GUITAR CENTER INC - 10-Q Quarterly Report

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)		91362 (Zip Code)

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.

As of August 12, 2002, 22,488,847 shares of our Common Stock, $.01 par value, were outstanding.

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

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Guitar Center, Inc. and subsidiaries ("Guitar Center," the "Company," "we," "us," or "our") as of and for the three and six months ended June 30, 2002 and December 31, 2001. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

On April 16, 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 (the "American Music Group"). In consideration of the purchase, we paid $28.5 million in net cash and issued 115,358 shares of Guitar Center common stock for $2.1 million. We acquired assets of $22.6 million and assumed or repaid liabilities of $8.2 million. Goodwill of $16.2 million was recorded. The acquisition was accounted for using the purchase method. As part of the terms of the purchase agreement, there was a $2.5 million hold-back on the transaction, pending the American Music Group business meeting certain operating objectives in 2001. During the first quarter of 2002, it was determined that some of the objectives subject to the holdback were satisfied and on February 21, 2002, we paid an additional $1.8 million in cash to the previous owners of American Music Group in full satisfaction of our obligations under the hold-back arrangement. The amount was recorded as additional goodwill.

In February 2002, we acquired certain assets of Music Loft East, Inc., a single store located in Raleigh, North Carolina. In connection with the purchase we paid $488,000 in cash and acquired assets with a fair value of $369,000 and assumed liabilities of $146,000. Goodwill in the amount of $265,000 was recorded. The acquisition was accounted for using the purchase method.

On June 14, 2002, our band instrument division, American Music, completed the acquisition of M&M Music, a five-store band instrument retailer headquartered in Valdosta, Georgia. Under the terms of the agreement, American Music acquired the stock of M&M Music for total consideration of up to $6.0 million, of which we paid $3.6 million in cash. We intend to issue Guitar Center stock to satisfy the remaining $2.4 million due to the former owners. The purchase price is subject to adjustment based on the level of working capital delivered. In connection with the purchase, we acquired assets with a fair value of $5.0 million and assumed liabilities of $1.2 million. Goodwill in the amount of $2.2 million was recorded. The acquisition was accounted for using the purchase method.

The results of operations for American Music, the assets of the Raleigh store, and M&M Music were not material to Guitar Center's previous presented consolidated financial statements and, as such, pro-forma financial information is not presented. The results of operations for each of these acquisitions are included in Guitar Center's consolidated financial statements from the date of the acquisition.

Goodwill was recorded on the American Music, Music Loft and M&M Music acquisitions for any consideration paid in excess of fair value of the identifiable assets acquired. Through December 31, 2001, we amortized goodwill over twenty years. Please see Note 5 for a description of significant changes in the accounting for goodwill implemented in 2002.

On May 28, 1999, we acquired all of the stock of Musician's Friend, Inc., pursuant to a merger agreement. Under the terms of the Musician's Friend merger agreement, 570,000 shares, or 30% of the total shares issued, were placed in escrow for indemnification purposes. During 2000 and 2001, the escrow was resolved whereby 50,002 shares of Common Stock were returned to Guitar Center and the balance released to the former Musician's Friend stockholders. No shares remain in escrow from the Musician's Friend transaction.

Our reportable business segments are retail (Guitar Center and American Music stores) and direct response (Musician's Friend catalog and Internet). Management evaluates segment performance based primarily on net sales and income before income taxes. Accounting policies of the segments are the same as the accounting policies for the consolidated financial statements. There are no differences between the measurements of reportable segments' profits or losses or reportable segments' assets from those of the consolidated financial statements.

Net sales, income before income taxes and total assets are summarized as follows for the three and six month periods ended June 30, 2002 and June 30, 2001 (in thousands):

The presentation of certain prior year information has been reclassified to conform with the current year presentation. During the second quarter we adopted a new accounting policy to conform with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, for shipping and handling fees paid by our customers in our direct response division, treating such fees as revenue. Prior to the reclassification, shipping and handling fees were recognized as a reduction to cost of goods sold. As a result, $3.1 million of shipping and handling fees were recognized as direct response revenue in the second quarter of 2002 and $2.2 million were recognized in the second quarter of 2001. For the six month periods, $6.4 million of shipping and handling fees were recognized as direct response revenue in the six months ended June 30, 2002 and $5.1 million were recognized in the same period in 2001. The reclassification of these fees has no effect on operating income, net income or earnings per share for any period.

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). These new pronouncements significantly change the permissible accounting methods for business combinations and the treatment of goodwill and other intangible assets. Prior to the adoption of these new standards, goodwill and similar intangible assets were generally amortized into income on

a stated periodic basis. This treatment has been replaced by an alternative method, which does not require goodwill amortization on a stated basis but rather requires periodic testing of the goodwill for impairment, with no charge to income except to the extent of any such impairment.

We adopted the new rules effective January 1, 2002, at which time we ceased to record periodic goodwill charges absent an impairment charge. As of June 30, 2002, we had unamortized goodwill in the amount of $25.2 million and unamortized identifiable intangible assets in the amount of $325,000. The majority of the goodwill relates to the American Music Group acquisition. We have tested goodwill and intangible assets for impairment under the transition provisions of SFAS No. 142. These tests indicated that there was no impairment of goodwill or intangible assets. Net income for the three and six months ended June 30, 2001, if SFAS No. 142 had been in effect, would have been $4.3 million and $9.3 million, respectively, compared to reported net income of $4.1 million and $9.1 million, respectively. Basic and fully diluted earnings per share for the three months ended June 30, 2001, if SFAS No. 142 had been in effect, would have both been $0.19, compared to reported basic and fully diluted earnings per share of $0.19 and $0.18, respectively. Basic and fully diluted earnings per share for the six months ended June 30, 2001, if SFAS No. 142 had been in effect, would have been $0.42 and $0.41, respectively, compared to reported basic and fully diluted earnings per share of $0.41 and $0.40, respectively.

In October 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This pronouncement provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 effective January 1, 2002, and the adoption of this standard did not have an impact on our consolidated financial statements.

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

We operated 103 Guitar Center retail locations at June 30, 2002, including 93 stores in 39 major markets and 10 stores in secondary markets. 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, at June 30, 2002 American Music operated 19 stores, including the five stores acquired from M&M Music in June 2002. American Music is a leading provider of band instruments and accessories, primarily focused on school band and orchestral instrument sales and rentals.

From 1997 to 2001, our net sales grew at an annual compounded growth rate of 26.4%, principally due to the comparable store sales growth of our Guitar Center stores averaging 9.5% per year, the opening of new stores, and a 28.4% 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 brand names. We do not expect comparable store sales to continue to increase at historical rates.

We opened a total of 13 Guitar Center stores in 2001. During the six months ended June 30, 2002, we opened six new Guitar Center stores, acquired a store in Raleigh, North Carolina which we converted to our Guitar Center brand, and relocated our original North Dallas, Texas store. We plan to open one small format Guitar Center store in Atlantic City, New Jersey in the third quarter of 2002. Additionally, we plan to open five Guitar Center stores in the fourth quarter of 2002. Some of these Guitar Center stores may be smaller format units designed for secondary markets. In the second quarter of 2002, American Music completed the acquisition of M&M Music, a five-store band

instrument retailer. In addition, we plan to open one to two American Music stores during the fourth quarter of 2002. 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 and American Music Group brand names in new markets. In some markets, this clustering strategy results in the 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 product retailers attempt to execute national growth strategies. Our business strategy will also emphasize opportunities to continue to grow each of our businesses, including further acquisitions if attractive candidates can be located for reasonable prices.

Discussion of Critical Accounting Policies and Disclosures about Contractual Obligations and Commercial Commitments

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which includes those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Alternatively, certain of the policies described below are unique to our industry and deserve the attention of a reader of our financial statements.

Valuation of Inventory. We value our inventories (other than rental inventories) at the lower of cost or market using the first-in, first-out (FIFO) method. Rental inventories are valued at the lower of cost or market using the specific identification method and are depreciated on a straight-line basis over the term of the rental agreement for rent-to-own sales, or over the estimated useful life of the rented instrument for rental only items. We record adjustments to the value of inventory based upon obsolescence and changes in market value. Management has evaluated the current level of inventories considering future customer demand for our products, taking into account both general economic conditions and growth prospects within the marketplace, competition, the market acceptance of the current and upcoming products, management initiatives, and based on this evaluation, has recorded adjustments to cost of goods sold for estimated decreases in value. These judgments must be made in the context of our customer's shifting needs, social and technological trends, and changes in the geographic mix of our customers. A misinterpretation or misunderstanding of these conditions and uncertainties in the future outlook of our industry or the economy, or other failure to estimate correctly, could result in inventory losses either favorably or unfavorably, compared to the requirement determined to be appropriate as of the balance sheet date.

Valuation of Long-Lived Assets. Long-lived assets, such as property and equipment, goodwill, cost method investments and certain identifiable intangibles, historically have been reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important, which could trigger an impairment include, among other things:

The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. Assumptions used in these cash flows are consistent with internal forecasts and consider current and future expected sales volumes and related operating costs and any anticipated increases or declines given expected market conditions and local business environment factors. If an impairment has occurred, the amount of the impairment loss recognized would be determined by estimating the fair value of the assets and recording a loss if the fair value was less than the book value. Fair value will be determined based on appraisal values assessed by third parties, if deemed necessary, or the present value of future cash flows as determined above. For cost method investments, we would record a loss when the decline in value is other than temporary. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.

Our assessment regarding the existence of impairment factors is based on market conditions and operational performance of our businesses. Our review of factors present and the resulting appropriate carrying value of our goodwill, intangibles, and other long-lived assets are subject to judgments and estimates that management is required to make.

Sales Returns. We allow customers to return product when they meet certain established criteria. We regularly review and revise, when deemed necessary, our estimates of sales returns based primarily upon actual returns and historical trends. Actual returns may differ significantly, either favorably or unfavorably, from estimates if factors such as economic conditions or the competitive environment differ from our expectations.

Credits and Other Vendor Allowances. We receive cooperative advertising allowances (i.e., an allowance from the manufacturer to subsidize qualifying advertising and similar promotion expenditures relating to the vendor's products), price protection credits (i.e., credits from vendors with respect to in-stock inventory if the vendor subsequently lowers their wholesale price for such products) and vendor rebates (i.e., credits or rebates provided by vendors based on the purchase of specified products and paid at a later date). Cooperative advertising allowances are recognized as a reduction to selling, general and administrative expense when we incur the advertising expense eligible for the credit. We recognized cooperative advertising allowances of $1.1 million for the quarters ended June 30, 2002 and June 30, 2001, respectively, which amounts were recorded as an offset to selling, general and administrative expense. For the six month periods ended June 30, 2002 and 2001, the amounts were $2.2 million and $2.3 million, respectively. Price protection credits and vendor rebates are accounted for as a component of merchandise inventory and are recorded at the time the credit or rebate is earned. The effect of price protection credits and vendor rebates is recognized in the income statement as an effective reduction in cost of goods sold at the time the related item of inventory is sold. None of these credits are recorded as revenue.

For further discussion of contractual obligations and commercial commitments, please see Management's Discussion and Analysis of Financial Condition and Results of Operation in our audited consolidated financial statements and notes thereto, each of which is contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

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,
	2002		2001		2002		2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	25.8		26.0		25.5		25.7
Selling, general, and administrative expenses	22.0		21.4		21.9		20.8

Operating income	3.8		4.6		3.6		4.9
Interest expense, net	1.2		1.5		1.2		1.5

Income before income taxes	2.6		3.1		2.4		3.4
Income taxes	1.0		1.2		0.9		1.3

Net income	1.6		1.9		1.5		2.1

Net sales increased to $253.9 million for the three months ended June 30, 2002, from $215.6 million for the comparable prior period, a 17.8% increase. Net sales from retail stores totaled $207.4 million, an increase of $27.2 million, or 15.1%. Sales from new stores contributed $13.2 million, or 48.4% of the increase. Comparable store sales increased 8%. The increase in comparable store sales was due to greater response to our advertising and marketing for our retail division than anticipated and the closure of eleven stores of a competitor, Mars Music, which were in markets also served by us. Our management is presently anticipating comparable store sales growth of 5 to 7 percent for the second half of 2002, although fluctuations will undoubtedly take place from period to period. Our increase in anticipated comparative store sales from that expressed in our March quarterly report reflects our assumption that the improved business conditions experienced in the current quarter will continue. The foregoing statements are forward-looking statement and are subject to the qualifications set forth below under "Forward Looking Statements." Net sales from the direct response channel totaled $46.5 million, an $11.1 million, or 31.3%, increase from the second quarter of 2001. Catalog sales for the three months ended June 30, 2002 compared to 2001 increased 34.4% to $24.6 million from $18.3 million and Internet sales increased 27.9% to $21.9 million from $17.1 million for the same period last year. The increase is primarily due to the strong response to our DJ and drum catalogs, which contributed to our sales growth and remain a strong marketing tool driving customers to our website. The initial order fill rate in the second quarter of 2002 was 93% compared to 86% in the same period 2001. The initial order fill rate in the 2001 period was adversely impacted by operational issues, related to the consolidation of all fulfillment activities into our Kansan City facility in the second and third quarter of 2001.

During the second quarter we adopted a new accounting policy to conform with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, for shipping and handling fees paid by our customers in our direct response division, treating such fees as revenue. Prior to the reclassification, shipping and handling fees were recognized as a reduction to cost of goods sold. As a result, $3.1 million of shipping and handling fees were recognized as direct response revenue in the second quarter of 2002 and $2.2 million were recognized in the second quarter of 2001. The reclassification of these fees has no effect on operating income, net income or earnings per share for any period. We have made a conforming reclassification in all historical accounting periods in order to provide a comparable presentation. Please see our Current Report on Form 8-K dated July 25, 2002 for a

schedule of the reclassification amounts applied to our historical financial statements in order to implement this accounting policy.

Gross profit dollars for the three months ended June 30, 2002 compared to 2001 increased 16.5% to $65.4 million from $56.1 million. Gross profit as a percentage of net sales for the three months ended June 30, 2002 compared to 2001 decreased to 25.8% from 26.0%. Gross profit margin percentage for the retail stores after buying and occupancy costs was 24.7% compared to 25.7% in the second quarter of 2001. The decrease is partially due to a change in product mix which resulted in higher freight costs ($1.6 million) and with the remainder due to reduced merchandising margin. The gross profit margin for the direct response division was 30.3% for the quarter compared to 27.7% in the second quarter of 2001. The increase is primarily due to the consolidation of the fulfillment centers into Kansas City and the implementation of new "marry up" software and its resulting reduction in shipping and handling expenses. The marry-up software identifies instances in which multiple individual items going to a single customer can be consolidated into the most efficient packaging solution.

Selling, general and administrative expenses for the three months ended June 30, 2002 compared to 2001 increased 20.8% to $55.8 million from $46.2 million. As a percentage of net sales, selling, general and administrative expenses for the three months ended June 30, 2002 compared to 2001 increased to 22.0% from 21.4%. Selling, general and administrative expenses for the retail stores in the second quarter were 21.4% as a percentage of net sales compared to 21.0% in last year's second quarter. The increase reflects pre-opening costs associated with the new distribution center in Indianapolis, Indiana, ($1.4 million), higher labor costs at American Music to support growth objectives ($0.6 million), and increased insurance costs ($0.3 million), partially offset by the opening of fewer Guitar Center stores in the current quarter compared to the same period last year resulting in lower pre-opening and promotional costs ($0.4 million), as well as increased leveraging of our Guitar Center personnel costs. No significant costs were incurred related to the new distribution center in the prior year period. The facility became operational in early July and we are phasing in our new distribution program by vendor, primarily in the third quarter. Selling, general and administrative expense for the direct response division was 24.4% as a percentage of sales in the second quarter compared to 23.6% in the same period last year. The increase reflects increased catalog circulation costs and increased credit card fees due to the 12 month same as cash financing program.

Operating income, for the reasons stated above, decreased from $9.9 million to $9.6 million or 3.1% for the three months ended June 30, 2002.

Interest expense, net for the three months ended June 30, 2002 decreased to $3.0 million from $3.3 million in the same period of 2001. The decrease is due to lower interest rates applicable to our line of credit borrowings offset by additional borrowings.

In the three months ended June 30, 2002 and 2001, 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, 2002 and 2001. Although net sales increased by 17.8%, the decrease in the gross profit margin and the increase in selling, general and administrative expenses as a percentage of net sales resulted in net income that was unchanged from the same period last year.

Net sales increased to $508.7 million for the six months ended June 30, 2002, from $431.6 million for the comparable prior period, a 17.9% increase. Net sales from retail stores totaled $412.9 million, an increase of $58.5 million, or 16.5%. Sales from new stores contributed $36.1 million, or 61.7% of the increase. Comparable store sales increased 6%. The increase in comparable store sales was due to greater response to our advertising and marketing for our retail division than anticipated and closure of eleven stores of a competitor, Mars Music, which were in markets also served by us. Our management is presently anticipating comparable store sales growth of 5 to 7 percent for the second half of 2002, although fluctuations will undoubtedly take place from period to period. Our increase in anticipated comparative store sales from that expressed in our March quarterly report reflects our assumption that the improved business conditions experienced in the second quarter of 2002 will continue. The foregoing statements are forward-looking statement and are subject to the qualifications set forth below under "Forward Looking Statements." Net sales from the direct response channel totaled $95.8 million, an $18.6 million, or 24.0%, increase from the six months ended June 30, 2001. Internet sales increased 22.6% to $43.8 million from $35.8 for the same period last year. Catalog sales for the six months ended June 30, 2002 compared to 2001 increased 25.3% to $52.0 million from $41.5 million. The increase is primarily due to the recovery in customer spending levels as well as the strong response to our DJ and drum catalogs, which contributed to our sales growth and remain a strong marketing tool driving customers to our website. The initial order fill rate in the first six months of 2002 was 92% compared to 87% in the same period 2001. The initial order fill rate in the 2001 period was adversely impacted by operational issues related to the consolidation of all fulfillment activities into our Kansan City facility in the second quarter of 2001.

As described above, during the second quarter we adopted a new accounting policy to conform with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, for shipping and handling fees paid by our customers in our direct response division, treating such fees as revenue. As a result, $6.4 million of shipping and handling fees were recognized as direct response revenue in the six months ended 2002 and $5.1 million were recognized in the six months ended 2001.

Gross profit dollars for the six months ended June 30, 2002 compared to 2001 increased 16.8% to $129.5 million from $110.9 million. Gross profit as a percentage of net sales for the six months ended June 30, 2002 compared to 2001 decreased to 25.5% from 25.7%. Gross profit margin percentage for the retail stores after buying and occupancy costs was 24.7% compared to 25.1% for the six months ended June 30, 2001. The decrease is partially due to a change in product mix which resulted in higher freight costs ($2.9 million) and additional equipment rental costs at our retail stores ($1.0 million), with the remainder due to reduced merchandising margin, offset partially by a higher level of gross margin at American Music stores. The gross profit margin for the direct response division was 29.0% for the six months ended June 30, 2002 compared to 28.6% for the six months ended June 30, 2001. The increase is primarily due to the consolidation of the fulfillment centers into Kansas City and the implementation of the marry up software and its resulting reduction in shipping and handling expenses, slightly offset by the aggressive pricing in the January and February catalogs and the product mix being more weighted towards higher margin products during the same period last year.

Selling, general and administrative expenses for the six months ended June 30, 2002 compared to 2001 increased 23.7% to $111.2 million from $89.9 million. As a percentage of net sales, selling, general and administrative expenses for the six months ended June 30, 2002 compared to 2001 increased to 21.9% from 20.8%. Selling, general and administrative expenses for the retail stores in the second quarter, were 21.4% as a percentage of net sales compared to 20.5% in 2001. The increase reflects costs associated with the new distribution center in Indianapolis, Indiana ($1.8 million) as well as a higher level of expense for the American Music business as compared to the Guitar Center retail business and increased insurance costs ($0.7 million), offset by increased leveraging of our Guitar Center personnel costs. Selling, general and administrative expenses for American Music business

increased by $3.6 million reflecting higher spending and the fact that the 2001 period only included expense from the acquisition date in April 2001. Selling, general and administrative expenses for the direct response division were 23.9% in the six months ended June 30, 2002 compared to 22.4% in the same period last year. The increase primarily reflects increased wage costs and recruiting expenses related to Kansas City distribution center, increased catalog circulation costs and increased credit card fees due to t

Part I.	Financial Information
	Item 1. Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets—June 30, 2002 and December 31, 2001	3
	Consolidated Statements of Income—Three months ended June 30, 2002 and 2001	4
	Consolidated Statements of Income—Six months ended June 30, 2002 and 2001	5
	Consolidated Statements of Cash Flows—Six months ended June 30, 2002 and 2001	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	26
Part II.	Other Information
	Item 2. Changes in Securities and Use of Proceeds	26
	Item 4. Submission of Matters to a Vote of Security Holders	26
	Item 6. Exhibits and Reports on Form 8-K	26

		June 30, 2002			December 31, 2001
Assets
Current assets:
	Cash and cash equivalents	$	4,825		$	17,480
	Accounts receivable, net		19,177			19,243
	Merchandise inventory		271,433			249,685
	Prepaid expenses and deposits		9,719			6,404
	Deferred income taxes		4,744			4,744

Total current assets			309,898			297,556
Property and equipment, net			85,125			81,056
Goodwill			25,248			21,032
Deposits and other assets, net			4,973			5,040

		$	425,244		$	404,684

Liabilities and stockholders' equity
Current liabilities:
	Accounts payable	$	68,391		$	78,287
	Accrued expenses and other current liabilities		31,801			38,834
	Merchandise advances		11,930			12,780
	Revolving line of credit		104,599			76,904
	Current portion of long-term debt		456			638

Total current liabilities			217,177			207,443
Other long-term liabilities			4,358			3,716
Deferred income taxes			3,583			2,733
Long-term debt			66,821			66,924

Total liabilities			291,939			280,816
Stockholders' equity:
	Preferred Stock; authorized 5,000 shares at June 30, 2002 and December 31, 2001, none issued and outstanding		—			—
	Common stock, $0.01 par value, authorized 55,000 shares, issued and outstanding 22,486 at June 30, 2002 and 22,315 at December 31, 2001, respectively		225			223
	Additional paid in capital		249,962			248,063
	Accumulated deficit		(116,882	)		(124,418	)

Total stockholders' equity			133,305			123,868

		$	425,244		$	404,684

		Three months ended June 30,
		2002		2001
Net sales		$	253,887	$	215,570
Cost of goods sold, buying and occupancy			188,512		159,475

Gross profit			65,375		56,095
Selling, general and administrative expenses			55,757		46,170

Operating income			9,618		9,925
Interest expense, net			2,998		3,290

Income before income taxes			6,620		6,635
Income taxes			2,520		2,521

Net income		$	4,100	$	4,114

Net income per share
	Basic	$	0.18	$	0.19

	Diluted	$	0.18	$	0.18

Weighted average shares outstanding
	Basic		22,430		22,232

	Diluted		23,169		22,896

		Six months ended June 30,
		2002		2001
Net sales		$	508,710	$	431,617
Cost of goods sold, buying and occupancy			379,174		320,690

Gross profit			129,536		110,927
Selling, general and administrative expenses			111,219		89,926

Operating income			18,317		21,001
Interest expense, net			6,150		6,356

Income before income taxes			12,167		14,645
Income taxes			4,631		5,565

Net income		$	7,536	$	9,080

Net income per share
	Basic	$	0.34	$	0.41

	Diluted	$	0.33	$	0.40

Weighted average shares outstanding
	Basic		22,393		22,164

	Diluted		23,020		22,742

			Six months ended June 30,
			2002			2001
Operating activities
Net income			$	7,536		$	9,080
Adjustments to reconcile net income to net cash used in operating activities:
	Depreciation and amortization			7,943			7,251
	Amortization of deferred financing fees			328			249
	Loss on sale of assets			—			16
	Changes in operating assets and liabilities:
		Accounts receivable		816			4,441
		Merchandise inventories		(17,129	)		(16,155	)
		Prepaid expenses and deposits		(1,671	)		(973	)
		Other assets		(80	)		(1,883	)
		Accounts payable		(10,250	)		(10,818	)
		Accrued expenses and other current liabilities		(9,524	)		(5,923	)
		Other long term liabilities		642			322
		Merchandise advances		(855	)		(225	)

Net cash used in operating activities				(22,244	)		(14,618	)
Investing activities
Purchase of property and equipment				(13,655	)		(12,411	)
Acquisition of businesses				(5,932	)		(28,482	)
Investment in non-consolidated entity				—			(150	)

Net cash used in investing activities				(19,587	)		(41,043	)
Financing activities
Net change in revolving debt facility				27,695			42,753
Proceeds from exercise of stock options				1,901			878
Payments under capital lease				(420	)		(513	)

Net cash provided by financing activities				29,176			43,118
Net decrease in cash and cash equivalents				(12,655	)		(12,543	)
Cash and cash equivalents at beginning of year				17,480			12,934

Cash and cash equivalents at end of period			$	4,825		$	391

Non-cash activities
Acquisition of businesses:
Fair value of assets acquired			$	5,369		$	22,628
Liabilities assumed				(1,300	)		(8,235	)
Debt incurred				(2,400	)		—
Goodwill				4,263			16,181
Common stock issued				—			(2,092	)

Net cash paid for acquisitions				5,932			28,482
Cash acquired in acquisitions				—			278

Cash paid for acquisitions			$	5,932		$	28,760

Borrowings under capital leases			$	—		$	473

	Three Months Ended June 30, 2002						Six Months Ended June 30, 2002
	Retail		Direct Response		Total		Retail		Direct Response		Total
Net Sales	$	207,385	$	46,502	$	253,887	$	412,862	$	95,848	$	508,710
Income before income taxes		4,228		2,392		6,620		8,030		4,137		12,167
Total Assets								384,739		40,505		425,244