products and services for professional musicians, as well as to support other aspects of our marketing and advertising programs.

We believe licensing our trademarks such as Fender and others builds brand awareness and furthers our strategy of reaching new consumers, while developing additional relationships with existing consumers through new products. These licensing agreements typically offer low investment costs and attractive margin opportunities without the risk of cannibalizing existing sales. In addition, these activities provide us with a valuable source of advertising. We intend to expand beyond our existing licensed products to additional products in new and existing categories. In addition, we believe our non-revenue generating co-branding initiatives such as those with Apple Inc., Hard Rock Cafe International, Inc. and SAP Global Marketing, Inc., further increase our exposure and position our products as premier lifestyles brands through leveraging our partners’ resources and consumer reach beyond the musical instruments industry.

In an effort to expand awareness of our brands to target audiences and the population in general, we also conduct advertising campaigns. We maintain a staff dedicated to product placement and advertising campaign creation. These activities include purchasing ads in trade and broader interest publications, submitting products for reviews by various publications, as well as product placements in movies and television shows that contribute to awareness of our brands in an audience that may not necessarily be familiar with our core products.

We coordinate our advertising campaigns to support product introductions, company milestones and events and other areas that we believe are meaningful to consumers.

In addition to traditional print media, we maintain an active social media platform to help expose our products, service, support and community forums to consumers as well as various artists to foster loyalty and build a community of users who share a passion for our guitars and other products. We maintain brand-specific websites that are tailored to each brand’s attributes. Many of our websites feature a community forum section where our consumers and others can communicate with each other, including sharing tips and anecdotes. The community forum section and social media also allow us to communicate directly with our consumer base and receive feedback directly from our consumers. Our websites feature product pages where consumers can research and investigate our products and where they will find extensive product information, specifications, dealer locations and other important details about our products. To support various artists and maintain excitement for our brands and to encourage consumers to

return to our websites, our websites also feature news relevant to the brand, artist activity, links to useful websites and new product announcements. Through our websites, consumers also can access our customer service department to ask questions and receive assistance regarding our products. Our social media strategy across all of our brands connects directly with consumers via unique content delivered through various social media tools worldwide, including Facebook, Twitter, Flickr and YouTube, as well as e-mail blasts and social media contests through our websites. We consider our overall online effort to be a critical component of our marketing efforts to end consumers and intend to maintain focus in this area.

To support our brands and product leadership, we continue to bring new and innovative products to market that inspire our consumers and enhance brand loyalty. We strive to ensure that our products are built efficiently to achieve high quality at each price point. We design our products to satisfy our consumers’ desire for instruments that are easy to use, maintain, upgrade and customize. In the past 20 years, we have received numerous industry awards for our product leadership. In a recent example, Vintage Guitar magazine announced in its March 2012 issue that the Fender Deluxe Reverb amplifier was inducted into its Hall of Fame.

Our team of over 85 research and development professionals reports directly to our Chief Executive Officer. Our product development led to the introduction of 129, 274 and 356 new products in fiscal 2009, 2010 and 2011, respectively, and, as of January 2, 2012, we had approximately 649 ongoing projects. In fiscal 2011, sales of products introduced within the year represented 10.8% of gross sales before discounts and allowances. Over the last two years, we have also increased the pace at which we bring new products to market through more robust innovation processes. Our research and development expenditures were $9.0 million, $9.3 million and $10.2 million in fiscal 2009, 2010 and 2011, respectively.

Through our Custom Shop, our skilled craftspeople design and develop custom, specialty and limited-edition electric guitars and bass guitars. In addition, the Custom Shop produces a general line of products, often employing new techniques and incorporating features drawn from artist instruments as well as new designs and hardware, pickups and finishes that can be utilized in our other facilities and products. We believe our Custom Shop generates incremental higher margin business and enhances the images of our brands. Our Custom Shop also serves as a laboratory for the generation of ideas that can be more widely incorporated in our products.

Our strategically managed global supply chain is comprised of a network of our own manufacturing facilities in the United States and Mexico, distribution and warehouse facilities in North America and Europe, and established sourcing relationships with OEMs in Asia, Europe, North America and Mexico. We manufacture our premium products primarily in the United States. We believe that effectively managing our supply chain to achieve efficient and timely delivery of our products to our retail partners is critical to our success.

Our principal suppliers are providers of imported finished goods as well as raw materials and components.

With many of our OEMs we do business on a purchase order basis rather than pursuant to formal written contracts. Where we do have contracts with our OEMs, they are short term. Most of our OEM agreements can be terminated only upon breach of contract. Most of these contracts require our OEMs to provide us with a “favored nations” pricing policy whereby we get the benefit of any more favorable prices offered to other customers of our OEMs. In addition, our OEMs that use subcontractors cannot subcontract the manufacturing of our products unless we provide advance written consent and certain other criteria are met. Although some of our OEM contracts prevent the OEM from making or dealing in competitors’ products, others do not. In most of our OEM contracts, our OEMs represent to us that they are in compliance with local labor, environmental and safety laws. Although our supply chain employees occasionally visit our OEMs’ facilities, we do not require our OEMs to abide by any formal code of conduct as a condition of doing business with us.

Our products are manufactured by our OEMs, and by us at our owned manufacturing facilities. We believe this combination of facilities provides us with increased manufacturing capacity and the flexibility and scale to more efficiently and quickly respond to consumer demand. We have manufacturing operations in Corona, California; New Hartford, Connecticut; Ensenada, Mexico; Scottsdale, Arizona; and Ridgeland, South Carolina. We opened our Ensenada facility in 1987 and our current Corona facility in 1998. Our 176,000 square foot Corona facility and 167,000 square foot Ensenada facility manufacture guitars, guitar amplifiers and replacement parts. In addition to the more automated manufacturing operations, our Corona facility also houses our Custom Shop, which makes Fender, Gretsch, Jackson, Charvel and EVH custom guitars. We acquired our New Hartford and Ridgeland facilities through our acquisition of KMC. Our New Hartford facility primarily manufactures acoustic guitars. Our Ridgeland facility manufactures higher-end Gretsch drums. We have invested significant resources to establish and modernize these facilities.

Our products, particularly our guitars, require a significant amount of labor and handiwork by a skilled and well-trained workforce to achieve and maintain high quality, although we also employ automated guitar and guitar amplifier production and robotic paint processes.

Our manufacturing facilities are designed to provide us with manufacturing flexibility. In times of high demand, our management is able to add shifts and make other production line adjustments to vary production levels at each of our facilities. This ability, combined with the capabilities of our OEMs, allows us to vary capacity to respond to changing demand. We believe that our manufacturing facilities provide us with sufficient flexibility to expand production in the near and medium term.

We continually evaluate shifting additional production to manufacturing facilities with lower or more stable costs. For example, our Ensenada, Mexico manufacturing facility provides us with high-quality products at stable, relatively low costs, and we intend to explore opportunities to move additional production to that facility.

We utilize five warehouses with a total capacity of approximately 1.8 million square feet for the storage and distribution of our products. In the United States, we have three warehouses—one located in Ontario, California, one in Portland, Tennessee and one in Louisville, Kentucky. In fiscal 2011, we announced the closure of our Louisville warehouse, which will be consolidated into our Portland facility in the first half of fiscal 2012. We also have a facility in Ontario, Canada to service Canada. We operate all of our North American warehouse facilities. To support our

European sales efforts, we have a facility in the Netherlands, which is operated by DSV Solutions and managed by us. This network of distribution and warehouse centers enables us to move products quickly and efficiently to our retail consumers.

The musical instruments industry is highly fragmented and is served by a variety of companies, including independent instrument makers, large multinational corporations, technology-based electronics manufacturers and print publishers. We also compete with online sellers of new and used products, the market for which we believe has grown with the increasing popularity of websites such as eBay. In addition, from time to time, national music retailers as well as mass merchants have carried their own private-label products that compete with ours. Companies compete based on price, style of instrument, sound and sound quality, features and brand recognition. In the markets for fretted instruments and guitar amplifiers, we and our significant competitors are each associated with particular musicians and groups. We believe that our brands’ strong recognition, high-quality innovative products and associations with leading musicians and groups provide us with significant competitive advantages. We believe our primary competitors within the electric guitar and bass guitar markets include Gibson Guitar Corp. and its Epiphone subsidiary and Ibanez, a subsidiary of Hoshino USA. In the acoustic guitar market, our primary competitors include Martin & Co., Taylor Guitars and Yamaha Corporation. In guitar amplifiers, our primary competitors include Line 6, Inc. and Marshall Amplification PLC.

Our trademarks, including Fender and those associated with our other brands, are a critical component of the value of our business. Trade dress, which refers to the visual appearance of our products, also is an important part of our intellectual property rights. As described under “—Legal proceedings” below, we currently have a case pending before the U.S. Patent and Trademark Office with respect to registered trademarks covering some of our headstock designs.

Where we are the distributor for third parties’ products, including the Gretsch and EVH product lines, we license trademarks associated with those brands for use in our sales and distribution activities.

We do not have a written agreement that governs our distributorship arrangement with Takamine. Our distribution agreement with Sabian will expire on August 12, 2012, after which it will automatically renew for successive one-year periods, and will be terminable by either party for any reason upon 90 days prior written notice. Sabian may at any time stop permitting us to distribute its products upon 30 days prior written notice. For some products, this is true only if Sabian ceases manufacturing them. For other products, Sabian may stop permitting us to be a distributor of those products even if Sabian is still manufacturing them.

We also license our trademarks and related intellectual property rights to OEMs of our products from time to time, as well as in connection with licensing, co-branding or similar activities.

We hold patents for some aspects of our products and have patent applications pending. As of January 1, 2012, we had 48 issued patents and 9 patent applications pending in the United States and 32 corresponding issued patents and 9 patent applications pending in foreign countries. We cannot be certain that our patent applications will be issued or that any issued patents will provide us with any competitive advantage or will not be challenged by third parties. We also

hold copyrights for certain of the software incorporated in our guitar amplifiers as well as for some of the material on our website.

In addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, including contractual protections with employees, OEMs, distributors and others. Despite these protections, we may be unable to prevent third parties from using our intellectual property without our authorization, breaching any nondisclosure agreements with us, or independently developing products that are similar to ours, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States.

Guitar Center and its affiliates accounted for approximately 15.2%, 15.8% and 15.8% of our net sales for fiscal 2009, fiscal 2010 and fiscal 2011, respectively. Our arrangement with Guitar Center does not obligate it to purchase fixed amounts of our products.

As of January 2, 2012, we had 2,790 full-time and part-time employees, 1,561 of whom were employed in the United States. Except in Mexico, none of our employees are represented by a labor union, and we have experienced no work stoppages. We consider our employee relations to be good.

The following sets forth our principal facilities as of January 1, 2012. We lease our facilities, other than our Corona, California facility, which we own.

We also use the space of a third party warehouse in Rotterdam, the Netherlands. We do not own or lease this property.

Our manufacturing operations in the United States and Mexico involve the use, handling, storage and disposal of hazardous substances, including, for example, the paint used for our guitars. Accordingly, we are subject to environmental laws and regulations, including those regulating the handling, storage and disposal of hazardous substances and discharges to the air, soil and water, as well as the investigation and remediation of contaminated sites.

From time to time, we have been required to make payments or modify our operations and facilities as a result of environmental matters. In fiscal 2009, we reached a settlement with the Environmental Protection Agency pursuant to which we agreed to pay approximately $79,000 in penalties due to improper waste storage and inadequate personnel training at our Corona, California facility. At this time we have no known material environmental liabilities. However, if we were to become liable in the future with respect to the release of any hazardous substance or contamination of any site, we may be subject to significant fines and cleanup costs.

In September 2009, we were named as a defendant, together with the National Association of Music Merchants, or NAMM, and Guitar Center, Inc., in a class action lawsuit filed in the U.S. District Court in the Southern District of California (Giambusso v. National Association of Music Merchants, Guitar Center, Inc., Fender Musical Instruments Corporation, Case No. ‘09-CV 2002-LABJMA). The lawsuit alleged that anti-competitive conduct resulted in consumers paying too much for certain guitars and guitar amplifiers between 2004 and 2009. The allegations primarily arose from a consent order agreed to by the FTC and NAMM in April 2009. Shortly thereafter, we, NAMM, Guitar Center, Inc. and several other manufacturers and retailers of fretted instruments and guitar amplifiers, including KMC, were named as defendants in additional lawsuits arising out of the same general set of facts. Often referred to as tag-along actions, these follow-on lawsuits are not uncommon. In December 2009, the lawsuits were consolidated into one proceeding by the Judicial Panel on Multidistrict Litigation, or the MDL proceeding (In re Musical Instruments and Equipment Antitrust Litigation, MDL-2121). Following the filing of the consolidated complaint, we, together with NAMM, Guitar Center and several other musical instrument manufacturers, moved in the MDL proceeding to dismiss the complaint in its entirety. In August 2011, the court granted the motion to dismiss, but gave the plaintiffs leave to re-file a more specific complaint, which they did file on September 22, 2011. The court also granted plaintiffs limited discovery rights, as well as another opportunity to amend their complaint based on information received during the limited discovery period, which is now closed. Plaintiffs filed a second amended complaint on February 22, 2012, purporting to contain more specific

allegations. Although we cannot predict the outcome of this matter with certainty, we do not believe that an adverse outcome in this matter is probable or that any liability is reasonably ascertainable. We are also responsible for and are defending KMC in this litigation. We intend to vigorously defend this matter.

In July 2009, we were advised by U.S. Customs and Border Protection, or U.S. Customs, that we had been selected for an audit covering approximately the previous five years of imports. In response, we conducted our own review and then voluntarily disclosed to U.S. Customs potential duty underpayments. In addition, we made an offer to pay duties owed plus interest in the amount of approximately $400,000, which amount was reduced by approximately $75,000 as a result of a credit from U.S. Customs. In cooperation with U.S. Customs, we also developed improved control measures, standard operating procedures, or SOPs, and policies to improve our management of duty programs. Final resolution, which includes an exit conference, is not expected until the second half of 2012.

In the second quarter of fiscal 2010, we received a letter of inquiry from the FCC asking for information about Fender electronic digital device products subject to part 15 of the FCC’s rules governing radio frequency devices. We have provided information to the FCC throughout the course of its inquiry. The FCC’s inquiry remains open as of this date.

In June 2011, the German Customs Office in Essen commenced an investigation into our suspected violation of import restrictions against the importation of protected plant species. More specifically, German officials had undertaken a criminal investigation as to whether less than 500 Fender guitars with Brazilian rosewood fingerboards were improperly imported into Germany between approximately March 2010 and January 2011. We recalled the subject products from our inventory and from our customers if they had not been sold to consumers pending the resolution of the inquiry. We are investigating whether the necks of the subject products may be replaced with materials not subject to the import restriction at issue. Simultaneously, we are seeking an exemption from the import restriction in question (which if granted, may be retroactive).

In connection with trademark registration opposition proceedings that we initiated against Peavey Electronics Corporation, or Peavey, on March 5, 2008, Peavey filed counterclaims against us before the Trademark Trial and Appeal Board, or TTAB, of the U.S. Patent and Trademark Office, petitioning for cancellation of two of our registered headstock designs that are used in many of our electric guitars and bass guitars. The counterclaims allege that we (and our predecessors) fraudulently applied for and/or maintained these registrations by misrepresenting whether we used those headstock designs in commerce on all the goods as identified. On March 16, 2011, we filed a motion for summary judgment on the counterclaims, which was denied on December 12, 2011. The case is currently proceeding to trial before the TTAB. To the extent we are not successful in any of these counterclaims, our ability to prevent other companies from copying the subject headstock designs may suffer.

An adverse outcome in any of these actions could negatively impact our results of operations and financial condition and damage our reputation.

In addition, we are subject to lawsuits, investigations and claims from time to time in the ordinary course of business. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition.

Our executive officers and directors, and their ages and positions as of February 29, 2012 are as follows:

Larry E. Thomas has been our CEO since August of 2010. He was appointed to the FMIC Board of Directors in 2009. Mr. Thomas joined Guitar Center in 1977 as a salesperson and was store manager, regional manager, general manager, president and ultimately chairman and CEO. He served as Chairman and CEO of Guitar Center from 1996 to 2004. Between 2004 and August 2010, Mr. Thomas was retired. Our board of directors has concluded that Mr. Thomas should serve on the board of directors based on his extensive experience in senior executive positions in the musical instruments industry.

James S. Broenen has served as our Chief Financial Officer and Corporate Treasurer since November 2008. From April 2006 to November 2008, Mr. Broenen was our Vice President Financial Planning and Analysis. Mr. Broenen is a certified public accountant.

Mark D. Van Vleet served as our General Counsel beginning in January 2002. Mr. Van Vleet was appointed Corporate Secretary in May 2002 and named our Chief Legal Officer and Senior Vice President of Business Affairs, now Business Development, in March 2007.

Edward G. Miller has been President of KMC since July 2007. Mr. Miller served as Executive Vice President and Chief Operating Officer of KMC from 1998 to July 2007.

Gordon L. T. Raison has served as our Managing Director, Europe since October 2005.

Andrew M. Rossi has been employed with FMIC in a variety of sales and marketing roles since 1991. He has served as Senior Vice President of Global Sales for the last five years.

Conrad A. Conrad has served as a member of our board of directors since July 2005. Mr. Conrad is a member of the board of directors of Universal Technical Institute, Inc. and served as a director of Rural/Metro Corporation until June 2011. He is also a certified public accountant. Our board of directors has determined that Mr. Conrad should serve on the board of directors and audit committee based on his extensive experience in senior executive positions in consumer products companies, his experience in finance and his financial literacy.

Mark H. Fukunaga has served as a member of our board of directors since July 1993 and Co-Chairman of the Board since August 2010. Since 1994, he has been the Chairman and CEO of Servco Pacific Inc., a company with operations in automotive distribution and retailing, home products distribution and commercial insurance brokerage, and investments in venture capital and private equity. Our board of directors has determined that Mr. Fukunaga should serve on the board of directors and the audit and nominating and corporate governance committees based on his executive experience in the retail industry and his general business experience.

Kenneth L. Goodson Jr. has served as a member of our board of directors since February 2006. Mr. Goodson has served as Executive Vice President of Operations for Herman Miller Incorporated, a company that designs, manufactures and sells furniture systems and products for offices and healthcare facilities, since 2002. Our board of directors has determined that Mr. Goodson should serve on the board of directors and compensation committee based on his experience in the manufacturing sector and general business experience.

Donald Haider has served as a member of our board of directors since January 1997. Mr. Haider is a Professor of Management at the Kellogg School of Management, Northwestern University, where he has been a faculty member since 1973. Mr. Haider served as the Treasurer for the City of Chicago School Finance Authority until 2010 and, since 1995, has served as Dean of the National Association of State Treasurers National Institute for Public Finance. He has served on the board of directors of Asset Acceptance Capital Corporation since 2004 and served on the board of directors of LaSalle Bank Corporation, Chicago, Illinois, until its acquisition by Bank of America in October 2007. Our board of directors has determined that Mr. Haider should serve on the board of directors and the audit and compensation committees based on his experience in finance and his financial literacy.

Michael P. Lazarus has served as a member of our board of directors since December 2001 and Co-Chairman of the Board since August 2010. Mr. Lazarus co-founded Weston Presidio, a growth capital firm, in 1991. Prior to the formation of Weston Presidio, he served as Managing Director and Director of the Private Placement Department of Montgomery Securities. Mr. Lazarus serves on the board of advisors of Azul Linhas Aereas Brasileiras SA, and the boards of directors of lntegro and Jimmy John’s LLC. He was previously the Founding Chairman of JetBlue Airways and served on the board of directors for the airline as well as on the boards of directors for Restoration Hardware and Guitar Center. Our board of directors has determined that Mr. Lazarus should serve on the board of directors and the compensation and nominating and corporate governance committees based on his knowledge of investments in retail companies, his financial literacy and his general business experience.

William L. Mendello has served as a member of our board of directors since January 1985. He served as Chief Executive Officer of our company from April 2005 to August 2010. From May 1996 through March 2005, Mr. Mendello served as our President and Chief Operating Officer. Prior to May 1996, he served in many positions at our company, including Chief Financial Officer. Our board of directors has concluded that Mr. Mendello should serve on the board of directors based on his deep knowledge of our company gained from his positions as Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, as well as his experience in the musical instruments industry.

Robert C. Wood has served as a member of our board of directors since 2011. Mr. Wood served as the President of Nike Golf from September 1998 to September 2008. From September 2008 to July 2011, he served as the Vice President of SPARQ Training at Nike, Inc. and since September 2011 has acted as an independent consultant for Nike, Inc. Our board of directors has determined that Mr. Wood should serve on the board of directors and audit and nominating and corporate governance committees based on his executive experience in the retail industry and his general business experience.

Our board of directors is currently composed of eight members. Our board of directors and its committees set schedules to meet throughout the year and also can hold special meetings and act by written consent under certain circumstances. The independent members of our board of directors also regularly hold separate executive session meetings at which only independent directors are present.

Our board of directors has determined that a majority of its members are independent under the rules of Nasdaq listing standards and the federal securities laws. In particular, our board of directors has determined that the following directors are independent: Messrs. Conrad, Fukunaga, Goodson, Haider, Lazarus and Wood. In making its determination, our board of directors reviewed Mr. Lazarus’ affiliation with Weston Presidio. To assist it in its determination of director independence, effective upon completion of this offering, our board of directors has adopted categories of relationships that it has deemed immaterial for director independence purposes.

Our current directors were elected pursuant to the terms of a stockholders agreement that we entered into in December 2001 with certain of our stockholders. Pursuant to the stockholders agreement, Weston Presidio is entitled to designate one director and has designated Mr. Lazarus as a director, and Servco has a right to designate one director and has designated Mr. Fukunaga as a director. The rights to appoint board members under our stockholders’ agreement will terminate upon the completion of this offering. Our directors hold office until their successors have been elected and qualified or their earlier death, resignation or removal.

Upon completion of this offering, our board of directors will be divided into three classes of directors, each serving a staggered three-year term. As a result, only one class of our board of directors will be elected each year from and after the closing. Messrs. Haider and Mendello will

be assigned as Class I directors whose terms will expire at the first annual meeting of stockholders after the closing of the offering. Messrs. Conrad, Goodson and Wood will be assigned as Class II directors whose terms will expire at the second annual meeting of stockholders after the closing of the offering. Messrs. Fukunaga, Lazarus and Thomas will be assigned as Class III directors whose terms will expire at the third annual meeting of stockholders after the closing of the offering. Our certificate of incorporation and bylaws provide that the number of authorized directors will be not less than seven and no more than eleven and may be changed only by resolution of a number of directors that is more than half of the number of directors then authorized (including any vacancies), and that any vacancies or new directorships on the board may be filled only by the vote of a majority of the directors then in office. Whenever the holders of any class or classes of stock are entitled to a director under our certificate, vacancies and newly created directorships of such class may be filled only by a majority of that class’ director or directors then in office. The classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. All of the members of these committees are independent as required by the Nasdaq listing standards and applicable federal law. Our board of directors has delegated various responsibilities and authority to its committees as generally described below. These committees regularly report on their activities and actions to the full board of directors. Each committee of our board of directors has a written charter approved by our board of directors, which will become effective upon the completion of this offering. At that time, copies of each charter will be available on the Investor Relations’ section of our website at www.fender.com. Information on our website does not constitute part of this prospectus.

The audit committee of our board of directors oversees our accounting practices, system of internal controls, audit procedures and financial reporting system. Our audit committee is responsible for, among other things,

Messrs. Conrad, Fukunaga, Wood and Haider comprise the audit committee. Mr. Conrad is the chairman of the audit committee. Our board of directors has determined that Mr. Conrad is an “audit committee financial expert” as defined in the SEC’s rules.

The compensation committee of our board of directors is responsible for assisting and advising our board with respect to compensation of our Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and other executive officers and their performance, and oversees and makes recommendations regarding compensation for our executive officers. The compensation committee is responsible for, among other things:

Messrs. Goodson, Haider and Lazarus comprise the compensation committee. Mr. Goodson is the chairman of the compensation committee.

The nominating and corporate governance committee of our board of directors is responsible for assisting our board of directors in a variety of matters relating to board and committee composition and other corporate governance matters. The nominating and corporate governance committee is responsible for, among other things:

Messrs. Fukunaga, Lazarus, and Wood comprise the nominating and corporate governance committee. Mr. Fukunaga is the chairman of the nominating and corporate governance committee.

Our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors effective upon the completion of this offering. At that time, the full text of our code of business conduct and ethics will be available on the Investor Relations section of our website at www.fender.com. We intend to disclose future amendments to certain provisions of our code of business conduct, or waivers of certain provisions as they relate to our directors and executive officers, at the same location on our website or otherwise as

required by applicable law. Information on our website does not constitute part of this prospectus.

As noted above, the compensation committee of our board of directors currently consists of Messrs. Goodson, Haider and Lazarus. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. See “Transactions with related persons” for a summary of certain transactions involving the members of the compensation committee. In fiscal 2011, the compensation committee of our board of directors consisted of Messrs. Fukunaga, Haider, Lazarus, Goodson, Mendello and, for a portion of fiscal 2011, Wood. Mr. Mendello has served our company in a variety of executive officer positions, including most recently as Chief Executive Officer from April 2005 to August 2010.

Our certificate of incorporation provides that our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability for:

Our certificate of incorporation and our bylaws also provide that we will indemnify our directors and officers to the fullest extent permitted by law and that we may, by resolution of our board of directors, indemnify our employees and other agents as well. These provisions also provide that we will advance the expenses incurred by a director or officer in advance of the final disposition of an action or proceeding, and we may advance expenses of our employees and other agents as well in the event that we determine to indemnify them. Our certificate of incorporation also permits us to purchase and maintain insurance on our own behalf and on behalf of any current or former director, officer, employee or agent or any person who is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether or not the laws of Delaware would permit us to indemnify that person. We also maintain directors’ and officers’ insurance.

We also have entered into indemnification agreements with each of our directors and executive officers. With specified exceptions, these agreements provide for indemnification to the fullest extent permitted by law of related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts actually and reasonably incurred by the applicable director or executive officer in any action, proceeding or similar event by reason of such person’s status as a director, officer, employee, agent or fiduciary of the company or any similar status at an entity where the individual is serving at our request. The agreements also provide that, to the fullest extent permitted by law, we will advance all expenses incurred by our directors and

executive officers in connection with a legal proceeding in which they may be entitled to indemnification. We have entered into a separate indemnification agreement with entities affiliated with Weston Presidio and Michael Lazarus, who is affiliated with Weston Presidio. This agreement is similar to our agreements with our other directors and our executive officers, but also provides for indemnification of expenses incurred in connection with any action, proceeding or similar event by reason of or related to the fact that the parties to the agreement are or may be stockholders or controlling persons of our company.

Each non-management member of our board of directors, or the Board, receives a $25,000 annual retainer, with the chairman of the audit committee receiving an additional $15,000 annual retainer and the chairmen of the nominating and corporate governance committee and the compensation committee each receiving an additional $5,000 annual retainer. In addition, the members of our Board are entitled to receive fees of $1,000 per board meeting that they attend in person, and $500 per regularly scheduled board meeting that they attend telephonically. The board members also receive $1,000 for all committee meetings attended, whether in person or by telephone. Fees are paid following each meeting. In lieu of cash payments, our non-management directors are entitled to elect to receive an amount of our products, at the equivalent dealer net price. Our directors also are entitled to participate in our employee discount program, but none did so in fiscal 2011. Management directors do not receive any additional compensation for serving on the Board.

In June 2011, our Board approved individual option grants under our 2007 Amended and Restated Equity Compensation Plan, or 2007 Equity Compensation Plan, in the amount of 250 stock options to each of our non-management directors. The exercise price of these options is $987 per share, and the options vest in annual installments over a four year period following the grant date or upon an earlier “change of control” of the company (as described below in the section titled “—Potential payments upon termination or change in control (year-end 2011)”).

The following table sets forth total compensation awarded to, earned by or paid to each person who served as a director during fiscal 2011, other than a director who also served as an executive officer.

Effective February 29, 2012, our board committees were reconstituted to have the membership set forth under “—Board committees.”

As described in “—Board of directors—Independent directors”, our Board has determined that a majority of its members are independent under the rules of Nasdaq listing standards and the federal securities laws. Specifically, our Board has determined that the following directors are independent: Messrs. Conrad, Fukunaga, Goodson, Haider, Lazarus and Wood.

This compensation discussion and analysis describes the material elements of our fiscal 2011 executive compensation program and the principles underlying our executive compensation policies and decisions, and provides information regarding the compensation paid to our Chief Executive Officer, our Chief Financial Officer, and our three most highly compensated executive officers (other than the Chief Executive Officer and Chief Financial Officer) for fiscal 2011 (collectively, our “Named Executive Officers” or “NEOs”). In fiscal 2011, our Named Executive Officers were:

Our compensation program for our Named Executive Officers, as well as other members of senior management, is designed to:

To help incentivize our Named Executive Officers to meet these objectives, our executive compensation program consists of several elements, including:

Overall, we believe the design of our executive compensation program creates alignment between the level of performance achieved and the amount of compensation awarded and motivates achievement of both annual goals and sustainable long-term performance.

The following table sets forth the percentage of each NEO’s fiscal 2011 compensation that was comprised of fixed compensation (i.e., base salary) and variable compensation (i.e., annual incentive and long-term incentive awards). The variable component percentages are based on actual fiscal 2011 annual incentive payments and the aggregate grant date fair value of option grants made in fiscal 2011.

Given the competitiveness of the market for executive talent and our business strategy, we believe that our executive compensation program must reflect the realities of our business environment. As a result, our compensation decisions are based on competitive pay practices and individual performance in determining the compensation of our executives. As a general matter, the compensation committee is responsible for the determination of executive compensation for Messrs. Thomas, Broenen, and Van Vleet and considers recommendations from Mr. Thomas for

Messrs. Broenen’s and Van Vleet’s compensation, as well as objective and subjective factors in structuring the executive compensation program. These factors include:

Using the same factors, in fiscal 2011, the compensation for Messrs. Rossi and Raison was determined by Mr. Thomas in consultation with our Senior Vice President of Human Resources.

In determining fiscal 2011 executive compensation, the compensation committee relied on general industry survey data and then evaluated base pay and total target compensation for our executives as discussed below. We did not, however, formally benchmark executive compensation to a set percentile of compensation at other companies. Differences in total target compensation generally reflect the tenure, relevant experience, and expertise of the individual Named Executive Officers within their roles. Our strategy following this offering is to utilize our peer group (listed below in the section titled “Benchmarking”) in conjunction with national survey data to benchmark the compensation of our Named Executive Officers against both general industry data and our peer group. This strategy is intended to help ensure that we take a comprehensive systemic approach to the establishment and evaluation of our executives’ compensation.

In fiscal 2011, the compensation committee retained Mercer (US) Inc., or Mercer, to assist it in evaluating our Named Executive Officers’ compensation levels and targets relative to those of both the broader national data and our selected peer group. Mercer assisted the compensation committee in fiscal 2011 in the determination of appropriate levels of long-term incentive grants for our Named Executive Officers. For fiscal 2012, Mercer assisted the compensation committee in the determination of each of the components of fiscal 2012 compensation for our Named Executive Officers by providing data related to competitive levels of compensation and making recommendations for award levels for consideration by the compensation committee. In fiscal 2011, neither Mercer nor any of its affiliates provided any additional services to us.

The compensation committee established the compensation for Mr. Thomas in fiscal 2011. In making this determination, the compensation committee considered the following factors: the compensation committee’s assessment of Mr. Thomas’ individual performance, our operating and financial performance and Mr. Thomas’ tenure with the organization.

Mr. Thomas recommended to the compensation committee the compensation for Messrs. Broenen and Van Vleet, based on his assessment of their individual responsibility, performance, overall contribution, and competitive market data. The compensation committee approved the recommended compensation arrangements. Using the same factors, the compensation for Messrs. Rossi and Raison, was determined by Mr. Thomas in consultation with the Senior Vice President of Human Resources.

The compensation committee has not established specific policies for allocating between long-term and currently-paid compensation or between cash and non-cash compensation. The current approach to compensation is to remain competitive as compared to the market but to have

flexibility to tailor our approach to compensation by responding to market conditions and retention issues as they arise.

We believe that it is important to continually evaluate the competitiveness and effectiveness of our pay practices. In the past, we have done so by reviewing market survey data and data that reports on national market trends. Following this offering, we will continue to use those resources to evaluate the competitiveness of our compensation programs and also will periodically benchmark executive pay within our peer group. In fiscal 2011, Mercer assisted us in developing the list of our peer group companies, which we will use to benchmark compensation beginning in fiscal 2012.

The selected peer group consists of 18 companies from the Consumer Discretionary GICS Sector, which was further refined down to the GICS Sub Industry of Apparel, Textile & Luxury Goods, Electronics, Entertainment and Household Durable Goods categories with revenue ranging from one-half to two times our revenue. The decision to set the range for establishing the peer group at one-half to two times our revenue was made based on recommendations from Mercer due to our unique blend of businesses.

Base salaries for executive officers, including our Named Executive Officers, were reviewed during our fiscal 2011 annual compensation review process, which we refer to as our “merit process.” The Chief Executive Officer did not recommend salary increases for any of our Named Executive Officers for fiscal 2011, and the compensation committee did not determine to increase the CEO’s salary for fiscal 2011. Instead, we looked to award significant long-term incentives to better align our executives with our long-term strategy.

In August 2011, the compensation committee determined to increase our CEO’s base salary at the same time that it amended and restated his employment agreement effective January 1, 2012, among other things, to extend the term of his employment to December 31, 2013 (which was subsequently extended to March 31, 2015). In making its fiscal 2012 base salary determination for the CEO, the compensation committee took into account his fiscal 2011 performance, his fiscal 2011 annual incentive target and goals and the market data review and determined to increased his base salary from $600,000 to $800,000 beginning January 1, 2012.

We pay an annual cash incentive to our Named Executive Officers if certain performance goals are met. In fiscal 2011, we made changes to the performance goals used to determine annual

incentive payments under our Annual Incentive Plan. The fiscal 2011 goals were approved by the compensation committee and required attainment of certain company financial performance goals and individual project-based performance goals. Each Named Executive Officer was assigned a personalized set of goals that was intended to specifically align his performance to the company’s performance, based on his role within the company. Because our Chief Executive Officer is responsible for our performance, as a whole, for fiscal 2011, his annual incentive was determined, based solely on achievement of an EBITDA goal. In establishing EBITDA goals for purposes of our Annual Incentive Plan and for certain options granted to Mr. Thomas with performance-vesting conditions, we use a definition of EBITDA that differs from the definition of Adjusted EBITDA used elsewhere in this prospectus. EBITDA for these purposes is equal to Adjusted EBITDA as described under “Prospectus summary—Summary consolidated financial data—Non-GAAP financial measures,” further adjusted to exclude equity in losses from investees and foreign currency losses from hedging activities. The relative weighting of each of our Named Executive Officers’ fiscal 2011 performance goals under the Annual Incentive Plan is set forth in the table below.

The targets for each performance goal were determined by the compensation committee at the beginning of fiscal 2011. Achievement for each individual project-based goal was determined on an achieved or not achieved basis and, therefore, the threshold and maximum payouts were equal to target. All financial performance goals had a threshold of 90% of target performance, with the exception of our CEO and CFO, whose financial performance goals had a threshold of 100% of target performance, because their actual EBITDA target levels were lower than the applicable EBITDA target levels of our other Named Executive Officers. As set forth below, the maximum achievement for each financial goal is 125% of target performance.

No incentive is awarded with respect to a goal if the threshold for that performance goal is not achieved. Each individual project-based performance goal is personalized for each NEO and the Named Executive Officer could receive all or none of his target payout for that performance goal based on his specific performance. The financial goals for our CEO and CFO differ from the financial goals of our other Named Executive Officers due to the nature of the performance goals for each. The CEO’s performance goals were solely based on our financial performance and our CFO’s performance goals were primarily weighted towards our financial performance, while the other Named Executive Officers’ performance goals were more weighted toward individual project-based goals.

For fiscal 2011, target annual incentive awards for our NEOs were equal to 100% of base salary for the CEO and 50% of base salary for all other Named Executive Officers. Annual incentive awards for all NEOs were capped at 125% of the target award. Our Chief Executive Officer has a higher target annual incentive award as a percentage of compensation based on his responsibility for our overall financial performance and based on the compensation committee’s assessment of market practice.

The weighting of each company financial performance goal and individual project-based performance goal for each Named Executive Officer was determined by the compensation committee and is described in the following table. Each performance goal that is a component of a Named Executive Officer’s annual incentive calculation is individually considered by the compensation committee at the end of the performance year for the purpose of calculating that officer’s total annual incentive payment. For financial performance goals, the portion of the annual incentive that relates to each goal is based on the percentage of the goal achieved. For

individual project-based performance goals, the portion of the annual incentive that relates to that objective is only awarded if the objective is achieved.

Fiscal 2011 annual incentive plan weighting, threshold and target performance goals table


Delaware	3931	33-0081996
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x (do not check if a smaller reporting company)	Smaller reporting company	¨



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price (1)(2)	Amount of Registration Fee
Common Stock, $0.01 par value per share	$200,000,000	$22,920


	Per share	Total

Initial public offering price	$	$

Underwriting discounts and commissions	$	$

Proceeds to us, before expenses	$	$

Proceeds to selling stockholders, before expenses	$	$


	Shares eligible for sale
Date	Number of shares	Percentage of outstanding shares

On the date of this prospectus
90 days after the date of this prospectus
At various times beginning 181 days or more after the date of this prospectus



Baird	Stifel Nicolaus Weisel	Wells Fargo Securities


	Page

Prospectus summary		1

Risk factors		15

Special note regarding forward-looking statements		38

Use of proceeds		39

Dividend policy		39

Capitalization		40

Dilution		43

Selected consolidated financial data		45

Management’s discussion and analysis of financial condition and results of operations		48

Business		77

Management		102

Transactions with related persons		137

Principal and selling stockholders		140

Description of capital stock		143

Shares eligible for future sale		147

Material U.S. tax consequences to non-U.S. holders of common stock		150

Underwriting		154

Conflicts of interest		160

Validity of common stock		161

Experts		161

Where you can find more information		161

Index to consolidated financial statements		F-1


As of January 1, 2012 (in thousands, except share and per share data)	Actual			Pro forma (unaudited)			Pro forma as adjusted (1) (unaudited)

Cash and cash equivalents	$	12,971		$	12,971		$

Short-term debt	$	6,607		$	6,607		$
Long-term debt:
Revolver		—			—
Term loan		239,598			239,598

Redeemable common stock:
Class A and B common stock, par value $0.01 per share; 361,408 shares authorized, 4,920 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		5,887			—			—
Class C common stock, par value $0.01 per share; 77,176 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		93,902			—			—

Stockholders’ (deficit) equity:
Preferred stock, par value $0.01 per share; no shares, authorized, issued and outstanding, actual; shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted		—			—			—
Common stock, par value $0.01 per share; no shares authorized, issued and outstanding, actual; shares authorized, 196,112 shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted		—			2
Class A common stock, par value $0.01 per share; 276,572 shares authorized, 106,274 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma adjusted		1			—			—
Class B common stock, par value $0.01 per share; 84,836 shares authorized, 7,742 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		0			—			—
Additional paid-in capital		—			99,788
Accumulated other comprehensive income		4,775			4,775
Accumulated deficit		(72,587	)		(72,587	)

Total stockholders’ (deficit) equity		(67,811	)		31,978			—

Total capitalization	$	278,183		$	278,183		$	—


Assumed initial public offering price per share		$
Pro forma net tangible book value per share as of January 1, 2012	$
Increase in pro forma as adjusted net tangible book value per share attributable to new investors in this offering

Pro forma as adjusted net tangible book value per share after giving effect to this offering

Dilution per share to new investors in this offering		$


	Shares purchased			Total consideration			Average price per share
	Number	Percent		Amount	Percent		Average price per share
Existing stockholders			%	$		%	$
New investors in this offering

Totals			100.0%	$		100.0%	$


Fiscal year ended (in thousands, except share and per share data)	December 30, 2007 (1)			December 28, 2008			January 3, 2010			January 2, 2011			January 1, 2012

Consolidated statement of operations data:
Net sales	$	457,156		$	712,907		$	612,521		$	617,830		$	700,554
Cost of goods sold		299,121			485,072			420,919			447,250			483,020

Gross profit		158,035			227,835			191,602			170,580			217,534


Operating expenses:
Selling, general and administrative		88,234			150,349			125,711			121,651			137,128
Warehouse		14,699			26,536			25,878			27,713			28,426
Research and development		7,011			8,557			9,004			9,299			10,157
Impairment charges		—			32,570			1,200			—			—

Total operating expenses		109,944			218,012			161,793			158,663			175,711

Income from operations		48,091			9,823			29,809			11,917			41,823


Other income (expense):
Net foreign currency exchange gain (loss)		(832	)		1,781			(3,602	)		(1,175	)		(3,807	)
Interest expense		(24,521	)		(25,766	)		(15,636	)		(12,688	)		(14,927	)
Other, net		(1,977	)		533			1,723			(391	)		1,130

Total other income (expense)		(27,330	)		(23,452	)		(17,515	)		(14,254	)		(17,604	)

Income (loss) before income taxes		20,761			(13,629	)		12,294			(2,337	)		24,219
Income tax expense (benefit)		6,151			(5,435	)		1,507			(652	)		5,208

Net income (loss)		14,610			(8,194	)		10,787			(1,685	)		19,011
Net income available to redeemable common stockholders		69,844			—			4,724			15,584			15,785

Net income (loss) available (attributable) to common stockholders	$	(55,234	)	$	(8,194	)	$	6,063		$	(17,269	)	$	3,226


Net income (loss) per common share available (attributable) to common stockholders:
Basic	$	(493.99	)	$	(70.25	)	$	51.89		$	(147.75	)	$	28.38
Diluted	$	(493.99	)	$	(70.25	)	$	43.70		$	(147.75	)	$	24.72

Weighted average common shares outstanding:
Basic		111,812			116,640			116,853			116,877			113,691
Diluted		111,812			116,640			138,744			116,877			130,508


As of (in thousands)	December 30, 2007 (1)			December 28, 2008			January 3, 2010			January 2, 2011			January 1, 2012


Consolidated balance sheet data:
Cash and cash equivalents	$	28,784		$	19,369		$	44,961		$	15,990		$	12,971
Inventories		119,093			202,615			145,648			163,876			181,333
Working capital		145,242			183,080			169,912			184,489			190,569
Property and equipment—net		31,310			37,498			32,906			28,504			31,389
Total assets		272,476			422,161			356,772			346,897			366,580
Total debt and capital lease obligations, including current maturities		201,062			344,229			249,971			268,287			247,520
Total stockholders’ equity (deficit)		(133,348	)		(79,420	)		(68,308	)		(84,272	)		(67,811	)


Fiscal year	2009					2010					2011
(dollars in thousands)	Actual			Percent of net sales		Actual			Percent of net sales		Actual			Percent of net sales

Net sales	$	612,521			100.0%	$	617,830			100.0%	$	700,554			100.0%
Cost of goods sold		420,919			68.7%		447,250			72.4%		483,020			68.9%

Gross profit		191,602			31.3%		170,580			27.6%		217,534			31.1%

Operating expenses:
Selling, general and administrative		125,711			20.5%		121,651			19.7%		137,128			19.6%
Warehouse		25,878			4.2%		27,713			4.5%		28,426			4.1%
Research and development		9,004			1.5%		9,299			1.5%		10,157			1.4%
Impairment charges		1,200			0.2%		—			0.0%		—			0.0%

Total operating expenses		161,793			26.4%		158,663			25.7%		175,711			25.1%

Income from operations		29,809			4.9%		11,917			1.9%		41,823			6.0%

Other income (expense):
Net foreign currency exchange (loss)		(3,602	)		-0.6%		(1,175	)		-0.2%		(3,807	)		-0.5%
Interest expense		(15,636	)		-2.6%		(12,688	)		-2.1%		(14,927	)		-2.1%
Other, net		1,723			0.3%		(391	)		-0.1%		1,130			0.2%

Total other income (expense)		(17,515)			-2.9%		(14,254)			-2.3%		(17,604)			-2.5%
Income (loss) before income taxes		12,294			2.0%		(2,337	)		-0.4%		24,219			3.5%

Income tax expense (benefit)		1,507			0.2%		(652	)		-0.1%		5,208			0.7%

Net income (loss)	$	10,787			1.8%	$	(1,685	)		-0.3%	$	19,011			2.7%


Fiscal quarter ended (in thousands)	Apr. 4, 2010			Jul. 4, 2010 (1)			Oct. 3, 2010 (1)			Jan. 2, 2011			Apr. 3, 2011 (1)			Jul. 3, 2011 (1)			Oct. 2, 2011			Jan. 1, 2012

Net sales	$	147,666		$	126,388		$	164,534		$	179,242		$	170,106		$	167,747		$	175,395		$	187,306
Cost of goods sold		104,371			95,115			118,020			129,744			117,848			115,162			120,431			129,579

Gross profit		43,295			31,273			46,514			49,498			52,258			52,585			54,964			57,727


Operating expenses:
Selling, general and administrative		33,413			28,644			29,599			29,995			33,917			32,678			34,285			36,248
Warehouse		6,578			6,569			7,005			7,561			7,044			7,166			7,103			7,113
Research and development		2,495			2,265			2,335			2,204			2,397			2,622			2,477			2,661

Total operating expenses		42,486			37,478			38,939			39,760			43,358			42,466			43,865			46,022

Income from operations		809			(6,205	)		7,575			9,738			8,900			10,119			11,099			11,705

Other income (expense):
Net foreign currency exchange gain (loss)		144			(820	)		(96	)		(403	)		(269	)		6			(2,547	)		(997	)
Interest expense		(3,681	)		(3,543	)		(3,745	)		(1,719	)		(2,815	)		(5,325	)		(3,280	)		(3,507	)
Other, net		23			197			67			(678	)		371			177			158			424

Total other income (expense)		(3,514	)		(4,166	)		(3,774	)		(2,800	)		(2,713	)		(5,142	)		(5,669	)		(4,080	)

Income (loss) before income taxes		(2,705	)		(10,371	)		3,801			6,938			6,187			4,977			5,430			7,625
Income tax expense (benefit)		(901	)		(1,915	)		145			2,019			(695	)		1,636			1,446			2,821

Net income (loss)	$	(1,804	)	$	(8,456	)	$	3,656		$	4,919		$	6,882		$	3,341		$	3,984		$	4,804


Fiscal year
(in thousands)	2009			2010			2011

Net cash provided by operating activities	$	80,557		$	4,385		$	29,213
Net cash used in investing activities		(5,276	)		(5,308	)		(10,576	)
Net cash used in financing activities		(50,344	)		(27,398	)		(21,589	)
Effect of exchange rate changes on cash and cash equivalents		655			(650	)		(67	)

Increase (decrease) in cash and cash equivalents	$	25,592		$	(28,971	)	$	(3,019	)


J.P. Morgan		William Blair & Company


Building		30-39 years
Machinery and equipment		3-10 years
Furniture and fixtures		3-7 years
Computer hardware and software		3-5 years
Leasehold improvements		Lesser of estimated useful life or life of lease


Grant date	Type of award granted	Number of awards granted		Exercise price per share of common stock		Estimated fair value per share of common stock

June 17, 2009	stock options		310	$	628.00 to $846.00	$	627.10
May 5, 2010	restricted stock units		300		706.00		705.23
August 1,2010	stock options		3,882		706.00		705.23
June 9, 2011	stock options		21,378		987.00		986.65
August 15, 2011	stock options		10,025		987.00		986.65
October 3, 2011	stock options		500		987.00		986.65


Payments due by period (in thousands)	Total		Less than one year		1 – 3 years		3 – 5 years		More than 5 years

Principal repayment	$	246,205	$	6,607	$	239,598	$	—	$	—
Interest payment (1)		15,138		5,773		9,365		—		—
Capital lease obligations		1,370		728		566		76		—
Operating lease obligations		63,505		11,638		18,369		15,543		17,955
Royalty agreements (2)		1,500		1,500		—		—		—
Purchase commitments (3)		10,100		10,100		—		—		—

Total contractual obligations	$	337,818	$	36,346	$	267,898	$	15,619	$	17,955


Category	Products	% of gross sales before discounts and allowances


Fretted instruments			59.9	%

Guitar amplifiers			12.1	%

Percussion			9.1	%

Accessories/other			18.9	%


Location		Principal uses

Scottsdale, Arizona		Executive and administrative offices, electronics research and development, manufacturing
Corona, California		Guitar manufacturing, Custom Shop and electronic manufacturing, Visitor Center
Ontario, California		Central warehouse and sales office
Burbank, California		Artist Relations
Bloomfield, Connecticut		Executive and administrative offices for KMC
New Hartford, Connecticut		Manufacturing and office space
Effingham, Illinois		Sales office
Louisville, Kentucky*		Warehouse and office space
Garfield, New Jersey		Office space
Charleston, South Carolina		Office space
Ridgeland, South Carolina		Manufacturing
Nashville, Tennessee		Artist Relations
Portland, Tennessee		Warehouse and office
Austin, Texas		Artist Relations
Mississauga, Ontario, Canada		Office space and warehouse
Horsham, West Sussex, England		European sales and marketing



East Grinstead, West Sussex, England		Fender U.K. sales and marketing
Clichy, France		Fender France sales and marketing
Düsseldorf, Germany		Fender Germany sales and marketing
Hamamatsu, Japan		Market development
Ensenada, Mexico		Production and distribution facilities
Madrid, Spain		Fender Iberica sales and marketing
Gothenburg, Sweden		Fender Scandinavia sales and marketing



Name	Age	Position

*Executive officers*

Larry E. Thomas	62	Chief Executive Officer and Director

James S. Broenen	49	Chief Financial Officer and Corporate Treasurer

Mark D. Van Vleet	46	Chief Legal Officer, Corporate Secretary and Senior Vice President of Business Development

Edward G. Miller	64	President of KMC Musicorp

Gordon L. T. Raison	46	Managing Director, Europe

Andrew M. Rossi	49	Senior Vice President, Global Sales

*Directors*

Conrad A. Conrad (1)	66	Director

Mark H. Fukunaga (1)(3)	56	Co-Chairman of the Board

Kenneth L. Goodson Jr. (2)	59	Director

Donald Haider (1)(2)	70	Director

Michael P. Lazarus (2)(3)	56	Co-Chairman of the Board

William L. Mendello	67	Director

Robert C. Wood (1)(3)	57	Director



	Fees earned or paid in cash (1)		Option awards (2)		All other compensation (3)		Total

Conrad A. Conrad	$	46,500	$	123,593	$	—	$	170,093
Laurence Franklin(4)	$	30,000	$	123,593	$	—	$	153,593
Mark Fukunaga	$	41,000	$	123,593	$	—	$	164,593
Kenneth L. Goodson	$	36,000	$	123,593	$	3,500	$	163,093
Donald Haider	$	42,000	$	123,593	$	—	$	165,593
Michael P. Lazarus	$	35,000	$	123,593	$	—	$	158,593
William L. Mendello	$	33,000	$	123,593	$	—	$	156,593
Robert C. Wood(5)	$	28,917	$	123,593	$	—	$	152,510



	Audit committee	Compensation committee	Nominating and corporate governance committee

Conrad A. Conrad	Chair		X
Laurence Franklin
Mark Fukunaga	X	X	Chair
Kenneth L. Goodson	X	X
Donald Haider	X	Chair	X
Michael P. Lazarus		X	X
William L. Mendello		X
Robert C. Wood		X
Number of Meetings	3	4	1


Name		Title

Larry E. Thomas		Chief Executive Officer
James S. Broenen		Chief Financial Officer and Corporate Treasurer
Mark D. Van Vleet		Chief Legal Officer, Corporate Secretary, Senior Vice President of Business Development
Andrew M. Rossi		Senior Vice President, Global Sales
Gordon L. T. Raison		Managing Director, Europe



Executive	Fixed % (1)		Total variable % (2)		Annual variable % (3)		Long-term variable % (4)

Larry E. Thomas		15%		85%		33%		67%
James S. Broenen		16%		84%		25%		75%
Mark D. Van Vleet		45%		55%		67%		33%
Andrew M. Rossi		28%		72%		44%		56%
Gordon L. T. Raison		28%		72%		33%		67%


Arctic Cat Inc.		Lululemon Athletica Inc.
Avid Technology, Inc.		Movado Group, Inc.
Callaway Golf Co.		Oxford Industries Inc.
Dolby Laboratories, Inc.		Polycom, Inc.
Elizabeth Arden, Inc.		Steinway Musical Instruments Inc.
Helen of Troy Ltd.		Tempur Pedic International Inc.
Inter Parfums Inc.		Under Armour, Inc.
JAKKS Pacific, Inc.		Universal Electronics Inc.
Johnson Outdoors Inc.		VOXX International Corporation


	Performance weighting			Threshold required (% of target performance)	Goal type	Payout based on achievement (% of target performance)
	Performance weighting			Threshold required (% of target performance)	Goal type	Threshold	Target	Maximum

Larry E. Thomas		100	%	FMIC EBITDA	Financial	100%	100%	125%

James S. Broenen		20	%	Cash Flow from Operations	Financial	100%	100%	125%
		70	%	FMIC EBITDA	Financial	100%	100%	125%
		10	%