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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2001

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 000-22207

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GUITAR CENTER, INC.(Exact Name of Registrant as Specified in its Charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

95-4600862(I.R.S. Employer
Identification Number)5795 LINDERO CANYON ROAD
WESTLAKE VILLAGE, CALIFORNIA(Address of principal executive offices)

91361(Zip Code)


(818) 735-8800Registrant's telephone number, including area code

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

As
of August 1, 2001, 22,286,235 shares of our Common Stock, $.01 par value, were outstanding.

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Guitar Center, Inc. and subsidiaries    INDEX

|Part I.  |  | Financial Information                                                                         |  |   
|-------- |  | --------------------------------------------------------------------------------------------- |  | --
|         |  | Item 1. Consolidated Financial Statements (Unaudited)                                         |  |   
|         |  | Consolidated Balance SheetsJune 30, 2001 and December 31, 2000                               |  | 3 
|         |  | Consolidated Statements of IncomeThree months ended June 30, 2001 and 2000                   |  | 4 
|         |  | Consolidated Statements of IncomeSix months ended June 30, 2001 and 2000                     |  | 5 
|         |  | Consolidated Statements of Cash FlowsSix months ended June 30, 2001 and 2000                 |  | 6 
|         |  | Notes to Consolidated Financial Statements                                                    |  | 7 
|         |  | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 9 
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 19
|Part II. |  | Other Information                                                                             |  |   
|         |  | Item 1. Not Applicable                                                                        |  |   
|         |  | Item 2. Changes in Securities and Use of Proceeds                                             |  | 20
|         |  | Item 3. Not Applicable                                                                        |  |   
|         |  | Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 20
|         |  | Item 5. Other Information                                                                     |  | 20
|         |  | Item 6. Exhibits                                                                              |  | 21

2

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Guitar Center, Inc. and subsidiaries  Consolidated Balance Sheets(in thousands)

|                                       |                                                                                                                                                       | June 30, 2001 |         | December 31, 2000 |  
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ------- | ----------------- | -
|Assets                                 |                                                                                                                                                       |               |         |                   |  
|Current assets:                        |                                                                                                                                                       |               |         |                   |  
|                                       | Cash and cash equivalents                                                                                                                             |               | $       | 391               |  
|                                       | Accounts receivable, net                                                                                                                              |               |         | 18,006            |  
|                                       | Merchandise inventory, net                                                                                                                            |               |         | 234,971           |  
|                                       | Prepaid expenses and deposits                                                                                                                         |               |         | 6,397             |  
|                                       | Deferred income tax                                                                                                                                   |               |         | 5,931             |  
|                                       |                                                                                                                                                       |               |         |                   |  
|Total current assets                   |                                                                                                                                                       |               | 265,696 |                   |  
|Property and equipment, net            |                                                                                                                                                       |               | 72,933  |                   |  
|Goodwill, net                          |                                                                                                                                                       |               | 21,465  |                   |  
|Deposits and other assets, non-current |                                                                                                                                                       |               | 11,830  |                   |  
|                                       |                                                                                                                                                       |               |         |                   |  
|                                       |                                                                                                                                                       | $             | 371,924 |                   | $
|                                       |                                                                                                                                                       |               |         |                   |  
|Liabilities and stockholders' equity   |                                                                                                                                                       |               |         |                   |  
|Current liabilities:                   |                                                                                                                                                       |               |         |                   |  
|                                       | Accounts payable                                                                                                                                      |               | $       | 68,914            |  
|                                       | Accrued expenses and other current liabilities                                                                                                        |               |         | 25,324            |  
|                                       | Merchandise advances                                                                                                                                  |               |         | 10,287            |  
|                                       | Revolving line of credit                                                                                                                              |               |         | 78,621            |  
|                                       | Current portion of long-term debt                                                                                                                     |               |         | 725               |  
|                                       |                                                                                                                                                       |               |         |                   |  
|Total current liabilities              |                                                                                                                                                       |               | 183,871 |                   |  
|Other long-term liabilities            |                                                                                                                                                       |               | 3,092   |                   |  
|Deferred tax liability                 |                                                                                                                                                       |               | 2,160   |                   |  
|Long-term debt                         |                                                                                                                                                       |               | 67,288  |                   |  
|                                       |                                                                                                                                                       |               |         |                   |  
|Total liabilities                      |                                                                                                                                                       |               | 256,411 |                   |  
|Stockholders' equity:                  |                                                                                                                                                       |               |         |                   |  
|                                       | Preferred Stock; authorized 5,000 shares at June 30, 2001 and December 31, 2000, none issued and outstanding                                          |               |         |                  |  
|                                       | Common stock, $0.01 par value, authorized 55,000 shares, issued and outstanding 22,278 at June 30, 2001 and 22,087 at December 31, 2000, respectively |               |         | 223               |  
|                                       | Additional paid in capital                                                                                                                            |               |         | 247,661           |  
|                                       | Accumulated deficit                                                                                                                                   |               |         | (132,371          | )
|                                       |                                                                                                                                                       |               |         |                   |  
|Total stockholders' equity             |                                                                                                                                                       |               | 115,513 |                   |  
|                                       |                                                                                                                                                       |               |         |                   |  
|                                       |                                                                                                                                                       | $             | 371,924 |                   | $
|                                       |                                                                                                                                                       |               |         |                   |  

See
accompanying notes to consolidated financial statements.

3

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Guitar Center, Inc. and subsidiaries  Consolidated Statements of Income(in thousands, except per share data)

|                                             |         | Three months ended June 30,
|-------------------------------------------- | ------- | ---------------------------
|
|Net sales                                    |         | $                          
|Cost of goods sold, buying and occupancy     |         |                            
|                                             |         |                            
|Gross profit                                 |         |                            
|Selling, general and administrative expenses |         |                            
|                                             |         |                            
|Operating income                             |         |                            
|Interest expense, net                        |         |                            
|                                             |         |                            
|Income before income taxes                   |         |                            
|Income taxes                                 |         |                            
|                                             |         |                            
|Net income                                   |         | $                          
|                                             |         |                            
|Net income per share                         |         |                            
|                                             | Basic   |                            
|                                             |         |                            
|                                             | Diluted |                            
|                                             |         |                            
|Weighted average shares outstanding          |         |                            
|                                             | Basic   |                            
|                                             |         |                            
|                                             | Diluted |                            
|                                             |         |                            

See
accompanying notes to consolidated financial statements.

4

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Guitar Center, Inc. and subsidiaries  Consolidated Statements of Income(in thousands, except per share data)

|                                             |         | Six months ended June 30,
|-------------------------------------------- | ------- | -------------------------
|
|Net sales                                    |         | $                        
|Cost of goods sold, buying and occupancy     |         |                          
|                                             |         |                          
|Gross profit                                 |         |                          
|Selling, general and administrative expenses |         |                          
|                                             |         |                          
|Operating income                             |         |                          
|Interest expense, net                        |         |                          
|                                             |         |                          
|Income before income taxes                   |         |                          
|Income taxes                                 |         |                          
|                                             |         |                          
|Net income                                   |         | $                        
|                                             |         |                          
|Net income per share                         |         |                          
|                                             | Basic   |                          
|                                             |         |                          
|                                             | Diluted |                          
|                                             |         |                          
|Weighted average shares outstanding          |         |                          
|                                             | Basic   |                          
|                                             |         |                          
|                                             | Diluted |                          
|                                             |         |                          

See
accompanying notes to consolidated financial statements.

5

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Guitar Center, Inc. and subsidiaries  Consolidated Statements of Cash Flows(in thousands)

|                                                                                                                                                                                                 |                                              | Six months ended June 30,                      |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ---------------------------------------------- | -------
|
|Operating activities                                                                                                                                                                             |                                              |                                                |        
|Net income                                                                                                                                                                                       |                                              | $                                              | 9,080  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities:                                                                                                      |                                              |                                                |        
|                                                                                                                                                                                                 | Depreciation and amortization                |                                                |        
|                                                                                                                                                                                                 | Amortization of deferred financing fees      |                                                |        
|                                                                                                                                                                                                 | Loss on sale of assets                       |                                                |        
|                                                                                                                                                                                                 | Changes in operating assets and liabilities: |                                                |        
|                                                                                                                                                                                                 |                                              | Accounts receivable                            |        
|                                                                                                                                                                                                 |                                              | Merchandise inventories                        |        
|                                                                                                                                                                                                 |                                              | Prepaid expenses                               |        
|                                                                                                                                                                                                 |                                              | Other assets                                   |        
|                                                                                                                                                                                                 |                                              | Accounts payable                               |        
|                                                                                                                                                                                                 |                                              | Accrued expenses and other current liabilities |        
|                                                                                                                                                                                                 |                                              | Other long term liabilities                    |        
|                                                                                                                                                                                                 |                                              | Merchandise advances                           |        
|                                                                                                                                                                                                 |                                              |                                                |        
|Net cash (used in) provided by operating activities                                                                                                                                              |                                              |                                                | (14,618
|Investing activities                                                                                                                                                                             |                                              |                                                |        
|Purchase of property and equipment                                                                                                                                                               |                                              |                                                | (12,427
|Investment in non-consolidated entity                                                                                                                                                            |                                              |                                                | (150   
|Purchase of American Music Group, net of cash acquired                                                                                                                                           |                                              |                                                | (28,482
|Purchase of Veneman Music, net of cash acquired                                                                                                                                                  |                                              |                                                |       
|Proceeds from sale of assets                                                                                                                                                                     |                                              |                                                | 16     
|                                                                                                                                                                                                 |                                              |                                                |        
|Net cash used in investing activities                                                                                                                                                            |                                              |                                                | (41,043
|Financing activities                                                                                                                                                                             |                                              |                                                |        
|Net change in revolving debt facility                                                                                                                                                            |                                              |                                                | 42,753 
|Proceeds from exercise of stock options                                                                                                                                                          |                                              |                                                | 878    
|Payments under capital lease                                                                                                                                                                     |                                              |                                                | (513   
|                                                                                                                                                                                                 |                                              |                                                |        
|Net cash provided by financing activities                                                                                                                                                        |                                              |                                                | 43,118 
|Net (decrease) increase in cash and cash equivalents                                                                                                                                             |                                              |                                                | (12,543
|Cash and cash equivalents at beginning of year                                                                                                                                                   |                                              |                                                | 12,934 
|                                                                                                                                                                                                 |                                              |                                                |        
|Cash and cash equivalents at end of period                                                                                                                                                       |                                              | $                                              | 391    
|                                                                                                                                                                                                 |                                              |                                                |        
|Non-cash activities                                                                                                                                                                              |                                              |                                                |        
|Guitar Center purchased all of the assets of American Music Group (2001) and the stock of Veneman Music Group (2000). In conjunction with the acquisitions, liabilities were assumed as follows: |                                              |                                                |        
|Fair value of assets acquired                                                                                                                                                                    |                                              |                                                | 22,628 
|Liabilities assumed                                                                                                                                                                              |                                              |                                                | (8,235 
|Goodwill                                                                                                                                                                                         |                                              |                                                | 16,181 
|Common stock issued                                                                                                                                                                              |                                              |                                                | (2,092 
|                                                                                                                                                                                                 |                                              |                                                |        
|Net cash paid for acquisitions                                                                                                                                                                   |                                              |                                                | 28,482 
|Cash acquired in acquisitions                                                                                                                                                                    |                                              |                                                | 278    
|                                                                                                                                                                                                 |                                              |                                                |        
|Cash paid for acquisitions                                                                                                                                                                       |                                              |                                                | 28,760 
|                                                                                                                                                                                                 |                                              |                                                |        
|Borrowings under capital leases                                                                                                                                                                  |                                              |                                                | 473    
|                                                                                                                                                                                                 |                                              |                                                |        

See
accompanying notes to consolidated financial statements.

6

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Guitar Center, Inc. and subsidiaries  Notes to Consolidated Financial Statements

1.  General



2.  Acquisitions



7

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3.  Segment Information



|                           |  | Three Months Ended
June 30, 2001 |         | Six Months Ended
June 30, 2001
|-------------------------- |  | -------------------------------- | ------- | ------------------------------
|
|Net Sales                  |  | $                                | 180,139 |                               
|Income before income taxes |  |                                  | 5,490   |                               
|Total Assets               |  |                                  | 341,302 |                               

|                           |  | Three Months Ended
June 30, 2000 |         | Six Months Ended
June 30, 2000
|-------------------------- |  | -------------------------------- | ------- | ------------------------------
|
|Net Sales                  |  | $                                | 149,579 |                               
|Income before income taxes |  |                                  | 5,182   |                               
|Total Assets               |  |                                  | 273,130 |                               

4.  Debt



8

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We operated 87 Guitar Center retail locations in 35 major markets and four Guitar Center stores in secondary markets as of June 30, 2001. We also
operate the largest direct response channel (Musician's Friend catalog and Internet) in the musical instruments industry in the United States. In addition, we acquired the assets of American Music
Group and related companies in the second quarter of 2001. American Music Group is a leading provider of band instruments and accessories, and primarily focuses on school band and orchestra sales and
rentals. This business will be operated as a division of our Guitar Center retail business. The acquisition of the American Music Group business offers us a strong point of entry into the band
instrument market. We believe that this acquisition is complementary to our existing Guitar Center stores and direct response business, and that it further enhances our leadership position in the
overall musical instrument industry.

From
1996 to 2000, our net sales grew at an annual compound rate of 31.9%, principally due to the comparable store sales growth of our Guitar Center stores averaging 10% per year, the
opening of new stores, and a 31% per year increase in the direct response channel. We believe such volume increases are the result of the continued success of the implementation of our business
strategy, continued growth in the music products industry and increasing consumer awareness of the Guitar Center, Musician's Friend and American Music Group brand names. We do not expect comparable
store sales to continue to increase at historical rates.

We
opened fourteen Guitar Center stores in 2000, one of which was acquired from Veneman Music in May 2000. As of June 30, 2001, we had opened eight additional Guitar
Center stores. Presently, we expect to open one to two additional larger formats Guitar Center stores and three to four smaller format Guitar Center stores during the remainder of 2001. We will
continue to pursue our strategy of clustering stores in major markets to take advantage of operating and advertising efficiencies and to build awareness of the Guitar Center name in new markets. In
some markets this clustering strategy results in some transfer of sales from existing stores to new locations.

As
we enter new markets, we expect that we will initially incur higher administrative and promotional costs per store than is currently experienced in established markets. We expect
competition to continue to increase as other music products retailers attempt to execute national growth strategies. Our business strategy will also emphasize opportunities to continue to grow each of
our businesses, including through further acquisitions if attractive candidates can be located for reasonable prices.

The
following table sets forth historical income statement data as a percentage of net sales:

|                                              |  | Three Months Ended
June 30, |   | Six Months Ended
June 30, |  
|--------------------------------------------- |  | --------------------------- | - | ------------------------- | -
|
|Net sales                                     |  | 100.0                       | % | 100.0                     | %
|Gross profit                                  |  | 26.3                        |   | 25.8                      |  
|Selling, general, and administrative expenses |  | 21.6                        |   | 20.4                      |  
|                                              |  |                             |   |                           |  
|Operating income                              |  | 4.7                         |   | 5.4                       |  
|Interest expense, net                         |  | 1.6                         |   | 1.7                       |  
|                                              |  |                             |   |                           |  
|Income before income taxes                    |  | 3.1                         |   | 3.7                       |  
|Income taxes                                  |  | 1.2                         |   | 1.4                       |  
|                                              |  |                             |   |                           |  
|Net income                                    |  | 1.9                         |   | 2.3                       |  
|                                              |  |                             |   |                           |  

Results Of Operations

Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30, 2000.

Net
sales increased to $213.4 million for the three months ended June 30, 2001, from $178.6 million for the comparable prior period, a 19.5% increase. Net sales
from retail stores totaled

9

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$180.1 million, an increase of $30.6 million, or 20.4%. Sales from new stores, including $6.0 million contributed by the newly acquired American Music Group stores, represented
$22.5 million, or 73.6% of the increase. Comparable store sales increased 5%. Our management is presently anticipating comparable store sales growth of 5 to 7 percent for the immediate
future, although fluctuations will undoubtedly take place from period to period. The foregoing statement is a forward-looking statement and is subject to the qualifications set forth below under
"Forward Looking Statements." Net sales from the direct response channel totaled $33.2 million, a $4.3 million, or 14.7% increase from the second quarter of 2000. Logistical issues
related to the consolidation of warehouse facilities encountered during the final week of June resulted in approximately $2 million in orders unshipped at June 30, 2001, an amount much
higher than historical order fulfillment productivity. The delayed orders were instead shipped in July 2001. The growth in direct response sales has been driven by continued increases in
Internet sales offset by declining catalog sales. Internet sales increased 79.0% to $16.0 million from $9.0 for the same period last year. Catalog sales for the three months ended
June 30, 2001 compared to 2000 decreased 14.0% to $17.2 million from $20.0 million. The trend in favor of Internet sales over catalog sales is expected to continue. We believe
that revenues in the direct response division were adversely affected by weak economic conditions that are affecting the hobbyist customer base of this unit.

Gross
profit dollars for the three months ended June 30, 2001 compared to 2000 increased 21.9% to $56.1 million from $46.0 million. Gross profit as a percentage
of net sales for the three months ended June 30, 2001 compared to 2000 increased to 26.3% from 25.8%. Gross profit margin percentage for the retail stores after buying and occupancy costs was
25.7% compared to 25.2% in the second quarter of 2000. The combined results for the retail stores reflect the higher gross margin of the American Music Group business compared to the Guitar Center
retail business. Pressure on selling prices is expected to continue for at least the next several quarters in light of a competitive marketplace for retailers and weak economic conditions. The gross
profit margin for the direct response division was 29.5% for the quarter compared to 29.1% in the second quarter of 2000.

Selling,
general and administrative expenses for the three months ended June 30, 2001 compared to 2000 increased 26.6% to $46.2 million from $36.5 million. As a
percentage of sales, selling, general and administrative expenses for the three months ended June 30, 2001 compared to 2000 increased to 21.6% from 20.4%. Selling, general and administrative
expenses for the retail stores in the second quarter, inclusive of pre-opening costs and corporate general and administrative expenses, was 21.0% as a percentage of sales compared to 20.0%
in last year's second quarter. The increase reflects increased rent and related relocation expenses for the new corporate office occupied in April 2001 and the higher
level of expense for the American Music Group business as compared to the Guitar Center retail business. Selling, general and administrative expenses for the direct response division were 25.1% as a
percentage of sales in the second quarter compared to 22.4% in the same period last year. The increase primarily reflects costs associated with the closing of our Medford and Knoxville fulfillment
centers, and consolidation of operations to Kansas City.

Operating
income, for the reasons stated above, increased from $9.6 million to $9.9 million, or 3.7%, for the three months ended June 30, 2001 as compared to
2000.

Interest
expense, net for the three months ended June 30, 2001 increased to $3.3 million from $3.0 million in the same period of 2000. The increase reflects
increased borrowings under our credit facility, partially offset by a reduction in interest rates applicable to those borrowings.

In
the three months ended June 30, 2001 and 2000, a $2.5 million provision for income taxes was recorded, both based on an annualized tax rate of 38%.

Net
income was $4.1 million for the three months ended June 30, 2001 and 2000.

10

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Net sales increased to $426.5 million for the six months ended June 30, 2001, from $354.4 million for the comparable prior period, a 20.4%
increase. Net sales from retail stores totaled $354.3 million, an increase of $59.4 million, or 20.1%. Sales from new stores, including $6.0 million contributed by the newly
acquired American Music Group stores, represented $41.4 million, or 69.7% of the increase. Comparable store sales increased 6%. Our management is presently anticipating comparable store sales
growth of 5 to 7 percent for the immediate future, although fluctuations will undoubtedly take place from period to period. The foregoing statement is a forward-looking statement and is subject
to the qualifications set forth below under "Forward Looking Statements." Net sales from the direct response channel totaled $72.2 million, a $12.7 million, or 21.4%, increase from the
six months ended June 30, 2000. Logistical issues related to the consolidation of warehouse facilities encountered during the final week of June resulted in approximately $2 million in
orders unshipped at June 30, 2001, an amount much higher than historical order fulfillment productivity. The delayed orders were instead shipped in July 2001. The growth in direct
response sales has been driven by continued increases in Internet sales offset by declining catalog sales. Internet sales increased 98.0% to $33.3 million from $16.8 for the same period last
year. Catalog sales for the six months ended June 30, 2001 compared to 2000 decreased 8.8% to $38.9 million from $42.7 million. The trend in favor of Internet sales over catalog
sales is expected to continue. We believe that revenues in the direct response division were adversely affected by weak economic conditions that are affecting the hobbyist customer base of this unit.

Gross
profit dollars for the six months ended June 30, 2001 compared to 2000 increased 21.5% to $111.0 million from $91.3 million. Gross profit as a percentage of
net sales for the six months ended June 30, 2001 compared to 2000 increased to 26.0% from 25.8%. Gross profit margin percentage for the retail stores after buying and occupancy costs was 25.1%
compared to 25.2% for the six months ended June 30, 2000. Retail gross margins have decreased due to aggressive pricing on certain inventory items designed to narrow our merchandise assortment,
offset by higher gross margins for the American Music Group business compared to the Guitar Center business. Pressure on selling prices is expected to continue for at least the next several quarters
in light of a competitive marketplace for retailers and weak economic conditions. The gross profit margin for the direct response division was 30.6% for the six months ended June 30, 2001
compared to 28.4% for the six months ended June 30, 2000. The increase in the direct response gross profit is primarily due to a higher priced assortment offered during the period and effective
targeted marketing.

Selling,
general and administrative expenses for the six months ended June 30, 2001 compared to 2000 increased 24.6% to $89.9 million from $72.2 million. As a
percentage of sales, selling, general and administrative expenses for the six months ended June 30, 2001 compared to 2000 increased to 21.1% from 20.4%. Selling, general and administrative
expenses for the retail stores in the second quarter, inclusive of pre-opening costs and corporate general and administrative expenses, was 20.5% as a percentage of sales in the six months
ended June 30, 2001 compared to 20.0% in 2000. The increase
reflects increased rent and related relocation expenses for the new corporate office occupied in April 2001 and the higher level of expense for the American Music Group business as compared to
the Guitar Center retail business. Selling, general and administrative expenses for the direct response division were 24.0% in the six months ended June 30, 2001 compared to 22.3% in the same
period last year. The increase primarily reflects costs associated with the closing of our Medford and Knoxville fulfillment centers, consolidation of operations to Kansas City, higher marketing costs
as a result of additional mailings of catalogs to prospective customers during this period.

Operating
income, for the reasons stated above, increased from $19.1 million to $21.0 million, or 9.7%, for the three months ended June 30, 2001 as compared to
2000.

11

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Interest expense, net for the six months ended June 30, 2001 increased to $6.4 million from $6.0 million in the same period of 2000. The increase reflects
increased borrowings under our credit facility, partially offset by a reduction in interest rates applicable to those borrowings.

In
the six months ended June 30, 2001, a $5.6 million provision for income taxes was recorded compared to $5.0 million for the same period last year, both based
on an annualized tax rate of 38%.

Net
income for the six months ended June 30, 2001 was $9.1 million, compared to $8.2 million in the same period of 2000.

Liquidity and Capital Resources

Our need for liquidity will arise primarily from interest payable on indebtedness and the funding of capital expenditures and working capital requirements, as
well as possible acquisitions. We have historically financed our operations through internally generated funds and borrowings under our credit facilities. We have no mandatory payments of principal on
the $66.7 million of Senior Notes outstanding prior to their final maturity in 2006. As of June 30, 2001, we had $78.6 million outstanding under the 2001 Credit Facility,
excluding $936,000 outstanding on standby letters of credit, and had available borrowings of approximately $7.4 million.

In
the second quarter of 2001, we amended our credit facility with Foothill Capital Corporation in connection with our acquisition of the American Music Group business. The amended
agreement provides for borrowings of up to $150 million, subject to borrowing base limitations tied to inventory and accounts receivable, less a limitation of $15 million. In the third
quarter of 2001, the credit facility
was amended to reduce the $15 million limitation to $10 million until August 31, 2001, at which time the limitation will return to $15 million. The facility expires in
2004, and is subject to certain financial covenants. The facility is secured by certain assets of the Company and its subsidiaries.

For
the six months ended June 30, 2001, cash used by operating activities was $14.6 million, which principally consisted of purchases of inventory and a decrease in
accounts payable. Cash used in investing activities totaled $41.0 million, which principally consisted of capital expenditures under our store expansion program ($12.4 million) and the
acquisition of the American Music Group business ($28.5 million). Cash provided by financing activities totaled $43.1 million, which principally consisted of borrowings under the credit
facility, of which $28.5 million was used to acquire American Music Group.

We
intend to pursue an aggressive growth strategy by opening additional stores in new and existing markets. During the six months ended June 30 2001, we opened eight new
stores. Each new large format Guitar Center store typically has required approximately $1.6 to $1.8 million for gross inventory. Historically, our cost of capital improvements for a large
format Guitar Center new store has been approximately $850,000, consisting of leasehold improvements, fixtures and equipment. We incur higher costs in some geographic areas, particularly the
Northeast. We have developed smaller Guitar Center stores to build in secondary markets or sites that we do not believe will support our large format units. The first of these units was opened in late
2000 and the second in July 2001. Our small format stores will incur approximately $400,000 to $450,000 in capital expenditures and require approximately $600,000 to $800,000 in inventory.

We
are also evaluating additional capital and strategic requirements related to improving our fulfillment facilities and technology and pursuing new opportunities in the
e-commerce activities of Guitar Center and Musician's Friend, and related businesses. We leased a new distribution facility for Musician's Friend in Kansas City, which is operational. In
the second quarter of 2001, we closed our existing distribution facilities in Medford, Oregon and Knoxville, Tennessee and consolidated all direct response fulfillment in Kansas City.

12

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We intend during 2001 to begin construction of a central warehouse/distribution center in the Indianapolis, Indiana area for our retail store operations with a view towards the
facility commencing operation in 2002. Migration from our present "drop-ship" model to a centralized distribution model is an important development in our operating strategy and will
require significant financial and managerial resources for the next several quarters.

We
also continue to make significant investments in information technology across our businesses and to incur costs and make investments designed to expand the reach of the Guitar
Center and Musician's Friend brands on the Internet. The costs of these initiatives and other investments related to our businesses will continue to be significant.

Our
expansion strategy is to continue to increase our market share in existing markets and to penetrate strategically selected new markets. We opened a total of 14 stores in 2000 and
13 stores in 1999. As of June 30, 2001 we had opened eight additional Guitar Center stores and currently anticipate opening approximately five to six more before the end of the year. In 2002,
we anticipate opening approximately 12 to 14 Guitar Center stores, some of these stores will be new smaller format units designed for secondary markets. In addition, we plan to open six to eight
American Music Group stores during 2002.

We
believe there may be attractive opportunities to expand by selectively acquiring existing music products retailers. In April 2001, we acquired the assets of American Music
Group Ltd., and related companies, a New York-based musical instrument retailer specializing in the sale and rental of band instruments and accessories.

Goodwill
was recorded in respect of the American Music Group acquisition for any consideration paid in excess of fair value. Goodwill is amortized over twenty years. On
July 20, 2001, the Financial Accounting Standards Board issued Statement No. 141,Business Combinations (SFAS No. 141),and
Statement No. 142,Goodwill and Other Intangible Assets(SFAS No. 142). SFAS No. 141 addresses financial accounting and reporting
for business combinations. This statement requires the purchase method of accounting to be used for all business combinations, and prohibits the pooling-of-interests method of
accounting. This statement is effective for all business combinations initiated after June 30, 2001 and supercedes APB Opinion No. 16, "Business Combinations" as well as Statement of
Financial Accounting Standards No. 38,Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement requires goodwill to be
periodically reviewed for impairment rather than amortized, for fiscal years beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets". We
presently intend to adopt the new rules effective January 1, 2002, at which time we will cease to record periodic goodwill charges absent an impairment charge. As of June 30, 2001, we
had recorded on our consolidated balance sheet $21.5 million of goodwill, the majority of which relates to the American Music Group acquisition. We do not expect the adoption of these standards
to have a material effect on our consolidated financial statements.

We
may also consider acquisitions which are complimentary to other parts of our business, such as our direct response division, if attractive opportunities can be identified. While we
cannot provide assurance that we will complete any further acquisition transactions, in the ordinary course of our business we investigate and engage in negotiations regarding such opportunities.
Acquisitions will be financed with drawings under our existing credit facilities, expansion of our credit facilities, issuance of debt or equity securities, or a combination, depending upon
transaction size and market conditions, among other things. Separate and apart from our acquisition strategy, we may elect to raise additional capital in the form of common or preferred equity, debt
or convertible securities for the purpose of providing additional capital or to refinance existing obligations. Any such financing activity will be dependent upon many factors, including our liquidity
needs, market conditions and prevailing market

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terms, and we can not assure you that future external financing for Guitar Center will be available on attractive terms or at all.

Seasonality

Our operating results are not highly seasonal, except for the effect of the holiday selling season in November and December. Sales in the fourth quarter are
typically significantly higher on a per store basis and through the direct response unit than in any other quarter.

Inflation

We believe that the relatively moderate rates of inflation experienced in recent years have not had a significant impact on our net sales or profitability.

Forward Looking Statements

This report contains forward-looking statements relating to, among other things, future results of operations, growth and investment plans, sales, trends in
gross margin, growth in the Internet business and other factors affecting growth in sales and earnings. Specific forward-looking statements are provided regarding our management's current views
regarding comparable store sales and new store openings. Statements regarding new store openings are based largely on our current expectations and are necessarily subject to associated business risks
related to, among other things, the timely construction, staffing and merchandising of those stores and other matters, some of which are outside of our control. Comparative store sales growth is
highly dependent upon the effectiveness of our sales and promotion strategies and the effect of competition, including other national operators of music products stores attempting to implement
national growth strategies. The American Music Group business was only recently acquired by us and may be subject to significant fluctuations as we integrate these activities with the other Guitar
Center businesses.

Sales
and earnings trends are also affected by many other factors including, among others, general economic conditions, which recently have been weak, particularly in terms of
consumer demand and general retail sales, and the effectiveness of our merchandising strategies, changes in the music products industry, retail sales trends and the emergence of new or growing
specialty retailers of music products. In light of these risks, there can be no assurance that the forward-looking statements contained in this report will in fact be realized. The statements made by
us in this report represent our views as of the date of this report, and it should not be assumed that the statements made herein
remain accurate as of any future date. We do not presently intend to update these statements and undertake no duty to any person to affect any such update under any circumstances.

For
further discussion of risks associated with our business, please see the discussion under the caption "Risks Related to the Business".



An investment in our common stock involves a high degree of risk. Described below are some of the risks and uncertainties facing our
company. There may be additional risks that we do not presently know of or that we currently consider immaterial. Any of these risks could adversely affect our business, results of operations,
liquidity and financial position. The following information updates and supercedes the similar information provided in our Form 10-K for the year ended December 31,
2000.

We may be unable to meet our retail store growth strategy, which could result in financial performance below that planned for internally or expected by the investment
community.

Our
retail store growth strategy includes opening new stores and increasing sales at existing locations. We intend to pursue an aggressive expansion strategy by opening additional
stores in new and

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existing markets. As of June 30, 2001, we operated 91 Guitar Center stores. We opened 14 stores in 2000 and 13 stores in 1999, and plan to open approximately 12 to 14 stores in 2001 and
approximately 12 to 14 Guitar Center stores in 2002 as well as a number of additional American Music Group units. Our expansion plan depends on a number of factors, including:



We
cannot assure that we will achieve our store expansion goals or that our new stores will achieve sales or profitability levels similar to our existing stores. Our expansion
strategy includes clustering stores in existing markets. This has in the past and may in the future result in the transfer of sales to the new store and a reduction in the profitability of an existing
store. In addition to the factors noted above, expansion to new markets may present unique competitive and merchandising challenges, including:



Historically,
we have achieved significant sales growth in existing stores. Our quarterly comparable stores sales results have fluctuated significantly in the past. Sales growth for
comparable periods, excluding net sales attributable to stores not open for 14 months, was as follows:

2000

1999

1998Quarter 1

8
%
10
%
18
%Quarter 2

7

7

14Quarter 3

6

11

10Quarter 4

7

11

11Full Year

7
%
10
%
13
%


A
variety of factors affect our comparable store sales results, including:



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Our
management is presently planning for comparable store sales growth of 5% to 7% for the immediate future, although fluctuations will undoubtedly take place from period to period. A
shortfall in comparative sales growth in any period will likely cause a shortfall in earnings.

Any
shortfall in the growth plan for new stores or our existing stores would likely result in financial performance below that for which we have planned or the investment community
expects.

Our growth plans could be accelerated by acquisitions although such transactions involve special risks.

We
believe that our expansion may be accelerated by the acquisition of existing music product retailers. For example, in April 2001 we acquired the business of American Music
Group, a New York-based retailer of band instruments, a business we were not previously in. In the ordinary course of our business, we regularly consider, evaluate and enter into
negotiations related to potential acquisition opportunities. We may pay for these acquisitions in cash or securities, including equity securities, or a combination of both. We cannot assure that
attractive acquisition targets will be available at reasonable prices or that we will be successful in any such transaction. Acquisitions involve a number of special risks, including:



We depend on suppliers who may not be able to or desire to supply our requirements.

We
depend significantly on our suppliers for both our existing stores and the direct response unit as well as our expansion goals for each of these units. We do not have any
long-term contracts with our suppliers, which we believe is customary in our industry. If we failed to maintain our relationships with our key brand name vendors, we believe this could
have a material adverse effect on our business. We believe we currently have adequate supply sources; however, we cannot assure sufficient quantities or the appropriate mix of products will be
available in the future to supply our existing stores and expansion plans. This risk is especially prevalent in new markets where our vendors have existing agreements with other dealers and thereby
may be unwilling or unable to meet our requirements. Also, our growth presents a challenge to some of our vendors as it requires significant production increases by them which at times results in
extended lead times and shortages of desirable products.

We face significant competition particularly from those retailers also trying to execute national expansion strategies.

Our
industry is fragmented and highly competitive. We compete with many different types of retailers, including conventional retailers, as well as other catalog and
e-commerce retailers, who sell many or most of the items we sell. We anticipate increased competition in our existing markets and planned new markets as other large format music product
retailers, including Sam Ash Music and Mars Music, execute growth plans in their retail and e-commerce businesses. Additionally, our expansion to new markets will be inhibited by
established competitors in those markets. If our competitors adopt a new, innovative store format or retail selling method, or if a new competitor with substantial financial or other resources enters
the market place, then we may fail to achieve market position gains or may lose market share.

We depend on key personnel including our senior management who are important to the success of our business.

Our
success depends to a significant extent on the services of Larry Thomas, our Chairman and Co-CEO, Marty Albertson, our President and Co-CEO, and Robert
Eastman, the CEO of our wholly-owned subsidiary Musician's Friend, Inc., as well as our ability to attract and retain additional key personnel with the skills necessary to manage our existing
business and growth plans. The loss of one

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or more of these individuals or other key personnel could have a material adverse effect on our business, results of operations, liquidity and financial position. In June 1996, we entered into
a five-year employment contract with each of Mr. Thomas and Mr. Albertson and are negotiating extensions, although no definitive agreement has yet been entered into.
Additionally, we carry key man insurance on the lives of Mr. Thomas and Mr. Albertson in the amounts of $5.0 million and $3.5 million, respectively. Historically, we have
promoted employees from within our organization to fill senior operations, sales and store management positions. In order to achieve our growth plans, we will depend
upon our ability to retain and promote existing personnel to senior management, and we must attract and retain new personnel with the skills and expertise to manage our business. If we cannot hire,
retain and promote qualified personnel, our business, results of operations, financial condition and prospects could be adversely affected.

Our retail operations are concentrated in California, which ties our financial performance to events in that state.

As
of June 30, 2001, 19 of our 91 stores were located in California and stores located in that state generated 29.0% and 30.7% of our retail sales for 2000 and 1999,
respectively. Although we have opened stores in other areas of the United States, a significant percentage of our net sales and results of operations will likely remain concentrated in California for
the foreseeable future. As a result, our results of operations and financial condition are heavily dependent upon general consumer trends and other general economic conditions in California and are
subject to other regional risks, including earthquakes. We do maintain certain earthquake insurance, but such policies carry significant deductibles and other restrictions.

Economic conditions or changing consumer preferences could also adversely impact us.

Our
business is sensitive to consumer spending patterns, which can be affected by prevailing economic conditions. A downturn in economic conditions in one or more of our markets could
have a material adverse effect on our results of operations, financial condition, business and prospects. Although we attempt to stay informed of consumer preferences for musical products and
accessories typically offered for sale in our stores, any sustained failure on our part to identify and respond to trends would have a material adverse effect on our results of operations, financial
condition, business and prospects.

We must manage efficiently the expansion of our direct response business, including the musiciansfriend.com website and our systems that process orders in our direct response
business, in order to service our customers properly.

Our
direct response business, particularly our e-commerce business, will require significant investments to respond to anticipated growth and competitive pressures. If we
fail to rapidly upgrade our website in order to accommodate increased traffic, we may lose customers, which would reduce our net sales. Furthermore, if we fail to expand the computer systems that we
use to process and ship customer orders and process payments, we may not be able to successfully distribute customer orders. As a result, we could lose customers and our net sales could be reduced. We
may experience difficulty in improving and maintaining such systems if our employees or contractors that develop or maintain our computer systems become unavailable to us. We have experienced periodic
systems interruptions, which we believe will continue to occur, while enhancing and expanding these computer systems.

We intend to implement a new distribution center for the retail stores, which presents operational risks and will require a significant investment.

We
intend during 2001 to begin construction of a central warehouse/distribution center in the Indianapolis, Indiana area for our retail store operations with a view towards the
facility commencing operations in 2002. Migration from our present "drop-ship" model to a centralized distribution model is an important development in our operating strategy and will
require significant financial and

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managerial resources for the next several quarters. This program involves financial and operating risks that could include the need to expend greater funds than presently budgeted or disruptions in
retail store operations if inventory is not timely provided in the required quantities.

We must efficiently integrate the American Music Group and grow its band instrument business in order to earn an acceptable return on that investment.

In
April 2001 we completed our acquisition of American Music Group, a New York-based retailer of band instruments. We have not previously participated in the band
instruments segment of the music products business and have no experience in this distribution channel. We intend to integrate this business into our retail stores division as a separate business unit
and use the acquired business as a platform to grow this segment. Thus, we face the normal challenges of any acquisition, such as integration of personnel and systems as well as the need to learn,
understand and further develop this business. Failure to execute on these requirements could result in a poor or no return on our investment and a distraction of the efforts of our management team.

Net sales of our e-commerce business could decrease if our online security measures fail.

Our
relationships with our e-commerce customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card
numbers, are ineffective. If, as a result, we lose many customers, our net sales could decrease. We rely on security and authentication technology that we license from third parties. With this
technology, we perform real-time credit card authorization and verification with our bank. We cannot predict whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We
may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. We cannot assure that we can prevent all
security breaches.

If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers.

If
we face material delays in introducing new services, products and enhancements, our e-commerce customers may forego the use of our services and use those of our
competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our online store. The Internet and the online commerce industry are rapidly changing. If
competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing website and proprietary technology and systems may become
obsolete. To develop our website and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our website, our
transaction processing systems and our computer network to meet customer requirements or emerging industry standards. In addition, the success of e-commerce may result in greater
efficiency and lower prices, which could have an adverse effect on selling prices and margins in our retail store business and in our catalog business and generally constrain profitability in the
specialty retail business.

We may need to change the manner in which we conduct our business if government regulation increases which could impose additional costs and adversely affect our financial
results.

The
adoption or modification of laws or regulations relating to the Internet could adversely affect the manner in which we currently conduct our e-commerce business. For
example, laws related to the taxation of online commercial activity remain in flux. In addition, the growth and development of the market for online commerce may lead to more stringent consumer
protection laws, both in the United States and abroad, that may impose additional burdens on us. Laws and regulations directly applicable to communications or commerce over the Internet are becoming
more prevalent. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative

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action. It may take years to determine whether and how existing laws such as those governing intellectual property, consumer privacy, taxation of e-commerce transactions and the like are
interpreted and enforced. Any adverse change in any of these laws or in the interpretation or scope of existing laws could have a material adverse effect on our results of operations, financial
condition or prospects.

We have an investment in an Internet community company that could result in future charges to our financial statements if the venture is not successful.

We
have a minority investment of approximately $3.5 million in the equity of the operator of musician.com and guitar.com, Internet community sites oriented towards musicians.
We are carrying this investment at cost, and this value was recently validated by a third party financing completed with several venture capital firms. Nonetheless, success of this venture is not
assured. If in the future we
determine that the fair market value of these shares has been permanently reduced to less than our cost, we would be required under generally accepted accounting principles to recognize a charge to
our financial statements.

We have a limited history of trading on the Nasdaq National Market, and our stock price could be volatile.

We
began trading on the Nasdaq National Market on March 14, 1997. The market price of our shares of common stock has been subject to significant fluctuations in response to our
operating results and other factors, including announcements by our competitors, and those fluctuations will likely continue in the future. In addition, the stock market in recent years has
experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. These fluctuations, as well as a
shortfall in sales or earnings compared to public market analysts' expectations, changes in analysts' recommendations or projections, and general economic and market conditions, may adversely affect
the market price of our common stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not have any assets or liabilities which, in our view, impose upon us significant market risk except that for our outstanding $66.7 million in
aggregate principal amount of 11% Senior Notes due 2006. These senior notes constitute long-term, fixed interest rate obligations for which market quotations are available.

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Part II. Other Information

Item 2. Changes in Securities and Use of Proceeds

In connection with our acquisition of American Music Group and related companies in April 2001, we issued 115,358 shares of common stock to one
accredited investor in a transaction exempt from registration under the Securities Act of 1933, as amended, by operation of Section 4(2) of the act and Regulation D promulgated
thereunder.

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of stockholders was held on April 26, 2001. The actions taken at that meeting were previously reported under Item 4 in the
Form 10-Q filed with respect to our fiscal quarter ended March 31, 2001, which information is incorporated herein by this reference.

Item 5. Other Information

Effective July 25, 2001, Robert Eastman, CEO of our Musicians Friend unit, was appointed to the Board of Directors of Guitar Center, Inc. After
giving effect to this appointment, there are presently eight members of the Board of Directors.

Effective
August 1, 2001, the Compensation Committee of the Board of Directors approved stock option grants to employees of Guitar Center and its subsidiaries to purchase an
aggregate of approximately 900,000 shares of common stock at an exercise price of $15.30 per share. These options are subject to vesting and were issued under our 1997 Equity
Participation Plan, as amended.

Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized as of the 1st day of August 2001.

| |  | Guitar Center, Inc.                                                                           
| |  | ----------------------------------------------------------------------------------------------
| |  | /s/BRUCE L. ROSSBruce L. Ross, Executive Vice President,
Chief Financial Officer and Secretary
| |  | (Duly Authorized Officer and Principal Financial Officer)                                     
| |  |                                                                                               

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.40       |  | Asset Purchase Agreement made as of March 20, 2001, by and among Guitar Center Stores, Inc., and American Music Group, Ltd., Eastern Musical Supply Co., Inc., Lyons Music, Inc., American Music, Inc., American Musical
Instruments, Inc., Giardinelli Band Instrument Co., Central Music Supply, Inc., and GBI, Inc.
|10.41       |  | Employment Agreement made as of March 20, 2001 between Guitar Center Stores, Inc. and David Fleming.                                                                                                                                                                                                                  

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