Following is management's discussion and analysis of significant factors that have affected the Company's financial position and its results of operations for the periods presented in the accompanying consolidated financial statements.

Fiscal 2002 and 2001 results both include 52 weeks as compared to fiscal 2000 results, which includes 53 weeks. Management believes the Company's results of operations for fiscal 2000 were not materially affected by results attributable to the 53^rd week.

The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Part IV, Item 15 of this Form 10-K. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to its revenue recognition policy, the carrying value of its merchandise inventories, the adequacy of its store closure reserves, and the valuation of its long-lived assets and deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. In the past, actual results have not been materially different from the Company's estimates.

Some of the Company's significant accounting policies involve a higher degree of judgment or complexity than its other accounting policies. The policies described below have been identified as critical to the Company's business operations and the understanding of its results of operations. The impact and associated risks related to these policies on the Company's business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations.

Net retail sales are recognized at the point-of-sale, net of estimated sales returns and allowances and exclusive of sales tax. Net retail sales also include all amounts billed to a customer in a sale transaction for shipping and handling, including customer delivery charges. Revenues on special order sales are recognized when the merchandise is delivered to the customer and the merchandise has been paid for in its entirety.

The Company records an allowance for estimated sales returns in the period in which the related sale occurs. These estimates are based primarily on historical sales returns. If the historical data used to calculate these estimates does not properly reflect future returns, revenue could be overstated and adjustments to the allowance for estimated sales returns may be necessary.

Merchandise inventory, which consists of merchandise held for resale, is valued at the lower of LIFO (last-in, first-out) cost or market using the retail inventory method ("RIM") of accounting. Inherent in the RIM calculation are various judgements and estimates including, among others, merchandise markon, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost, as well as resulting gross margins. The Company applies various methodologies to ensure that the application of the RIM is consistent for all periods presented. Such methodologies include the development of consistent cost-to-retail ratios and the grouping of homogenous classes of merchandise. Estimated inventory shrinkage between physical inventory dates is based on historical experience. Should actual inventory shrinkage results differ from the Company's estimate, year-end revisions to inventory shrinkage expense recognized on an interim basis may be required.

Estimating the market value of the Company's merchandise inventory requires assumptions about future demand and market conditions. Such estimates are based on actual and forecasted sales trends, current inventory levels and aging information by merchandise categories. The Company records markdowns to value merchandise inventories at net realizable value. If forecasted sales are not achieved, or if other indicators of impairment are present, additional markdowns may be needed in future periods to clear excess or slow-moving merchandise, which may result in lower gross margins.

In the event a store is closed before its lease has expired, the remaining lease obligation after the closing date (less anticipated sublease rental income or proceeds from lease settlements, if any), and asset impairment charges related to furniture, fixtures and equipment, leasehold improvements, goodwill and leasehold interests, if any, are expensed in the period in which management adopts a plan to close the store. Severance and other incremental costs associated with a store closure are expensed as incurred.

For store closure plans adopted after January 1, 2003, store closure costs will generally be recognized when the costs are incurred.

As of February 1, 2003, the Company had a reserve for store closure costs totaling $618,000, which consisted primarily of estimated future lease obligations for two of the store locations closed in fiscal 2001 and the four locations closed in fiscal 2003. In the event the Company is not successful in selling or subleasing the two locations closed in fiscal 2001 as soon as management expects, additional reserves for store closure costs may be recorded. In addition, in the event the Company decides to close additional store locations in fiscal 2003 or beyond, additional reserves for store closure costs, which may be material, may be incurred.

The Company's long-lived assets consist primarily of property and equipment, goodwill, leasehold interests and other long-term assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. With respect to store locations, the Company performs an evaluation of whether an impairment charge should be recorded whenever a store experiences unfavorable operating performance. A store's assets are evaluated for impairment by comparing its estimated undiscounted cash flows over its estimated remaining lease term to its carrying value. If the cash flows are not sufficient to recover the carrying value, a loss equal to the difference between the carrying value and the discounted future cash flows of the asset is recognized. Estimates of future cash flows are based on a variety of factors, including historical experience in similar locations, changes in merchandising, promotional or operating strategy that may affect the profitability of a particular location, knowledge of the market area and in some cases, expected sale proceeds or sublease income, and independent appraisals. In addition, the analysis assumes that new store locations typically take three years to achieve their full profit potential. Various uncertainties, including but not limited to changes in consumer preferences, increased competition or a general deterioration in economic conditions could adversely impact the expected cash flows to be generated by an asset or group of assets. In fiscal 2002, the Company recorded asset impairment charges in connection with store closures, and such charges are included in store closure costs in the accompanying consolidated income statement. In addition, asset impairment charges were recorded for certain underperforming store locations which continue to be operated. If actual performance or fair value estimates for other locations are less favorable than management's projections, future asset impairment charges may be necessary. Similar procedures are used when analyzing other corporate assets for impairment.

Effective the beginning of fiscal 2002, the provisions of SFAS No. 142 were implemented. As a result, the Company no longer amortizes previously recorded goodwill. The Company performs an annual impairment review of goodwill as required by the statement, unless more frequent reviews are warranted by specific events or circumstances. There can be no assurance that at the time these reviews are completed that material impairment charges will not be recorded.

The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income to realize the value of these assets. In determining the appropriate valuation allowance, management considers all available evidence for certain tax credit, net operating loss and capital loss carryforwards that would likely expire prior to their utilization. Management believes it is more likely than not that the Company will generate sufficient future taxable income in the appropriate carryforward periods to realize the benefit of its remaining net deferred tax assets. However, if the available evidence were to change in the future, an adjustment to the valuation allowance may be required, resulting in additional income tax expense.

Prior to the sale of its customer credit card accounts and accounts receivable to Household on January 31, 2003, the Company conveyed all of the receivables generated under its private label customer credit cards to a wholly-owned subsidiary, GCRC, on a daily basis. Those receivables that met certain eligibility requirements of the program were simultaneously conveyed to GCC Trust to be used as collateral for securities issued to investors. GCC Trust was a qualified special purpose entity and was not consolidated in the Company's financial statements. The transfers of such receivables were accounted for as sales for financial reporting purposes pursuant to SFAS No. 140, "Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and as such, the transferred receivables were removed from the Company's balance sheet at the time of the transfer. The Company retained a beneficial ownership interest in certain of the receivables transferred under the program and also retained an uncertificated ownership interest in the retained interest to future interest income (interest-only strip) and other receivables that did not meet certain eligibility requirements of the program. The retained interests and the interest-only strips were carried at their estimated fair values, which were estimated based upon the present value of the expected future cash flows, calculated using management's best estimates of key assumptions about anticipated credit losses, account prepayment speeds, discount rates and other factors necessary to derive an estimate of fair values. The gain or loss on the sale of the receivables was calculated by comparing the carrying amount of the financial assets involved in the transfer to their relative fair values at the date of transfer. The certificated portion of the retained interests were considered readily marketable and were classified as available for sale and carried at their estimated fair values in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

The following table sets forth for the periods indicated certain items from the Company's Consolidated Income Statements, expressed as a percent of net sales:

                                             Fiscal Years
                                   -------------------------------
                                     2002       2001       2000
                                   ---------  ---------  ---------
Net sales.........................    100.0 %    100.0 %    100.0 %
Net credit revenues...............      1.2        1.2        1.4
Net leased department revenues....      0.5        0.6        0.6
                                   ---------  ---------  ---------
     Total revenues...............    101.7      101.8      102.0

Costs and expenses:
   Cost of sales..................     66.1       66.2       65.3
   Selling, general and
     administrative expenses......     31.6       31.5       30.4
   Depreciation and amortization..      2.1        2.0        1.7
   Asset impairment charges.......      1.6         --         --
   Store closure costs............      0.5        0.1         --
   Receivables sale costs.........      0.3         --         --
   New store pre-opening costs....       --         --        1.0
                                   ---------  ---------  ---------
     Total costs and expenses.....    102.2       99.8       98.4
                                   ---------  ---------  ---------
Operating income (loss)...........     (0.5)       2.0        3.6

Other (income) expense:
   Interest expense...............      2.3        2.0        2.1
   Losses on early extinguishment
     of debt......................      0.5        0.1         --
   Miscellaneous income...........     (0.3)      (0.2)      (0.2)
                                   ---------  ---------  ---------
                                        2.5        1.9        1.9
                                   ---------  ---------  ---------
Income (loss) before income taxes.     (3.0)       0.1        1.7

Income tax expense (benefit)......     (1.3)       0.1        0.6
                                   ---------  ---------  ---------
Net income (loss).................     (1.7)%      0.0 %      1.1 %
                                   =========  =========  =========

Net Sales

Net sales decreased by approximately $19.3 million, or 2.7%, to $691.4 million in fiscal 2002 as compared to $710.7 million in fiscal 2001. The fiscal 2002 sales decrease is primarily attributable to the closure of six stores in fiscal 2001 and two additional store closures in July, 2002. Comparable store sales for fiscal 2002, which includes sales for stores open for the full period in both years, decreased by 0.8% as compared to the same 52-week period of the prior year.

The Company operated 69 department stores and 12 specialty stores as of the end of fiscal 2002 as compared to 73 department stores and 13 specialty stores as of the end of fiscal 2001. As described more fully in Note 9 to the accompanying financial statements, during fiscal 2002 the Company announced the closure of eight stores. Two such stores were closed in each of June 2002, January 2003 and February 2003, and one store was closed in each of March 2003 and April 2003. Six stores were closed in June and July 2001, with one of those stores subsequently reopened in September 2001. The Company closed one additional store at the end of January 2002, resulting in a total of six stores closed in fiscal 2001.

Net credit revenues related to the Company's credit card receivables portfolio decreased by approximately $0.2 million or 2.3%, to $8.2 million in fiscal 2002 as compared to $8.4 million in fiscal 2001. As a percent of net sales, net credit revenues were 1.2% of net sales in both fiscal 2002 and fiscal 2001. Net credit revenues consist of the following:

(In thousands of dollars)                                   2002       2001
- --------------------------------------------------------  ---------  ---------
Service charge revenues................................. $  17,813  $  17,817
Interest expense on securitized receivables.............    (4,863)    (4,902)
Charge-offs on receivables sold and provision for
  credit losses on receivables ineligible for sale......    (4,821)    (4,550)
Gain on sale of receivables.............................        96         55
                                                          ---------  ---------
                                                         $   8,225  $   8,420
                                                          =========  =========

Service charge revenues and interest expense on securitized receivables in fiscal 2002 were essentially equal to fiscal 2001. The Company's credit sales as a percent of total sales increased to 43.2% in fiscal 2002 as compared to 40.9% in fiscal 2001.

Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale increased by $0.3 million, or 6.0%, in fiscal 2002 as compared to fiscal 2001. As a percentage of net sales, such losses increased to 0.7% in fiscal 2002 as compared to 0.6% in fiscal 2001. These increases reflect higher bankruptcies and higher unemployment rates caused by the economic downturn in certain of the Company's market areas.

The Company expects a substantial decrease in net credit revenues in fiscal 2003 as a result of the receivables sale to Household. The Company also expects a reduction in selling, general and administrative expenses as a result of outsourcing the credit card servicing to Household. In addition, the Company anticipates a reduction in interest expense arising from reduced line of credit borrowings resulting from the application of the proceeds from the Household transaction. The Company believes the net credit revenues the Company receives under the CCA will equal or exceed the net revenues from its former in-house credit card operations, net of operating expenses and interest expense.

Net rental income generated by the Company's various leased departments decreased by approximately $0.5 million, or 13.1%, to $3.6 million in fiscal 2002 as compared to $4.1 million in fiscal 2001. This decrease is primarily due to the August 2001 termination of the shoe department leases in 36 of the Company's Pacific Northwest and Alaska locations, which were operated by an independent lessee. The Company subsequently re-opened Company-operated shoe departments in 15 of those stores. Pursuant to Staff Accounting Bulletin ("SAB") No. 101, sales generated in those departments after the termination of the leases are included in total sales as opposed to net leased department revenues for financial reporting purposes.

Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments, the shoe departments in 36 Pacific Northwest and Alaska locations (prior to the termination of the lease in August 2001) and beauty salons, totaled $24.9 million in fiscal 2002 as compared to $28.9 million in fiscal 2001.

Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, decreased by approximately $13.2 million to $457.1 million in fiscal 2002 as compared to $470.3 million in fiscal 2001, a decrease of 2.8%. The dollar decrease is primarily due to the decrease in sales volume. The Company's gross margin percentage increased to 33.9% in fiscal 2002 as compared to 33.8% in fiscal 2001. The increase in the gross margin percentage was primarily due to lower markdowns as a percentage of sales as compared to the prior year.

Selling, general and administrative expenses decreased by approximately $5.1 million, or 2.3%, to $218.8 million in fiscal 2002 as compared to $223.9 million in fiscal 2001. As a percentage of net sales, selling, general and administrative expenses increased 0.1% to 31.6% in fiscal 2002 as compared to 31.5% in fiscal 2001. The dollar decrease is primarily attributable to realized benefits from cost reduction efforts and store closures, partially offset by increases in health care, workers' compensation and property and casualty insurance costs. Lower sales volume contributed to the increase in selling, general and administrative costs as a percentage of net sales. The Company is continuing to implement programs aimed at reducing operating costs throughout all areas of the Company. Although the Company fully anticipates it will be successful in achieving its cost reduction initiatives, there can be no assurance that the Company will be able to fully offset the impact of increases in certain of these costs in the future.

Depreciation and amortization expense, which includes the amortization of intangibles (leasehold interests and, in fiscal 2001, goodwill), increased by approximately $0.1 million or 1.0%, to $14.2 million in fiscal 2002 as compared to $14.1 million in fiscal 2001. As a percent of net sales, depreciation and amortization expense increased to 2.1% in fiscal 2002 as compared to 2.0% in fiscal 2001. The dollar increase is primarily due to additional depreciation related to information systems placed in service during 2002 and capital expenditures for the renovation and expansion of certain existing stores. These increases were partially offset by the discontinuance of goodwill amortization as a result of the implementation of SFAS No. 142.

Effective the beginning of fiscal 2002, the Company adopted the provisions of SFAS No. 142. As a result, goodwill is no longer amortized and instead is evaluated for impairment annually, or at any time certain indicators of impairment arise. The amortization of goodwill totaled $0.6 million in fiscal 2001. The Company will continue to amortize leasehold interests over their estimated lease terms.

During 2002, the Company recorded non-cash asset impairment charges of $10.9 million to write down long-lived assets related to certain underperforming stores, primarily former Lamonts locations. These charges consisted of $4.3 million of property and equipment, $6.5 million of leasehold interests and $0.1 million of goodwill. The charges were determined by comparing projected net operating cash flows, including estimated proceeds from the sale of certain assets, to the carrying value of the stores' long-lived assets. No such costs were recorded in 2001.

During fiscal 2002, the Company announced the closure of eight of the 34 stores acquired from Lamonts. These stores were determined to be either underperforming or inconsistent with the Company's long-term operating strategy. Two of these stores were closed in each of June 2002, January 2003 and February 2003 and one store was closed in each of March 2003 and April 2003. Net costs associated with the closure of these stores totaled $3.4 million in fiscal 2002. This amount consists of estimated lease termination costs, non-cash asset impairment charges, severance and other incremental costs associated with the store closings totaling $4.5 million less $1.1 million of cash proceeds received from the sale of lease rights and fixtures and equipment. After the eight store closures are completed, the Company will continue to operate 20 of the original 34 stores acquired from Lamonts.

During the second quarter of 2001 the Company closed six of the acquired stores that also were determined to be either underperforming or inconsistent with the long-term operating strategy of the Company. One of those stores was subsequently re-opened in the third quarter of 2001. As planned, the Company also discontinued the use of an outsourced distribution center facility located in Kent, Washington, in June 2001 and consolidated all of the Company's distribution functions into its distribution facility in Madera, California. One additional acquired store was closed in January 2002. Net costs associated with closure of those stores and the outsourced distribution center facility totaled $0.7 million. This amount consists of estimated lease termination costs, non- cash asset impairment charges, severance and other incremental costs associated with the closure of the stores totaling $2.0 million, less $1.3 million of cash proceeds received as a result of the sale of lease rights, fixtures and equipment.

Certain of the Company's remaining stores have continued to perform below expectations. In the event the Company is unable to improve the operating performance of such underperforming stores, the Company may consider the sale, sublease or closure of those stores in the future. In the past, the Company has successfully improved the operating results and cash flows of underperforming stores through a variety of strategies, including revising the merchandise mix, changing store management, revising marketing strategies, renegotiating lease agreements and reducing operating costs. However, there can be no assurance that these strategies will improve the operating results and cash flows of the remaining underperforming stores, or that the Company will be able to sell, sublease or close those stores in the event their performance does not improve. In addition, the Company may incur certain costs and expenses in connection with the sale or closure of those locations that may not be fully offset by sale proceeds, sublease income or favorable lease terminations.

Receivables Sale Costs

In connection with the sale of accounts receivable to Household, the Company recorded receivable sale transaction costs of $2.0 million including consulting, legal, and other fees, and the net non-cash write-off of the remaining accounts of GCRC. These charges are partially offset by a $0.3 million retained interest only strip that will be amortized over the estimated life of the underlying assets sold (estimated to be approximately five months). The interest only strip represents the portion of the initial program fees to be paid that is considered a residual interest in the assets sold.

Interest expense, which includes the amortization of deferred financing costs, increased by approximately $1.5 million to $15.9 million in fiscal 2002 as compared to $14.4 million in fiscal 2001, an increase of 10.6%. As a percent of net sales, interest expense increased to 2.3% in fiscal 2002 as compared to 2.0% in fiscal 2001. These increases are primarily due to amortization of higher deferred financing costs relating to long-term financings entered into in the fourth quarter of fiscal 2001 and the first three quarters of fiscal 2002, and to an amendment fee relating to the Company's revolving credit facility. These increases were partially offset by lower average outstanding borrowings on the Company's working capital facility.

Interest expense related to securitized receivables is reflected as a reduction of net credit revenues and is not included in interest expense for financial reporting purposes.

In fiscal 2002, in connection with the termination of its receivables securitization program, the Company recorded a loss on extinguishment of debt of $3.7 million representing prepayment penalties and the write-off of unamortized deferred loan fees related to the program. In fiscal 2001, the Company recorded a $0.7 million charge consisting of the prepayment penalty and the write-off of unamortized loan fees related to the early retirement of the Company's previous revolving credit facility.

Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, increased by approximately $0.2 million to $1.8 million in fiscal 2002 as compared to $1.6 million in fiscal 2001. As a percent of net sales, miscellaneous income increased to 0.3% in fiscal 2002 as compared to 0.2% in fiscal 2001. The dollar increase primarily relates to recoveries of prior interest charges arising from the partial settlement of certain net operating loss carryback claims, partially offset by charges to the Company's partnership investment in its corporate offices related to the partnership's implementation of SFAS No. 133.

The Company's effective tax rate is a benefit of 42.3% in fiscal 2002 as compared to an expense of 38.5% in fiscal 2001. The fiscal 2002 tax benefit includes $0.8 million arising from the realization of net operating loss carryback claims.

As a result of the foregoing, the Company reported a loss of $12.0 million in fiscal 2002 as compared to net income of $0.4 million in fiscal 2001. On a per share basis (basic and diluted), the 2002 net loss was $0.94 per share as compared to net income of $0.03 per share in fiscal 2001.

Net sales increased by approximately $46.8 million, or 7.1%, to $710.7 million in fiscal 2001 as compared to $663.9 million in fiscal 2000. Fiscal 2001 included 52 weeks as compared to fiscal 2000, which included 53 weeks. On a comparable 52 week versus 52 week basis, net sales for fiscal 2001 increased by $55.7 million, or 8.5%, as compared to fiscal 2000. Fiscal 2001 sales reflect a full year of sales generated by the 34 stores acquired in the Lamonts acquisition (net of lower sales volume resulting from the closure of six of those stores in fiscal 2001), as compared to fiscal 2000, which reflects net sales generated for five months after the opening of the stores in September 2000. Comparable store sales for fiscal 2001, which includes sales for stores open for the full period in both years, increased by 0.4% as compared to the same 52 week period of the prior year.

The Company operated 73 department stores and 13 specialty stores as of the end of fiscal 2001 as compared to 79 department stores and 17 specialty stores as of the end of fiscal 2000. Thirty-seven of those stores were opened in the second half of fiscal 2000, however, and accordingly were not open for the full period of the prior year. As described more fully in Note 2 to the Consolidated Financial Statements, six of the acquired stores were closed in June and July 2001, with one of those stores subsequently reopened in September 2001. The Company closed one additional store at the end of January 2002, resulting in a total of six stores closed in fiscal 2001.

Net credit revenues related to the Company's credit card receivables portfolio decreased by approximately $0.7 million, or 8.0%, to $8.4 million in fiscal 2001 as compared to $9.1 million in fiscal 2000. As a percent of net sales, net credit revenues were 1.2% of net sales in fiscal 2001 as compared to 1.4% in fiscal 2000. Net credit revenues consist of the following:

(In thousands of dollars)                                   2001       2000
- --------------------------------------------------------  ---------  ---------
Service charge revenues................................. $  17,817  $  16,832
Interest expense on securitized receivables.............    (4,902)    (4,425)
Charge-offs on receivables sold and provision for
  credit losses on receivables ineligible for sale......    (4,550)    (3,642)
Gain on sale of receivables.............................        55        385
                                                          ---------  ---------
                                                         $   8,420  $   9,150
                                                          =========  =========

Service charge revenues increased by approximately $1.0 million, or 5.9%, in fiscal 2001 as compared to fiscal 2000. This increase is primarily due to additional service charge revenues generated by newly originated customer credit card accounts in new stores opened since the same period of the prior year. The increase is also due to an increase in the volume of late charge fees collected on delinquent credit card balances as compared to the same period of the prior year. The decrease as a percentage of net sales is primarily due to lower average outstanding balances on newly originated customer accounts in the 37 new stores opened in fiscal 2000. Such accounts continue to generate lower service charge revenues as compared to those produced by more established accounts. The Company's credit sales as a percent of total sales were 40.9% in fiscal 2001 as compared to 41.4% in fiscal 2000. Excluding credit sales generated in the 37 new stores, credit sales as a percentage of total sales were 45.0% in fiscal 2001 as compared to 43.9% in fiscal 2000.

Interest expense on securitized receivables increased by approximately $0.5 million, or 10.8%, in fiscal 2001 as compared to fiscal 2000. This increase is due to a higher level of average outstanding securitized borrowings resulting from the issuance of the 2000-1 Series certificate in November 2000 (renewed in November 2001), partially offset by a lower weighted- average interest rate applicable to all securitized borrowings during the period (6.59% in fiscal 2001 as compared to 7.62% in fiscal 2000). Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale increased by $0.9 million, or 24.9%, in fiscal 2001 as compared to fiscal 2000. As a percentage of net sales, such losses increased to 0.6% in fiscal 2001 as compared to 0.5% in fiscal 2000. These increases reflect higher bankruptcies and higher unemployment rates caused by the economic downturn in certain of the Company's market areas. As a result of a decrease in the volume of receivables sold as compared to the prior year, the gain on the sale of receivables decreased by $0.3 million to $0.1 million in fiscal 2001 as compared to $0.4 million in fiscal 2000.

Net rental income generated by the Company's various leased departments increased by approximately $0.2 million, or 3.7%, to $4.1 million in fiscal 2001 as compared to $3.9 million in fiscal 2000. This increase is primarily due to additional revenues generated by the leased shoe departments in 36 of the Company's Pacific Northwest and Alaska locations, which were operated by an independent lessee since their opening in the second half of fiscal 2000. The Company terminated those leases in August 2001 and re-opened Company operated shoe departments in 15 of those stores. Pursuant to SAB No. 101, sales generated in those departments after the termination of the lease are included in total sales as opposed to net leased department revenues for financial reporting purposes.

Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments, the shoe departments in 36 Pacific Northwest and Alaska locations (prior to the termination of the lease in August 2001) and beauty salons, totaled $28.9 million in fiscal 2001 as compared to $27.7 million in fiscal 2000.

Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $36.6 million to $470.3 million in fiscal 2001 as compared to $433.7 million in fiscal 2000, an increase of 8.4%. The dollar increase is consistent with the increase in sales volume. The Company's gross margin percentage decreased to 33.8% in fiscal 2001 as compared to 34.7% in fiscal 2000. The decrease in the gross margin percentage was primarily due to higher markdowns as a percentage of sales as compared to the prior year. The increased level of markdowns was primarily attributable to the clearance of excess seasonal inventory levels in the first half of fiscal 2001 resulting from lower than expected sales in certain of the Pacific Northwest and Alaska store locations and to inventory liquidations at the six stores which were closed.

Selling, general and administrative expenses increased by approximately $22.2 million, or 11.0%, to $223.9 million in fiscal 2001 as compared to $201.7 million in fiscal 2000. As a percentage of net sales, selling, general and administrative expenses increased to 31.5% in fiscal 2001 as compared to 30.4% in fiscal 2000. The dollar increase is primarily attributable to operating costs associated with a full year of operating the 37 stores opened in the second half of fiscal 2000, as compared to five months of such costs incurred in the prior year. In addition, the Company experienced higher health care and workers' compensation costs, as well as higher utilities costs in California. These factors, combined with lower than expected sales volume generated by the new stores opened in fiscal 2000, contributed to the increase in selling, general and administrative costs as a percentage of net sales.

Depreciation and amortization expense, which includes the amortization of intangibles (goodwill and leasehold interests), increased by approximately $2.6 million, or 22.8%, to $14.1 million in fiscal 2001 as compared to $11.5 million in fiscal 2000. As a percent of net sales, depreciation and amortization expense increased to 2.0% in fiscal 2001 as compared to 1.7% in fiscal 2000. The dollar increase is primarily due to additional depreciation related to assets acquired from Lamonts, capital expenditures for new stores and for the renovation of existing stores, and for information systems enhancements, both to integrate the newly acquired stores into the Company's existing systems and for other system enhancements. The increase is also due to an increase in the amortization of assets acquired under capital leases and to the amortization of goodwill and leasehold interests recorded as a result of the Lamonts acquisition.

Effective the beginning of fiscal 2002, the Company adopted the provisions of SFAS No. 142. As a result, goodwill will no longer be amortized and will instead be evaluated for impairment at least annually, or at any time certain indicators of impairment arise. Amortization of goodwill totaled $0.6 million in both fiscal 2001 and fiscal 2000. The Company will continue to amortize leasehold interests over their estimated lease terms.

New store pre-opening costs, which are expensed as incurred, typically include costs such as payroll and fringe benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs incurred prior to the opening of a store. No new store pre-opening costs were incurred in fiscal 2001. The Company recognized a total of $6.2 million of new store pre-opening costs in fiscal 2000, including $5.6 million incurred in connection with the opening of the 34 stores acquired from Lamonts. The Company also recognized new store opening costs totaling $0.6 million in connection with the opening of three new stores in Grants Pass, Oregon, Walla Walla, Washington and Redding, California on August 23, November 8 and November 10, 2000, respectively.

During the second quarter of fiscal 2001, the Company closed six stores and discontinued the use of an outsourced distribution center facility located in Kent, Washington. The Company closed one additional store in January 2002. The Company recognized net store closure costs of $0.7 million in connection with the closure of those stores in fiscal 2001. Such costs represent approximately $2.0 million of estimated lease termination costs, asset impairment charges (including the write-off of allocated goodwill and leasehold interests), estimated severance and other incremental costs expected to be incurred in connection with the closure of the stores, less $1.3 million of cash proceeds received from the sale of lease rights and favorable lease terminations.

The Company re-opened one of the closed stores in the third quarter of fiscal 2001. Costs associated with the re-opening of the store were classified as selling, general and administrative costs and are not included in store closure costs for financial reporting purposes.

Interest expense, which includes the amortization of deferred financing costs, increased by approximately $0.6 million to $14.4 million in fiscal 2001 as compared to $13.8 million in fiscal 2000, an increase of 4.5%. As a percent of net sales, interest expense decreased to 2.0% in fiscal 2001 as compared to 2.1% in fiscal 2000. These decreases are primarily due to lower average outstanding borrowings on the Company's working capital facility, as well as a decrease in the weighted-average interest rate applicable to the facility (5.48% in fiscal 2001 as compared to 8.76% in fiscal 2000). These decreases were partially offset by higher interest resulting from the completion of a $4.0 million mortgage loan and approximately $8.1 million of additional fixtures and equipment lease financings in the first half of fiscal 2001. (See "Liquidity and Capital Resources.")

Interest expense related to securitized receivables is reflected as a reduction of net credit revenues and is not included in interest expense for financial reporting purposes.

The Company recorded a loss on the early extinguishment of debt totaling $0.7 million in fiscal 2001, consisting of the prepayment penalty and the write-off of unamortized loan fees related to the early retirement of the Company's previous revolving credit facility.

Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, increased by approximately $0.2 million to $1.6 million in fiscal 2001 as compared to $1.4 million in fiscal 2000. As a percent of net sales, miscellaneous income remained unchanged at 0.2% in both fiscal 2001 and 2000. The dollar increase relates to an increase in the amortization of the deferred gain on fixtures and equipment sale/leaseback transactions. (See "Liquidity and Capital Resources - External Financings.")

The Company's effective tax rate is 38.5% in fiscal 2001 as compared to 38.2% in fiscal 2000 (see Note 11 to the Consolidated Financial Statements).

As a result of the foregoing, the Company reported net income of $0.4 million in fiscal 2001 as compared to $7.1 million in fiscal 2000. On a per share basis (basic and diluted), net income was $0.03 per share in fiscal 2001 as compared to $0.56 per share in fiscal 2000.

The Company's working capital requirements are currently met through a combination of cash provided by operations, borrowings under its senior revolving credit facility, short-term trade and factor credit and by proceeds from external financings and sale transactions. As described more fully below and in Note 2 to the Consolidated Financial Statements, on January 31, 2003 the Company sold its credit card accounts and accounts receivable to Household. Proceeds from the sale were used to reduce the Company's debt, including off-balance sheet securitization obligations, by over $100 million. At the closing date, the Company's availability under its revolving credit facility increased by approximately $30 million. The Company expects the availability improvement over the course of the 2003 fiscal year to range from $22 million to $30 million, compared to the prior year and based upon historical levels of accounts receivable. As a result, the Company believes its liquidity position after the sale is substantially improved in comparison to prior years.

In fiscal 2002, the Company generated a total of $19.9 million from operations as compared to $43.5 million positive cash flow from