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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For The Fiscal Year Ended February 3, 2001
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from to
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Commission File Number 1-09100
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Gottschalks Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 77-0159791
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
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(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code: (559) 434-4800
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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Common Stock, $.01 par value New York Stock Exchange
- ---------------------------- -----------------------
Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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
N___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 31, 2001:
Common Stock, $.01 par value: $32,762,345
On March 31, 2001 the Registrant had outstanding 12,656,769 shares of
Common Stock.
Documents Incorporated By Reference: Portions of the Registrant's
definitive proxy statement with respect to its Annual Stockholders'
Meeting scheduled to be held on June 28, 2001, which will be filed
pursuant to Regulation 14A, are incorporated by reference into Part
III of this Form 10-K.
INDEX
PART I
Page No.
________
Item 1. Business................................... 1
Item 2. Properties................................. 15
Item 3. Legal Proceedings.......................... 16
Item 4. Submission of Matters to a Vote of
Security Holders........................... 17
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters................ 17
Item 6. Selected Financial Data.................... 17
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial
Condition.................................. 21
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................... 38
Item 8. Financial Statements and Supplementary
Data....................................... 40
Item 9. Changes in and Disagreements with Accountants
on Auditing and Financial Disclosures...... 40
PART III
Item 10. Directors and Executive Officers of the
Registrant................................. 40
Item 11. Executive Compensation..................... 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................... 42
Item 13. Certain Relationships and Related
Transactions............................... 43
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K........................ 43
Signatures........................................... 79
PART I
Item 1. BUSINESS
GENERAL
_______
Gottschalks Inc. is a regional department and specialty
store chain based in Fresno, California. The Company currently
operates 79 full-line "Gottschalks" department stores located in
seven Western states, with 39 stores located in California, 21 in
Washington, seven in Alaska, five in Idaho, four in Oregon, two
in Nevada and one in Utah. The Company also operates 17
"Gottschalks" and "Village East" specialty apparel stores which
carry a limited selection of merchandise. In fiscal 2000, the
Company's sales totaled $663.9 million, a 22.6% increase from
fiscal 1999 sales of $541.3 million.
The Company's department stores typically offer a wide
range of better to moderate brand-name and private-label
merchandise, including men's, women's, junior's and children's
apparel; cosmetics, shoes, fine jewelry and accessories; and home
furnishings including china, housewares, domestics, small
electric appliances and furniture (in selected locations). The
majority of the Company's department stores range from 40,000 to
150,000 in gross square feet, and are generally anchor tenants of
regional shopping malls or strategically located strip centers.
The Company has operated continuously for 97 years
since it was founded by Emil Gottschalk in 1904. At the time the
Company initially offered its stock to the public in 1986, the
Company operated 10 department stores. Since then, a total of 69
department stores have been added, with 42 of those stores being
added through acquisitions in fiscal 1998 and 2000. The Company
is incorporated in the state of Delaware.
Gottschalks Inc. has one wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC"). GCRC is a
qualified special purpose entity which was formed in 1994 in
connection with a receivables securitization program. (See Note 3
to the Consolidated Financial Statements.)
_________________________
ACQUISITIONS
____________
The Company completed the largest acquisition in its
operating history on July 24, 2000, strategically expanding its
presence throughout the Pacific Northwest and Alaska. Under the
transaction (hereinafter the "Lamonts acquisition"), the Company
acquired 37 department store leases, related store fixtures and
equipment and one store building from Lamonts Apparel, Inc.
("Lamonts"), a bankrupt specialty apparel store chain, for a cash
purchase price of $20.1 million. Concurrent with the closing of
the transaction, the Company sold one of the store leases for
$2.5 million, and subsequently terminated two other store leases,
resulting in a net cash purchase price of $17.6 million for 34
store leases, related store fixtures and equipment and one store
building. The Company did not acquire any of Lamonts' merchandise
inventory, customer credit card receivables or other corporate
assets in the transaction, nor did the Company assume any
material liabilities, other than the 34 store leases. The 34
stores acquired are located in five Western states, with 19
stores in Washington, seven in Alaska, five in Idaho, two in
Oregon and one in Utah. The newly acquired stores were converted
to the Gottschalks banner, re-merchandised and re-opened in
stages, beginning in late August with all stores completely open
by September 7, 2000.
On August 20, 1998, the Company acquired substantially
all of the assets and assumed certain liabilities of The Harris
Company ("Harris"), a wholly-owned subsidiary of El Corte Ingles
("ECI") of Spain. Harris operated nine full-line department
stores located in the Southern California area. As planned, the
Company closed one of the acquired stores on January 31, 1999. As
a result of the acquisition, Harris became a significant
stockholder of the Company. The Company also leases three of its
store locations from ECI.
OPERATING STRATEGY
__________________
Merchandising Strategy. The Company's merchandising
strategy is directed at offering and promoting moderate to upper-
moderately priced brand-name merchandise recognized by its
customers for style and value. Brand-name merchandise is
complemented with offerings of private-label and other higher and
budget-priced merchandise. Brand-name apparel, shoe, cosmetic and
accessory lines carried by the Company include Estee Lauder,
Lancome, Clinique, Chanel, Dooney & Bourke, Nine West, Liz
Claiborne, Carole Little, Calvin Klein, Ralph Lauren (Polo and
Chaps), Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan
Picone, Haggar, Koret and Levi Strauss. Brand-name merchandise
carried for the home includes Lenox, Krups, Calphalon, Royal
Velvet, Ralph Lauren, Tommy Hilfiger, KitchenAid and Samsonite.
The Company has also directed considerable effort
towards improving the quality and increasing the penetration of
private-label merchandise in its overall merchandise mix. The
Company's most well-recognized private-label is "Shaver Lake",
currently carried in the women's, men's and children's
departments, as well as in certain departments in the home
division. The "Shaver Lake" brand is exclusively offered in
Gottschalks stores, and provides an opportunity to increase
Gottschalks' brand acceptance and promote competitive
differentiation.
The Company purchases merchandise from numerous
suppliers. In no instance did purchases from any single vendor
amount to more than 5% of the Company's net purchases in fiscal
2000. The Company's merchandising activities are conducted
centrally from its corporate offices in Fresno, California.
The Company's merchandise mix as a percentage of total
sales (including leased department sales) is reflected in the
following table:
Fiscal Years
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Women's Apparel........ 28.0% 26.6% 27.0% 27.2% 26.3%
Cosmetics, Shoes
& Accessories(1)..... 22.5 22.2 19.0 17.8 17.5
Home................... 20.8 22.1 22.2 22.7 23.2
Men's Apparel.......... 14.0 13.7 14.0 14.0 14.5
Junior's and
Children's Apparel.... 10.7 10.3 10.1 10.5 10.7
Shoes, Fine Jewelry
& Other Leased
Departments(1)........ 4.0 5.1 7.7 7.8 7.8
----- ----- ----- ----- -----
Total Sales......... 100.0% 100.0% 100.0% 100.0% 100.0%
_____________________ ===== ===== ===== ===== =====
(1) The Company currently operates the shoe
departments in 42 of its department stores,
and leases the operation of the shoe
departments in 36 of its Pacific Northwest and
Alaska locations. One of the Company's
department stores does not have a shoe
department. The Company expects to terminate
the shoe department lease at the end of July
2001 and assume the operation of the shoe
departments in those locations effective
August 1, 2001. The Company also leases the
operation of its fine jewelry department and
beauty salons in certain of its stores.
Store Location and Expansion Strategy. The Company's
stores are located primarily in diverse, growing, non-major
metropolitan or suburban areas in the western United States.
Management believes the Company has a competitive advantage in
offering better to moderate brand-name merchandise and a high
level of service to customers in secondary markets where there is
strong demand and fewer competitors offering such merchandise.
The Company has historically avoided expansion into major
metropolitan areas which are well served by the Company's larger
competitors.
The Company's department stores are generally anchor
tenants of regional shopping malls or strategically located strip
centers. Other anchor tenants in the malls or strip centers
generally complement the Company's goods with a mixture of
competing and non-competing merchandise, and serve to increase
customer foot traffic. With new regional shopping mall
construction on the decline, management believes the Company has
a competitive advantage in being willing to accommodate diverse
locations into its operation that may not be desired by its
larger competitors that adopt a more standardized approach to
expansion.
The Company generally seeks to open at least two new
department stores per year, although more stores may be opened in
any given year if it is believed to be financially attractive to
the Company. The Company's future expansion plans include seeking
new locations which will serve to "fill in" geographical areas
between existing stores. Management believes this strategy will
improve the Company's ability to leverage advertising,
transportation and other operating costs more effectively. In
addition to opening individual store locations, the Company may
also pursue additional selective strategic acquisitions. (See
Part I, Item I, "Acquisitions".)
In addition to opening and acquiring new stores, the
Company has continued to invest in the renovation and refixturing
of its existing store locations in an attempt to maintain and
improve market share in those market areas. Store renovation
projects can range from updating decor and improving in-store
lighting, fixturing, wall merchandising and signage, to more
extensive remodeling and expansion projects. The Company
sometimes receives reimbursement from mall owners and vendors for
certain of its new store construction costs and costs associated
with the renovation and refixturing of existing store locations.
Such contributions have enhanced the Company's ability to enter
into attractive market areas that are consistent with the
Company's long-term expansion plans.
The following tables present selected data related to
the Company's stores for the fiscal years indicated:
Fiscal Years
Stores open at year-end: 2000 1999 1998 1997 1996
- ----------------------- ---- ---- ---- ---- ----
Department stores 79(1) 42 40(2) 34 32
Specialty stores (3) 17 20 22 25 27
-- -- -- -- --
TOTAL 96 62 62 59 59
== == == == ==
Gross store square
footage (in thousands):
- -----------------------
Department stores 6,139 4,377 4,301 3,391 3,175
Specialty stores 63 77 83 94 101
----- ----- ----- ----- -----
TOTAL 6,202 4,454 4,384 3,485 3,276
===== ===== ===== ===== =====
_______________________________
(1) The Company opened 37 new department stores in fiscal
2000, including the 34 store locations acquired from Lamonts
on July 24, 2000, and three additional new stores opened
during the third and fourth quarter of the year.
(2) The Company acquired nine stores from Harris in August
1998, closing one of the stores acquired on
January 31, 1999, as planned. Two of the stores acquired are
located in malls with pre-existing Gottschalks locations.
The Company combines separate locations within the same mall
for the purpose of determining the total number of stores
being operated, resulting in a net addition of six
department stores in fiscal 1998.
(3) The Company closed the pre-existing specialty store
location in Redding, California in fiscal 2000, and opened a
new 74,200 gross square foot department store in a nearby
location. The Company has continued to close certain free-
standing Village East stores as their leases expire and
incorporate those stores as separate departments into nearby
Gottschalks department stores. Sales generated by these
departments are combined with total specialty store sales
for reporting purposes.
Following is a summary of the Company's department
store locations, by store size:
# of
stores
open
------
Larger than 200,000 gross square feet 3
150,000 - 199,999 gross square feet 7
100,000 - 149,999 gross square feet 9
40,000 - 99,999 gross square feet 45
20,000 - 39,999 gross square feet 15
--
TOTAL 79
==
Marketing Strategy. The Company's marketing strategy
is based on a multi-media approach, using newspapers, television,
radio, direct mail and catalogs to highlight seasonal promotions,
selected brand-name merchandise and frequent storewide sales
events. Advertising efforts are focused on communicating branded
merchandise offered by the Company, and the high levels of
quality, value and customer service available in the Company's
stores. In its efforts to improve the effectiveness of its
advertising expenditures, the Company uses data captured through
its proprietary credit card and third party credit cards to
develop segmented advertising and promotional events targeted at
specific customers who have established purchasing patterns for
certain brands, departments or store locations.
The Company's sales promotion strategy also focuses on
special events such as fashion shows, bridal shows and wardrobing
seminars in its stores and in the communities in which they are
located to convey fashion trends to its customers. The Company
receives reimbursement for certain of its promotional activities
from some of its vendors.
The Company offers selected merchandise, a Bridal
Registry service, and other general corporate information on the
World Wide Web at http://www.gottschalks.com, and sells
merchandise through its mail order department.
Customer Service. Management believes one way the
Company can differentiate itself from its competitors is to
provide a consistently high level of customer service. The
Company has a "Four Star" customer service program, designed to
continually emphasize and reward high standards of customer
service in the Company's stores. Sales associates are encouraged
to keep notebooks of customers' names, clothing sizes, birthdays,
and major purchases, and to telephone customers about promotional
sales and to send thank-you notes and other greetings to their
customers during their normal working hours. Product seminars and
other training programs are frequently conducted in the Company's
stores and its corporate headquarters to ensure that sales
associates will be able to provide useful product information to
customers. The Company also offers opportunities for management
training and leadership classes for those associates identified
for promotion within the Company. Various financial incentives
are offered to the Company's sales associates for reaching sales
performance goals.
In addition to providing a high level of personal sales
assistance, management believes that well-stocked stores, a
liberal return and exchange policy, frequent sales promotions and
a conveniently located and attractive shopping environment
enhance its customers' shopping experience and increase customer
loyalty. Management also believes that maintaining appropriate
staffing levels in its stores, particularly at peak selling
periods, is essential for providing a high level of customer
service.
Distribution of Merchandise. The Company
currently distributes merchandise to its stores through two
distribution centers. The Company's primary distribution center
is a 420,000 square foot facility located in Madera, California.
The facility, constructed in 1989, is located in close proximity
to the Company's corporate headquarters in Fresno, California.
The facility currently serves 42 locations, including all of the
stores located in California and Nevada, and two stores located
in Oregon. The Company currently distributes merchandise to its
newly acquired locations in Washington, Alaska, Idaho, Utah and
two of the stores located in Oregon through an outsourced
facility located in Kent, Washington. In fiscal 2000,
approximately 89.0% of the total sales of the Company were
generated by the locations serviced through the Company's Madera
distribution center. In fiscal 2001, that amount is expected to
be in excess of 75.0%. Distributions are made on a daily basis to
the stores from both of the facilities.
The Company has continued to improve its
logistical systems, focusing on the adoption of new technology
and operational best practices, with the goals of receiving,
processing and distributing merchandise to stores at a faster
rate and at a lower cost per unit. The logistical system
currently installed at its Madera distribution facility enables
the Company to "cross dock" a significant percentage of its
merchandise and process merchandise through the distribution
center and to the stores in minutes and hours as compared to
several days in the past. The Company has formal guidelines for
vendors with respect to shipping, receiving and invoicing for
merchandise. Vendors that do not comply with the guidelines are
charged specified fees depending upon the degree of non-
compliance. Such fees are intended to offset higher costs
associated with the processing of and payment for such
merchandise.
Private-Label Credit Card. The Company issues its own
credit card, which management believes enhances the Company's
ability to generate and retain market acceptance and increase its
sales and other revenues. As described more fully in Note 3 to
the Consolidated Financial Statements, the Company sells its
customer credit card receivables to its wholly-owned subsidiary,
GCRC, on an ongoing basis in connection with a receivables
securitization program. The Company has continued to service and
administer the receivables under the program.
The following table represents a summary of information
related to the Company's credit card receivable portfolio for the
fiscal years indicated:
Fiscal Years
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands of dollars)
Average credit
card receivables
serviced (1) $80,992 $79,125 $69,143 $64,612 $64,162
Service charge income $16,832 $15,618 $13,522 $11,711 $10,604
Credit sales as a
% of total sales 41.4%(2) 44.2% 43.1% 43.7% 43.1%
_______________________
(1) Includes receivables sold, the retained interest in
receivables sold, and other receivables, all of which
are serviced by the Company.
(2) Excluding credit sales generated in the 37 stores
opened in fiscal 2000, which are currently generating a
lower credit sales percentage than the Company's more
mature stores, credit sales as a percentage of total
sales was 43.9% for fiscal 2000.
The Company has a variety of credit-related programs which
management believes have improved customer service and have
increased service charge revenues. Such programs include:
- an "Instant Credit" program, through
which successful credit applicants receive a
discount ranging from 10% to 50% (depending on
the results of the Instant Credit scratch-off
card) on the first day's purchases made with
the Company's credit card;
- a "55-Plus" charge account program, which
offers additional merchandise and service
discounts to customers 55 years of age and
older;
- "Gold Card" and "55-Plus Gold Card"
programs, which offer special services at a
discount for customers who have a minimum net
spending history on their charge accounts of
$1,000 per year; and
- The "Gottschalks Rewards" program, which
offers an annual rebate certificate for up to
5% of annual credit purchases on the Company's
credit card (up to a maximum of $10,000 of
annual purchases) which can be applied towards
future purchases of merchandise.
As of March 31, 2001, the Company had approximately
747,000 active credit card holders, as compared to 650,000 active
credit card holders as of March 31, 2000. Management believes
holders of the Company's credit card typically buy more
merchandise from the Company than other customers.
Competition and Seasonality. See Part I, Item I, "Risk
Factors -- Competition" and "Risk Factors -- Seasonality and
Weather".
Employees. As of February 3, 2001, the Company had
approximately 8,300 employees, including 2,200 employees working
part-time (less than 20 hours per week on a regular basis). As of
January 29, 2000, the Company had 6,550 employees (including
1,950 working part-time). The Company hires additional temporary
employees and increases the hours of part-time employees during
seasonal peak selling periods. Employees in eight former Lamonts
locations in King County Washington are covered by a collective
bargaining agreement. Lamonts had a collective bargaining agreement
with the United Food and Commercial Worker's Union (UFCW) covering
approximately 300 store associates in eight stores. Since the acquisition
of Lamonts' assets, which included the leases of those eight stores, the
Company engaged in good faith bargaining with the union. As a result, an
agreement with a 2 1/2 year term was ratified by the union on
April 7, 2001. Management does not believe that the agreement
will have a material affect on the Company's business, its financial
condition or results of operations. Management considers its
employee relations to be good.
Executive Officers of the Registrant. Information
relating to the Company's executive officers is included in Part
III, Item 10 of this report and is incorporated herein by
reference.
FORWARD-LOOKING STATEMENTS
__________________________
This Form 10-K contains certain "forward-looking
statements" regarding activities, developments and conditions
that the Company anticipates may occur or exist in the future
relating to things such as:
- revenues and earnings;
- savings or synergies from acquisitions;
- future capital expenditures;
- the Company's expansion strategy;
- the impact of acquisitions;
- the impact of sales promotions and customer service
programs on consumer spending;
- the termination of the shoe department
leases;
- the Company's competitive advantages;
- the amount of merchandise to be
distributed through the Madera distribution
center;
- lease extensions and suitable alternative
store locations;
- the Company's future operation of the 34
stores acquired in the Lamonts acquisition
- the impact of the current energy crisis
in the Western United States; and
- the utilization of consumer credit programs.
Such forward-looking statements can be identified by words such
as: "believes," "anticipates," "expects," "intends," "seeks,"
"may," "will," and "estimates". The Company bases its forward-
looking statements on its current views and assumptions. As a
result, those statements are subject to risks and uncertainties
that could cause actual results to differ materially from those
predicted. Some of the factors that could cause the Company's
results to differ from those predicted include the following risk
factors. The following list of important factors is not exclusive
and the Company does not undertake to revise any forward-looking
statement to reflect events or circumstances that occur after the
statement is made.
RISK FACTORS
____________
Lamonts Acquisition. On July 24, 2001, the Company
acquired 34 former Lamonts store leases, related store fixtures
and equipment, and one store building for a net purchase price of
$17.6 million in cash. This acquisition has substantially
increased the size and scope of the Company. No assurance can be
given that the Company will be successful in managing and
operating the acquired stores or that such activities will not
require a disproportionate amount of management's attention. In
addition, the costs associated with the Lamonts acquisition, as
well as lower than expected operating results at certain of the
former Lamonts stores during their first five months of operation
by the Company, contributed to a $36.3 million operating cash
flow deficit in fiscal 2000. Although the Company is evaluating
certain initiatives to improve the performance of the stores
acquired from Lamonts, there can be no assurance that the Company
will be able to profitably operate the former Lamonts stores in
the future. The Company's inability to successfully integrate the
acquired stores could have a material adverse affect on the
Company's financial condition and results of operations.
General Economic and Market Conditions. The Company's
stores are located primarily in non-major metropolitan, suburban
and agricultural areas in the western United States. A
substantial portion of the stores are located in California and
Washington. The Company's success depends upon consumer spending,
which may be materially and adversely affected by any of the
following events or conditions:
- a downturn in the national, California or
Pacific Northwest economy;
- a downturn in the local economies where the stores
are located;
- a decline in consumer confidence;
- an increase in interest rates;
- inflation or deflation;
- consumer credit availability;
- consumer debt levels;
- the energy crisis in California and the
Pacific Northwest;
- healthcare and workers' compensation
insurance costs;
- tax rates and policy; and
- unemployment trends.
Seasonality and Weather. Seasonal influences affect
the Company's sales and profits. The Company experiences its
highest levels of sales and profits during the Christmas selling
months of November and December, and, to a lesser extent, during
the Easter holiday and Back-to-School seasons. The Company has
increased working capital needs prior to the Christmas season to
carry significantly higher inventory levels and generally
increases its selling staff levels to meet anticipated demands.
Any substantial decrease in sales during its traditional peak
selling periods could materially adversely impact the Company's
business, financial condition and results of operations. Factors
that could cause results to vary include:
- the timing and level of sales promotions;
- the weather;
- fashion trends;
- local unemployment levels; and
- the overall health of the national, regional
and local economies.
The Company depends on normal weather patterns across
its markets. Historically, unusual weather patterns have
significantly impacted its business.
Consumer Trends. The Company's success partially
depends on its ability to anticipate and respond to changing
consumer preferences and fashion trends in a timely manner.
However, it is difficult to predict what merchandise consumers
will demand, particularly merchandise that is trend driven.
Failure to accurately predict constantly changing consumer
tastes, preferences and spending patterns could adversely affect
short and long term results.
Expansion Strategy - Future Growth and Recent
Acquisitions. The Company's expansion strategy involves opening
and acquiring new stores or remodeling and expanding existing
stores. The successful implementation of such expansion plans
(including any potential acquisitions) depends upon many factors,
including the ability of the Company to:
- identify, negotiate, finance, obtain, construct,
lease or refurbish suitable store sites;
- hire, train and retain qualified personnel;
and
- integrate new stores into existing information
systems and operations.
The Company cannot guarantee that it will achieve its
targets for opening or acquiring new stores or for remodeling or
expanding existing stores, or that such stores will operate
profitably when opened or acquired. If the Company fails to
effectively implement its expansion strategy, it could materially
and adversely affect the Company's business, financial condition
and results of operations. In addition, while the Company has not
historically closed department stores, it may consider the
closure of stores in the future.
Competition. The retail business is highly
competitive. The Company's primary competitors include national,
regional and local chain department and specialty stores, general
merchandise stores, discount and off-price retailers and outlet
malls. Increased use and acceptance of the internet and other
home shopping formats also creates increased competition. Some
of these competitors offer similar or better branded merchandise
and have greater financial resources to purchase larger
quantities of merchandise at lower prices. The Company's success
in counteracting these competitive pressures depends on its
ability to:
- offer merchandise which reflects the different
regional and local needs of its customers;
- differentiate and market itself as a home-town,
locally-oriented store (as opposed to its more
nationally focused competitors); and
- continue to offer adequate quantities of better to
moderate branded merchandise.
Existing or new competitors, however, may begin to
carry such brand-name merchandise or increase their offering of
better quality merchandise which may negatively impact the
Company's business, financial condition and results of
operations.
Vendor Relations. The Company believes its close
relationships with its key vendors enhance its ability to
purchase brand-name merchandise at competitive prices. If the
Company loses key vendor support or its vendors withdraw brand-
name merchandise, it could have a material adverse effect on the
Company's business, financial condition and results of
operations. The Company cannot guarantee that it will be able to
acquire brand-name merchandise at competitive prices or on
competitive terms in the future.
Leverage and Restrictive Covenants. Due to the level
of the Company's indebtedness, any material adverse development
affecting the Company could significantly limit its ability to
withstand competitive pressures and adverse economic conditions,
take advantage of expansion opportunities or to meet its
obligations as they become due. The Company's existing debt
agreements impose operating and financial restrictions that limit
the Company's ability to make dividend payments and grant liens,
among other matters.
Interest Rate Risk. The Company's borrowings under its
revolving line of credit facility, 2000-1 Series certificate and
one of its long-term financing agreements bear interest at a
variable rate. If interest rates increase significantly, the
Company's financial results could be materially adversely
affected. See Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk."
California Electric Utilities Crisis. A substantial
portion of the Company's stores are located in California. As a
result, the Company is particularly sensitive to negative
occurrences in that state. Recently, problems associated with the
deregulation of the electric industry in California have resulted
in intermittent service interruptions and are expected to result
in significantly higher utility rates for the Company. The
Company's inability to adequately address these problems could
have a material adverse affect on its financial position and
results of operations. Management believes that power
interruptions and higher utilities costs may also be incurred in
certain other states in which the Company operates.
Consumer Credit Risks. The Company's private-label
credit card facilitates sales and generates additional revenue
from credit card fees. Changes in credit card use, default rates
or in the laws regulating the granting or servicing of credit
(including late fees and finance charges applied to outstanding
balances) could materially adversely affect the Company's
business, financial condition and results of operations. In
addition, the Company cannot guarantee that the credit card
programs it has implemented will increase or maintain customer
spending.
Securitization of Accounts Receivable. The Company
securitizes the receivables generated under its private-label
credit card. Under the securitization program, the Company sells
all of its customer credit card receivables to a wholly-owned
subsidiary, GCRC, and those receivables are simultaneously
conveyed to a qualified special purpose entity which issues
securities representing interests in the receivables to
investors. The Company cannot guarantee that it will continue to
generate receivables by credit card holders at the same rate, or
that it will establish new credit card accounts at the rate it
has in the past. Any material decline in the generation of
receivables or in the rate of cardholder payments on accounts
could have a material adverse effect on the Company's financial
condition and results of operations.
Dependence on Key Personnel. The Company's success
depends to a large extent on its executive management team. The
loss of the services of certain of its executives could have a
material adverse effect on the Company. The Company cannot
guarantee that it will be able to retain such key personnel or
attract additional qualified members to its management team in
the future.
Labor Conditions. The Company depends on attracting
and retaining a large number of qualified employees to maintain
and increase sales and to execute its customer service programs.
Many of the employees are in entry level or part-time positions
with historically high levels of turnover. The Company's ability
to meet its employment needs is dependent on a number of
factors, including the following factors which affect the
Company's ability to hire or retain qualified employees:
- unemployment levels;
- minimum wage legislation; and
- changing demographics in the local economies where
stores are located.
Item 2. PROPERTIES
Corporate Offices and Distribution Centers. The
Company's corporate headquarters are located in an office
building in northeast Fresno, California. The building was
constructed in 1991 by a limited partnership in which the Company
is the sole limited partner holding a 36% interest in the
partnership and the building constructed. The Company leases
89,000 square feet of the 176,000 square foot building under a
twenty-year lease expiring in the year 2011. The lease contains
two consecutive ten-year renewal options and the Company receives
favorable rental terms under the lease. The Company believes that
its current office space is adequate to meet its office space
requirements for the foreseeable future.
The Company's primary distribution center, completed in
1989, is a 420,000 square foot distribution facility located in
Madera, California, which is in close proximity to the Company's
corporate headquarters. The facility was originally designed to
provide for the future growth of the Company and its processing
capacity and physical size is readily expandable. The Company
leases the distribution facility from an unrelated party under a
20-year lease expiring in the year 2009, with six consecutive
five-year renewal options. The Company also leases a distribution
center located in Kent, Washington from an unrelated party under
a one-year lease expiring in February 2002.
Store Leases and Locations. The Company owns seven of
its 79 department stores, and leases the remaining 72 department
stores and all of its 17 specialty stores. Most of the Company's
department store leases expire in various years through 2021, and
have renewal options for one or more periods ranging from five to
20 years. Leases for specialty store locations generally do not
contain renewal options. While there is no assurance that the
Company will be able to negotiate further extensions of any
particular lease, management believes that satisfactory
extensions or suitable alternative store locations will be
available.
Certain of the department and specialty apparel leases
provide for the payment of additional contingent rentals based on
a percentage of sales, require the payment of property taxes,
insurance and maintenance costs, and in certain cases, also
provide for rent abatements and scheduled rent increases during
the lease terms. The Company leases three of its department
stores from ECI, an affiliate of the Company. Additional
information pertaining to the Company's store leases is included
in Note 9 to the Consolidated Financial Statements.
The following table contains additional information
about the Company's stores open as of the end of fiscal 2000:
# Gross
of Square
State Stores Footage(1)
----- ------ ---------
Department Stores
- -----------------
California 39 4,104,250
Washington 21 1,036,500
Alaska 7 358,300
Idaho 5 214,500
Oregon 4 183,100
Nevada 2 206,000
Utah 1 36,500
-- ---------
Total 79 6,139,150
== =========
Specialty Stores:
- -----------------
California 16 59,550
Nevada 1 3,400
-- ------
Total 17 62,950
__________ == ======
(1) Reflects total store square footage, including office
space, storage, service and other support space that is
not dedicated to direct merchandise sales.
Item 3. LEGAL PROCEEDINGS
The Company is party to legal proceedings and claims
which have arisen during the ordinary course of business. In the
opinion of management, the ultimate outcome of such litigation
and claims is not expected to have a material adverse effect on
the Company's financial position or results of its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders
of the Company during the fourth quarter of the fiscal year
covered in this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed for trading on
both the New York Stock Exchange ("NYSE") and the Pacific Stock
Exchange. The following table sets forth the high and low sales
prices per share of common stock as reported on the NYSE
Composite Tape under the symbol "GOT" during the periods
indicated:
2000 1999
-------------- --------------
Fiscal Quarters High Low High Low
- --------------- ---- --- ---- ---
1st Quarter 6.94 4.69 7.81 6.75
2nd Quarter 6.56 4.38 9.19 7.19
3rd Quarter 6.81 4.75 9.19 8.06
4th Quarter 4.94 4.13 9.06 6.81
On March 30, 2001, the Company had 812 stockholders of
record, some of which were brokerage firms or other nominees
holding shares for multiple stockholders. The closing price of
the Company's common stock as reported by the NYSE on March 30,
2001 was $5.05 per share.
The Company has not paid a cash dividend since its
initial public offering in 1986. The Board of Directors has no
present intention to pay cash dividends in the foreseeable
future, and will determine whether to declare cash dividends in
the future depending on the Company's earnings, financial
condition and capital requirements. In addition, the Company's
credit agreement with Congress Financial Corporation prohibits
the Company from paying dividends without prior written consent
from that lender.
Item 6. SELECTED FINANCIAL DATA
The Company reports on a 52/53 week fiscal year ending
on the Saturday nearest to January 31. The fiscal years ended
February 3, 2001, January 29, 2000, January 30, 1999, January 31,
1998 and February 1, 1997, are referred to herein as fiscal 2000,
1999, 1998, 1997 and 1996, respectively. All fiscal years noted
include 52 weeks, except for fiscal 2000, which includes 53
weeks. The Company's results of operations for fiscal 2000 were
not materially affected by the 53rd week.
The selected financial data below should be read in
conjunction with Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of the Company and related
notes included elsewhere herein. The Company completed the
acquisition of 34 stores from Lamonts on July 24, 2000. The
acquisition has affected the comparability of the Company's
financial results. In addition, as described in Note 1 to the
Consolidated Financial Statements, certain amounts in the
accompanying fiscal 1999, 1998, 1997 and 1996 financial
statements have been reclassified to conform with the fiscal 2000
presentation.
RESULTS OF OPERATIONS:
- -----------------------
Fiscal Years
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands of dollars, except share data)
Net sales $663,868 $541,275 $478,538 $414,361 $390,749
Net credit revenues 9,150 8,709 6,988 6,478 4,886
Net leased department
revenues(1) 3,948 4,209 5,944 5,135 4,198
------- ------- ------- ------- -------
Total revenues 676,966 554,193 491,470 425,974 399,833
Costs and expenses:
Cost of sales 433,724 354,010 313,431 274,843 259,524
Selling, general and
administrative
expenses 201,765 167,561 152,231 132,034 124,976
Depreciation and
amortization(2) 11,505 9,465 8,040 6,078 5,585
New store pre-opening
costs(3) 6,183 495 421 589 1,337
Asset impairment charge(4) 1,933
Acquisition related
expenses 859 673
------- ------- ------- ------- -------
Total costs
and expenses 653,177 533,464 474,982 414,217 391,422
======= ======= ======= ======= =======
Operating income 23,789 20,729 16,488 11,757 8,411
Other (income) expense:
Interest expense 13,750 11,408 9,470 7,325 8,111
Miscellaneous income (1,414) (1,555) (2,011) (1,955) (2,792)
------- ------- ------- ------- -------
12,336 9,853 7,459 5,370 5,319
------- ------- ------- ------- -------
Income before
income tax expense 11,453 10,876 9,029 6,387 3,092
Income tax expense 4,374 4,240 3,747 2,657 1,258
------- ------- ------- ------- -------
Net income $ 7,079 $ 6,636 $ 5,282 $ 3,730 $ 1,834
======= ======= ======= ======= =======
Net income per
common share -
basic and diluted $ 0.56 $ 0.53 $ 0.46 $ 0.36 $ 0.18
======= ======= ======= ======= =======
Weighted-average
number of common
shares outstanding:
Basic 12,614 12,577 11,418 10,474 10,461
Diluted 12,632 12,616 11,449 10,491 10,461
SELECTED BALANCE SHEET DATA:
- ----------------------------
Fiscal Years
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands of dollars)
Retained interest in
receivables sold $19,853 $29,138 $ 37,399 $ 15,813 $ 20,871
Receivables, net 8,840 7,597 18,985 6,650 4,636
Merchandise
inventories 185,226 130,028 123,118 99,294 89,472
Property and
equipment, net 143,670 120,393 113,645 99,057 87,370
Total assets 407,221 316,164 326,596 244,080 234,370
Working capital 115,052 104,719 96,231 67,579 70,231
Long-term obligations,
less current portion 113,012 80,674 74,114 62,420 60,241
Subordinated note
payable to affiliate 21,303 20,961 20,618 --- ---
Stockholders' equity 117,573 110,238 103,468 83,905 80,139
OTHER SELECTED DATA:
- -------------------
Fiscal Years
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands of dollars,
except per square foot data)
Sales growth:
Total store sales 22.6%(5) 9.9% 15.4% 6.2% 5.3%
Comparable store
sales(6) 5.6%(7) 7.7% 2.1% 3.3% 1.4%
Comparable stores data(8):
Sales per selling
square foot $ 176 $ 168 $ 170 $ 160 $ 170
Selling square
footage 3,384 2,758 2,621 2,642 2,161
Capital expenditures $25,704 $16,059 $16,801 $14,976 $6,845
Current ratio 1.93:1 2.38:1 1.98:1 2.01:1 2.10:1
____________________________
(1) Net leased department revenues consist of
sales totaling $27.7 million, $29.0 million,
$40.2 million, $35.2 million and $32.8 million
in fiscal 2000, 1999, 1998, 1997 and 1996,
respectively, less cost of sales.
(2) Depreciation and amortization includes the amortization
of goodwill and favorable lease rights (beginning in
fiscal 2000) totaling $666,000, $536,000 and $291,000
in fiscal 2000, 1999 and 1998, respectively, and
$116,000 in both 1997 and 1996.
(3) Fiscal 2000 includes $5.6 million pre-tax ($3.5
million, or $0.28 per share, after-tax) of non-
recurring costs associated with the re-opening of the
stores acquired from Lamonts on July 24, 2000.
Excluding this amount, net income for fiscal 2000 was
$10.6 million, or $0.84 per share.
(4) Represents a non-recurring charge related
to the write-off of an investment in a co-operative
buying group. Excluding this amount, net income for
fiscal 1999 was $7.8 million, or $0.62 per share.
(5) The increase in total store sales in
fiscal 2000 is partially due to the addition
of 34 stores acquired from Lamonts in July
2000. (See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations - Net Sales" below.)
(6) Comparable store sales in fiscal 1999 were materially
affected by the termination of the shoe department leases
in 28 department stores effective August 1, 1999, and by the
implementation of Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", which requires
the Company to report sales in leased departments
separately from sales in owned departments. Comparable
store sales data for fiscal years 1995 - 1998 would not
be materially affected by the exclusion of leased
department sales, due to the consistency of the
contribution of those departments during those years.
(7) Represents comparable store sales growth for the first 52
weeks of fiscal 2000 as compared to the same period of fiscal
1999. Comparable store sales for the 53 week period in fiscal
2000 increased by 6.9% as compared to the 52 week period in
fiscal 1999.
(8) Includes leased department sales in order to facilitate
an understanding of the Company's sales relative to its
selling square footage.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of
significant factors which have affected the Company's financial
position and its results of operations for the periods presented
in the accompanying Consolidated Financial Statements. As
described more fully in Note 2 to the Consolidated Financial
Statements, the Company completed the largest acquisition in its
operating history on July 24, 2000, acquiring 34 store leases,
related store fixtures and equipment, and one store building from
Lamonts. As noted below, the acquisition has affected the
comparability of the Company's financial results. In addition,
fiscal 2000 results include 53 weeks as compared to 52 weeks in
fiscal 1999. Management believes the Company's results of
operations for fiscal 2000 were not materially affected by
results applicable to the 53rd week.
Results of Operations
______________________
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
2000 1999 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Net credit revenues 1.4 1.6 1.5
Net leased department revenues 0.6 0.8 1.2
----- ----- -----
102.0 102.4 102.7
Costs and expenses:
Cost of sales 65.3 65.4 65.5
Selling, general and
administrative expenses 30.4 31.0 31.8
Depreciation and amortization 1.7 1.7 1.7
New store pre-opening costs 1.0 0.1 0.1
Asset impairment charge 0.4
Acquisition related costs 0.1
----- ----- -----
98.4 98.6 99.2
----- ----- -----
Operating income 3.6 3.8 3.5
Other (income) expense:
Interest expense 2.1 2.1 2.0
Miscellaneous income (0.2) (0.3) (0.4)
----- ----- -----
1.9 1.8 1.6
----- ----- -----
Income before income tax expense 1.7 2.0 1.9
Income tax expense 0.6 0.8 0.8
----- ----- -----
Net income 1.1% 1.2% 1.1%
===== ===== =====
Fiscal 2000 Compared to Fiscal 1999
Net Sales
__________
Net sales increased by approximately $122.6 million, or
22.6%, to $663.9 million in fiscal 2000 as compared to $541.3
million in fiscal 1999. This increase is primarily due to
additional sales volume generated by the 37 stores opened during
the second half of fiscal 2000, and by two new stores opened in
Danville and Davis, California in October and November 1999,
respectively. The increase is also due to a 6.9% increase in
comparable store sales. Fiscal 2000 included 53 weeks of sales as
compared to 52 weeks in fiscal 1999. Excluding the 53rd week in
fiscal 2000, net sales increased by 21.1%, with a 5.6% increase
in comparable store sales. The increase in comparable store sales
in fiscal 2000 resulted partially from the conversion of the shoe
departments in 28 Gottschalks locations from leased to owned
departments, effective August 1, 1999. Sales generated in those
departments prior to the termination of the lease on August 1,
1999 are included in Net Leased Department Revenues, as described
below.
The Company operated 79 department stores and 17
specialty apparel stores as of the end of fiscal 2000, as
compared to 42 department stores and 20 specialty apparel stores
as of the end of fiscal 1999. Thirty-seven of these department
stores were opened in the second half of fiscal 2000, including
the 34 stores which were acquired from Lamonts on July 24, 2000
and re-opened during the period beginning August 24 and
continuing through September 7, 2000, and the three new stores
opened in Grants Pass, Oregon, Walla Walla, Washington and
Redding, California on August 23, November 8 and November 10,
2000, respectively. The new department store in Redding is a
replacement for a pre-existing specialty store in that location,
which was closed.
Net Credit Revenues
_____________________
Net credit revenues associated with the Company's
private label credit card increased by $441,000, or 5.1%, in
fiscal 2000 as compared to fiscal 1999. As a percent of net
sales, net credit revenues decreased to 1.4% of net sales in
fiscal 2000 as compared to 1.6% in fiscal 1999. Net credit
revenues consist of the following:
(In thousands of dollars) 2000 1999
_________________________________________________________________
Service charge revenues $16,832 $15,618
Interest expense on securitized
receivables (4,425) (4,069)
Charge-offs on receivables sold and
provision for credit losses on
receivables ineligible for sal e (3,642) (3,013)
Gain on sale of receivables 385 173
------ ------
$ 9,150 $ 8,709
====== ======
Service charge revenues increased by approximately $1.2
million, or 7.8%, in fiscal 2000 as compared to fiscal 1999, but
as a percent of net sales, decreased to 2.5% in fiscal 2000 as
compared to 2.9% in fiscal 1999. The dollar increase is primarily
due to a change in the method of assessing service charges to an
average-daily balance method effective April 1999 (previously
assessed based on the balance as of the end of a billing period),
an increase in the volume of late charge fees collected on
delinquent credit card balances and additional service charge
revenues generated by newly originated customer credit card
accounts in the Company's 37 new stores opened in fiscal 2000.
The decrease as a percentage of net sales is primarily due to
lower average outstanding balances on newly originated customer
accounts in those 37 new stores, and such accounts are currently
generating 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 41.4% in fiscal 2000 as compared
to 44.2% in fiscal 1999. Excluding credit sales generated in the
37 new stores, credit sales as a percentage of total sales were
43.9% in fiscal 2000.
Interest expense on securitized receivables increased
by $356,000, or 8.7%, in fiscal 2000 as compared to fiscal 1999.
This increase is primarily due to a higher level of outstanding
securitized borrowings during the period resulting from the
issuance of the 2000-1 Series certificate in November 2000.
Charge-offs on receivables sold and the provision for credit
losses on receivables ineligible for sale increased by $629,000,
or 20.9%, in fiscal 2000 as compared to fiscal 1999. As a percent
of net sales, however, such losses decreased to 0.5% in fiscal
2000 as compared to 0.6% in fiscal 1999. The gain on sale of
receivables increased by $212,000 in fiscal 2000 as compared to
fiscal 1999 as a result of an increase in the volume of
receivables sold as compared to the prior year.
Net Leased Department Revenues
______________________________
Net rental income generated by the Company's various
leased departments decreased by $261,000, or 6.2%, to $3.9
million in fiscal 2000 as compared to $4.2 million in fiscal
1999. This decrease is primarily due to the termination of the
shoe department leases in 28 Gottschalks locations as of the end
of the first half of 1999. The Company assumed the operation of
those shoe departments upon the termination of the lease and shoe
department sales in those locations beginning in the second half
of 1999 are included in total sales for financial reporting
purposes. The decrease in net rental income was partially offset
by additional revenues generated by the leased shoe departments
in 36 of the Company's new locations in the Pacific Northwest and
Alaska, which have been operated by an independent lessee since
being opened. The Company expects to terminate that lease at the
end of July 2001 and assume the operation of those departments
beginning August 2001.
As required by SAB No. 101, leased department revenues
are presented net of the related costs for financial reporting
purposes. Sales generated by the Company's leased departments,
consisting primarily of the shoe departments (currently in 36
Pacific Northwest and Alaskan locations), fine jewelry
departments and the beauty salons, totaled $27.7 million in
fiscal 2000 and $29.0 million in fiscal 1999.
Cost of Sales
_____________
Cost of sales, which includes costs associated with the
buying, handling and distribution of merchandise, increased by
approximately $79.7 million to $433.7 million in fiscal 2000 as
compared to $354.0 million in fiscal 1999, an increase of 22.5%.
This increase is due to the increase in the Company's net sales.
The Company's gross margin percentage increased to 34.7% in
fiscal 2000 as compared to 34.6% in fiscal 1999.
Selling, General and Administrative Expenses
____________________________________________
Selling, general and administrative expenses increased
by approximately $34.2 million to $201.8 million in fiscal 2000
as compared to $167.6 million in fiscal 1999, an increase of
20.4%. As a percent of net sales, selling, general and
administrative expenses decreased to 30.4% in fiscal 2000 as
compared to 31.0% in fiscal 1999. The dollar increase is
primarily due to operating costs associated with the 37 new
stores opened during the second half of fiscal 2000. The decrease
as a percentage of net sales is primarily due to leveraging the
Company's fixed costs and corporate overhead against a higher
sales base. This decrease was partially offset by higher costs as
a percentage of net sales incurred in the 37 new stores opened in
fiscal 2000, which are currently being operated with a higher
payroll and advertising structure than the Company's existing
stores. Such expenditures are expected to decrease as a
percentage of net sales as the new stores mature.
The Company expects to incur higher utilities costs in
fiscal 2001 as a result of the energy crisis in California and
the Pacific Northwest. In an attempt to partially offset the
impact of the expected rate increase, the Company is currently
implementing various programs aimed at reducing energy
consumption at all facilities. The Company also expects to incur
higher health care and workers' compensation costs in fiscal
2001. Programs aimed at reducing costs in other controllable
areas of the Company are also currently being developed.
Depreciation and Amortization
______________________________
Depreciation and amortization expense, which includes
the amortization of intangibles (goodwill and favorable lease
rights), increased by approximately $2.0 million to $11.5 million
in fiscal 2000 as compared to $9.5 million in fiscal 1999, an
increase of 21.6%. As a percent of net sales, depreciation and
amortization expense remained unchanged at 1.7% in fiscal 2000
and 1999. The dollar increase is primarily due to additional
depreciation related to assets acquired from Lamonts, capital
expenditures for new stores and the renovation of existing
stores, and information systems enhancements, both to integrate
the newly acquired stores into the Company's existing systems and
for other system enhancements. The dollar increase also relates
to goodwill and favorable lease rights recorded as a result of
the Lamonts acquisition. Excluding the amortization of
intangibles, depreciation and amortization expense increased by
$1.9 million, or 21.4%, as compared to the prior year, and as a
percentage of net sales, remained unchanged at 1.6%.
New Store Pre-Opening Costs
_____________________________
New store pre-opening costs, which are expensed as
incurred, typically include costs such as payroll and fringe
benefits for store associates, store rents, grand opening
advertising, credit solicitation and other costs incurred in the
opening of a new store. As a result, the amount of new store pre-
opening expenses recognized can vary significantly from year to
year depending on the number of new stores opened.
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 re-opening of the 34 stores
acquired from Lamonts. The Company also incurred $551,000 in
connection with the opening of the three new stores in Grants
Pass, Oregon, Walla Walla, Washington and Redding, California.
New store pre-opening costs of $495,000 were recognized in fiscal
1999, representing costs incurred in connection with the opening
of two new stores in Davis and Danville, California.
Asset Impairment Charge
_______________________
The Company recognized a non-recurring asset impairment
charge of approximately $1.9 million in fiscal 1999 resulting
from the write-off of an investment in a cooperative merchandise
buying group accounted for under the cost method.
Interest Expense
_________________
Interest expense, which includes the amortization of
deferred financing costs, increased by approximately $2.3 million
to $13.8 million in fiscal 2000 as compared to $11.4 million in
fiscal 1999, an increase of 20.5%. As a percent of net sales,
interest expense remained unchanged at 2.1% in fiscal 2000 and
1999. The dollar increase is primarily due to higher average
outstanding borrowings on the Company's working capital facility
and an increase in the weighted-average interest rate applicable
to the facility (8.76% in fiscal 2000 compared to 7.52% in fiscal
1999). The increase is also due to the issuance of the $10.0
million note payable in connection with the Lamonts acquisition
(see Note 2 to the Consolidated Financial Statements).
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.
Miscellaneous Income
_____________________
Miscellaneous income, which includes the amortization
of deferred income and other miscellaneous income and expense
amounts, decreased to approximately $1.4 million in fiscal 2000
as compared to $1.6 million in fiscal 1999. As a percent of net
sales, miscellaneous income decreased to 0.2% in fiscal 2000 as
compared to 0.3% in fiscal 1999.
Income Taxes
_____________
The Company's effective tax rate was 38.2% in fiscal
2000 as compared to 39.0% in fiscal 1999. (See Note 10 to the
Consolidated Financial Statements.)
Net Income
__________
As a result of the foregoing, the Company reported net
income of $7.1 million, or $0.56 per share (basic and diluted),
in fiscal 2000. This amount includes $5.6 million (pre-tax) of
non-recurring costs incurred in connection with the re-opening of
the 34 stores acquired from Lamonts. Excluding such costs on an
after-tax basis, net income for fiscal 2000 increased by $2.8
million, or $0.22 per share, to $10.6 million, or $0.84 per share
in fiscal 2000, as compared to $7.8 million, or $0.62 per share
(excluding the non-recurring item), in fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Net Sales
__________
Net sales increased by approximately $62.7 million, or
13.1%, to $541.3 million in fiscal 1999 as compared to $478.5
million in fiscal 1998. This increase is primarily due to
additional sales volume generated by the eight new stores
acquired from Harris which were not open for the entire period in
the prior year, and by two new stores opened in Danville and
Davis, California in October and November 1999, respectively. The
increase is also due to a 7.7% increase in comparable store
sales, resulting partially from the conversion of the shoe
departments in 28 stores from leased to owned departments,
effective August 1, 1999. Pursuant to SAB No. 101, sales
generated in these shoe departments prior to the termination of
the lease on August 1, 1999 are included in Net Leased Department
Revenues, as described below.
Net Credit Revenues
____________________
Net credit revenues associated with the Company's
private label credit card increased by approximately $1.7
million, or 24.6%, in fiscal 1999 as compared to fiscal 1998. As
a percent of net sales, net credit revenues increased to 1.6% of
net sales in fiscal 1999 as compared to 1.5% in fiscal 1998. Net
credit revenues consist of the following:
(In thousands of dollars) 1999 1998
____________________________________________________________________
Service charge revenues $15,618 $13,522
Interest expense on securitized
receivables (4,069) (3,314)
Charge-offs on receivables sold and
provision for credit losses on
receivables ineligible for sale (3,013) (3,175)
Gain (loss) on sale of receivables 173 (45)
------ ------
$ 8,709 $ 6,988
====== ======
Service charge revenues increased by approximately $2.1
million, or 15.5%, in fiscal 1999 as compared to fiscal 1998.
This increase is primarily due to additional service charge
revenues generated by customer credit card receivables acquired
from Harris, a change in the method of assessing service charges
to an average-daily balance method effective April 1999
(previously assessed based on the balance as of the end of a
billing period), and an increase in the volume of late charge
fees collected on delinquent credit card balances. The Company's
credit sales as a percent of total sales increased to 44.2% in
fiscal 1999 as compared to 43.1% in fiscal 1998.
Interest expense on securitized receivables increased
by $755,000, or 22.8%, in fiscal 1999 as compared to fiscal 1998.
This increase is primarily due to a higher level of outstanding
securitized borrowings during the period, combined with a higher
weighted-average interest rate applicable to such borrowings
(7.59% in fiscal 1999 as compared to 7.30% in fiscal 1998).
Charge-offs on receivables sold and the provision for credit
losses on receivables ineligible for sale decreased by $162,000,
or 5.1%, in fiscal 1999 as compared to 1998, primarily due to a
favorable trend in credit losses during the period. As a result
of an increase in the volume of receivables sold as compared to
the prior year, the gain (loss) on sale of receivables increased
by $218,000 in fiscal 1999 as compared to fiscal 1998.
Net Leased Department Revenues
________________________________
Net rental income generated by the Company's various
leased departments decreased by approximately $1.7 million, or
29.2%, to $4.2 million in fiscal 1999 as compared to $5.9 million
in fiscal 1998. This decrease is primarily due to the termination
of the shoe department leases in 28 store locations effective
August 1, 1999. Shoe department sales in those locations after
August 1, 1999 are included in total sales for financial
reporting purposes.
Leased department revenues are presented net of the
related costs for financial reporting purposes. Sales generated
by the Company's leased departments, consisting primarily of the
shoe departments (prior to August 1, 1999), fine jewelry
departments and the beauty salons, totaled $29.0 million in
fiscal 1999 and $40.2 million in fiscal 1998.
Cost of Sales
_____________
Cost of sales, which includes costs associated with the
buying, handling and distribution of merchandise, increased by
approximately $40.6 million to $354.0 million in fiscal 1999 as
compared to $313.4 million in fiscal 1998, an increase of 12.9%.
This increase is due to the increase in sales. The Company's
gross margin percentage increased to 34.6% in fiscal 1999 as
compared to 34.5% in fiscal 1998.
Selling, General and Administrative Expenses
____________________________________________
Selling, general and administrative expenses increased
by approximately $15.4 million to $167.6 million in fiscal 1999
as compared to $152.2 million in fiscal 1998, an increase of
10.1%. As a percent of net sales, selling, general and
administrative expenses decreased to 31.0% in fiscal 1999 as
compared to 31.8% in fiscal 1998, primarily due to higher sales
volume gained through the acquisition of the Harris stores,
combined with on-going Company-wide cost reduction efforts.
Depreciation and Amortization
______________________________
Depreciation and amortization expense increased by
approximately $1.5 million to $9.5 million in fiscal 1998 as
compared to $8.0 million in fiscal 1998, an increase of 17.7%.
As a percent of net sales, depreciation and amortization remained
unchanged at 1.7% in fiscal 1999 and fiscal 1998. The dollar
increase is primarily due to additional depreciation related to
assets acquired from Harris and capital expenditures for the
renovation of existing stores, and a full year of amortization of
Harris goodwill.
New Store Pre-Opening Costs
____________________________
New store pre-opening costs of $495,000 were recognized
in fiscal 1999, representing costs incurred in connection with
the opening of two new stores in Danville and Davis, California.
New store pre-opening costs incurred in fiscal 1998, totaling
$421,000, represents the amortization of costs arising from two
new store openings in fiscal 1997.
Non-Recurring Items
____________________
The Company recognized a non-recurring asset impairment
charge of approximately $1.9 million in fiscal 1999 resulting
from the write-off of an investment in a cooperative merchandise
buying group accounted for under the cost method.
Fiscal 1998 results include acquisition related
expenses of $859,000, consisting primarily of costs incurred
prior to the elimination of duplicative operations of Harris,
including merchandising, advertising, credit and distribution
functions. By the end of fiscal 1998, all duplicative operations
of Harris had been eliminated.
Interest Expense
_________________
Interest expense, which includes the amortization of
deferred financing costs, increased by approximately $1.9 million
to $11.4 million in fiscal 1999 as compared to $9.5 million in
fiscal 1998, an increase of 20.5%. As a percent of net sales,
interest expense increased to 2.1% in fiscal 1999 as compared to
2.0% in fiscal 1998. These increases are primarily due to
additional interest associated with the Subordinated Note issued
to Harris (see Note 8 to the Consolidated Financial Statements),
combined with higher average outstanding borrowings under the
Company's working capital facility, which were required to
facilitate increased inventory purchases for new stores and for
the newly owned shoe departments. These increases were partially
offset by a decrease in the weighted-average interest rate
applicable to outstanding borrowings under the Company's working
capital facility (7.52% in fiscal 1999 as compared to 7.88% in
fiscal 1998), resulting primarily from a 1/4% interest rate
reduction effective March 1999.
Miscellaneous Income
______________________
Miscellaneous income, which includes the amortization
of deferred income and other miscellaneous income and expense
amounts, decreased by approximately $400,000 to $1.6 million in
fiscal 1999 as compared to $2.0 million in fiscal 1998.
Miscellaneous income in fiscal 1998 includes a credit of
approximately $350,000 to standardize the amortization periods of
certain donated properties.
Income Taxes
_____________
The Company's effective tax rate decreased to 39.0% in
fiscal 1999 as compared to 41.5% in fiscal 1998, primarily due to
the implementation of tax planning strategies. (See Note 10 to
the Consolidated Financial Statements.)
Net Income
____________
As a result of the foregoing, the Company's net income
increased by approximately $1.3 million to $6.6 million in fiscal
1999 as compared to $5.3 million in fiscal 1998. On a per share
basis (basic and diluted), net income increased to $0.53 per
share in fiscal 1999 as compared to $0.46 per share in fiscal
1998. Excluding the previously described non-recurring asset
impairment charge, net income for fiscal 1999 was $7.8 million,
or $0.62 per share.
Liquidity and Capital Resources
_________________________________
In fiscal 2000, the Company's working capital
requirements were met through a combination of borrowings under
its revolving line of credit, short-term trade credit, and by
sales of proprietary credit card accounts under its receivables
securitization program. Working capital increased by
approximately $10.4 million to $115.1 million in fiscal 2000 as
compared to $104.7 million in fiscal 1999. The Company's ratio of
current assets to current liabilities decreased to 1.93:1 as of
the end of fiscal 2000 as compared to 2.38:1 as of the end of
fiscal 1999.
As described more fully below, the Company acquired 34
stores from Lamonts in fiscal 2000 and capital requirements,
costs associated with opening the stores and lower than expected
operating results generated by those stores reduced the Company's
liquidity position as of the end of fiscal 2000.
Acquisition of 34 Stores from Lamonts. As described
more fully in Note 2 to the Consolidated Financial Statements, on
July 24, 2000, the Company acquired 34 former Lamonts store
leases, related store fixtures and equipment, and one store
building for a net purchase price of $17.6 million in cash. The
acquisition significantly expanded the Company's presence in the
Pacific Northwest and Alaska. A portion of the purchase price for
the assets was financed through the issuance of a $10.0 million
three-year note payable to a third party lender. The Company
financed the remainder of the purchase price from existing
financial resources. The Company incurred approximately $5.6
million of non-recurring costs in connection with the re-opening
of the former Lamonts stores. The Company also experienced a
significant outflow of cash to purchase an adequate level of
merchandise to open the stores, to refurbish the stores and to
integrate the stores into the Company's existing information
systems. In addition to the cash required to acquire and open the
stores, operating results produced by those stores for their
first five months of operation were lower than expected. These
factors contributed to the $36.3 million operating cash flow
deficit in fiscal 2000.
Management believes that the cash required to operate
and maintain an optimal level of merchandise in the acquired
stores in fiscal 2001 will be significantly less than that
required to initially open those stores in fiscal 2000.
Management has also implemented various initiatives aimed at
improving sales, profitability and cash flows generated by those
stores. Such initiatives include, but are not limited to,
revising the merchandise mix in the stores based on current
selling trends, improving the effectiveness of advertising
expenditures, improving sales associate productivity, and
reducing staffing levels and other operating costs, where
appropriate. In addition, the Company is evaluating the possible
sale or closure of five to seven of the stores which are
currently considered to be either underperforming, or
inconsistent with the long-term operating strategy of the
Company, due to their small size, low sales volume and/or
location. The Company is also evaluating the possible mortgage
financing of the building acquired in the Lamonts transaction.
Although management believes that these initiatives will improve
the Company's liquidity position in fiscal 2001, there can be no
assurance that the Company will integrate the Lamonts stores into
its operations successfully and improve their profitability.
Sources of Liquidity.
______________________
Revolving Line of Credit. The Company has a $180.0
million revolving line of credit facility with Congress Financial
Corporation (Western) through March 31, 2002. Borrowings under
the arrangement are limited to a restrictive borrowing base that
is generally equal to 75% of eligible merchandise inventories,
and at the Company's option, such borrowings may be increased to
80% of such inventories during the period of November 1 through
December 31 of each year, to fund increased seasonal inventory
requirements. During the period of March 1, 2000 through February
28, 2001, interest on outstanding borrowings was charged at a
rate of LIBOR plus 1.875% (7.9% at February 3, 2001), with no
interest charged on the unused portion of the line of credit. The
interest rate was increased to LIBOR plus 2.00% on March 1, 2001.
The Company had $18.3 million of excess availability under the
credit facility as of February 3, 2001, and was in compliance
with the single financial loan covenant applicable to the
facility.
Receivables Securitization Program. As described more
fully in Note 3 to the Consolidated Financial Statements, the
Company sells all of its accounts receivable arising under its
private-label credit cards on an ongoing basis under a
receivables securitization facility. The facility provides the
Company with an additional source of working capital and long-
term financing that is generally more cost-effective than
traditional debt financing.
On March 1, 1999, the Company issued a $53.0 million
principal amount 7.66% Fixed Base Class A-1 Credit Card
Certificate (the "1999-1 Series") to a single investor through a
private placement. Proceeds from the issuance of the 1999-1
Series were used to repay the outstanding balances of previously
issued certificates, totaling $26.9 million as of that date, and
the remaining funds were used to purchase additional receivables
from the Company. The holder of the 1999-1 Series certificate
earns interest on a monthly basis at a fixed interest rate of
7.66%, and the outstanding principal balance of the certificate,
which is off-balance sheet for financial reporting purposes, is
to be repaid in twelve equal monthly installments commencing
September 2003 and continuing through August 2004.
On November 16, 2000, a Variable Base Class A-1 Credit Card
Certificate (the "2000-1 Series") was also issued in the
principal amount of up to $24.0 million. The 2000-1 Series was
issued to provide financing for receivables in the Company's
portfolio in excess of amounts required to support the 1999-1
Series, and for the additional receivables expected to be
generated by the 37 new stores opened in the second half of
fiscal 2000. The Company can borrow against the 2000-1 Series
certificate on a revolving basis, similar to a revolving line of
credit arrangement. Such borrowings are limited to a specified
percentage of the outstanding balance of receivables underlying
the certificate. The holder of the 2000-1 Series certificate
earns interest on a monthly basis at a variable rate equal to one-
month LIBOR plus 1.5% (7.38% at February 3, 2001). As of February
3, 2001, $18.0 million was issued and outstanding against the
certificate, which was the maximum amount available for
borrowings as of that date. The 2000-1 Series certificate was
issued for an initial 364-day commitment period (expiring October
31, 2001), and may be extended for subsequent 364-day periods at
the option of GCC Trust and the certificate holder, through July
31, 2003. The outstanding principal balance of the certificate,
which is treated as off-balance sheet for financial reporting
purposes, is to be repaid in six equal monthly installments
commencing in the month following the end of the commitment
period. In the event the commitment period is extended through
July 31, 2003, the principal is to be repaid in twelve equal
monthly installments commencing September 2003 and continuing
through August 2004. Management presently expects to reissue the
certificate for an additional 364-day period upon its expiration
on October 31, 2001.
Monthly cash flows generated by the Company's credit card
portfolio, consisting of principal and interest collections, are
first used to pay certain costs of the program, which include the
payment of principal (when required) and interest to the
investor, and monthly servicing fees to the Company. Any excess
cash flows are then available to fund additional purchases of
newly generated receivables, ultimately serving as a source of
working capital financing for the Company. Subject to certain
conditions, the Company may expand the securitization program to
meet future receivables growth.
Uses of Liquidity.
_____________________
Capital expenditures in fiscal 2000,
totaling $25.7 million, were primarily related to tenant
improvements and fixtures and equipment for the 37 new department
stores opened during the year, the renovation and refixturing of
certain existing locations, and for various information systems
enhancements, including those required to integrate the newly
acquired stores into the Company's existing systems. The Company
presently has no commitments to open or remodel any stores in
fiscal 2001. Management has the ability to limit or delay a
significant percentage of its current fiscal 2001 planned capital
expenditures without adversely affecting the Company's business,
its financial condition or its results of operations.
As described more fully in Note 8 to the Consolidated
Financial Statements, the Company has other long-term
obligations, including capital lease obligations, with total
outstanding balances of $39.5 million at February 3, 2001 ($35.2
million as of January 29, 2000). The obligations mature at dates
ranging from 2001 to 2010, bear interest at fixed and variable
rates ranging from 8.63% to 10.45%, and are collateralized by
various properties and equipment of the Company. The scheduled
annual principal maturities on the Company's various long-term
obligations are $5.8 million, $4.8 million, $3.4 million,
$906,000 and $660,000 for fiscal 2001 through 2005, with $18.1
million due thereafter. In addition, in fiscal 1998 the Company
issued a $22.2 million 8% Subordinated Note in connection with
the Harris acquisition. The Subordinated Note is due August 20,
2003, but may be extended to August 2006 under certain
circumstances. (See Notes 7 and 8 to the Consolidated Financial
Statements.)
Certain of the Company's long-term debt and lease
arrangements contain various restrictive financial covenants. The
Company was in compliance with all such restrictive financial
covenants as of February 3, 2001.
Management believes the previously described sources of
liquidity, including, without limitation, the anticipated
proceeds from the proposed sale or mortgage financing of certain
of the stores acquired in the Lamonts transaction, will be
adequate to meet the Company's working capital, capital
expenditure and debt service requirements for fiscal 2001.
Inflation
_________
Although inflation has not been a material factor in
the Company's operations during the past several years, the
Company has experienced increases in the costs of certain of its
merchandise, salaries, employee benefits and other general and
administrative costs, including health care and workers'
compensation costs. The Company is generally able to offset these
increases by adjusting its selling prices or by modifying its
operations. The Company's ability to adjust selling prices is
limited by competitive pressures in its market areas.
The Company accounts for its merchandise inventories on
the retail method using last-in, first-out (LIFO) cost based upon
the department store price indices published by the Bureau of
Labor Statistics. Under this method, the cost of products sold
reported in the financial statements approximates current costs
and thus reduces the impact of inflation due to increasing costs
on reported income.
Seasonality
_____________
The Company's business, like that of most retailers, is
subject to seasonal influences, with the major portion of net
sales, gross profit and operating results realized during the
Christmas selling months of November and December of each year,
and to a lesser extent, during the Easter and Back-to-School
selling seasons. The Company's results may also vary from quarter
to quarter as a result of, among other things, the timing and
level of the Company's sales promotions, weather, fashion trends
and the overall health of the economy, both nationally and in the
Company's market areas. Working capital requirements also
fluctuate during the year, increasing substantially prior to the
Christmas selling season when the Company must carry
significantly higher inventory levels.
The following table sets forth unaudited quarterly
results of operations for fiscal 2000 and 1999 (in thousands,
except per share data). (See Note 15 to the Consolidated
Financial Statements.)
2000
_____________________________________________
Quarter Ended April 29 July 29 October 28 February 3
- ------------- -------- ------- ---------- ----------
Net sales (1) $121,335 $129,939 $153,694 $258,900
Gross profit 41,034 45,067 57,316 86,727
Income (loss) before
income tax expense
(benefit) (2) (1,390) 17 (4,086) 16,912
Net income (loss) ( 841) 11 (2,472) 10,381
Net income (loss)
per common share -
basic and diluted $ (0.07) $ (0.00) $ (0.20) $ 0.83
Weighted-average
number of common
shares outstanding:
Basic 12,597 12,605 12,621 12,582
Diluted 12,597 12,629 12,621 12,616
1999
___________________________________________
Quarter Ended May 1 July 31 October 30 January 29
- ------------- ----- ------- ---------- ----------
Net sales (1) $111,502 $119,209 $123,330 $187,234
Gross profit 37,930 41,351 44,366 63,618
Income (loss) before
income tax expense
(benefit)(3) (1,851) ( 180) 615 12,292
Net income (loss) (1,079) ( 105) 358 7,462
Net income (loss)
per common share -
basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59
Weighted-average
number of common
shares outstanding:
Basic 12,575 12,575 12,575 12,581
Diluted 12,575 12,575 12,646 12,615
(1) The Company's net sales by quarter in both fiscal 2000 and
1999 have been increased to include shipping and handling
fees charged to customers, in accordance with EITF No. 00-10
(see "Recently Issued Accounting Standards" below). Such
amounts were previously credited to selling, general and
administrative costs.
(2) Income (loss) before income tax expense (benefit) in the
three month periods ended July 29, 2000 and October 28, 2000
include non-recurring, pre-tax charges for costs incurred in
the re-opening of the 34 stores acquired from Lamonts
totaling $977,000 and $4,655,000, respectively. The total of
such costs recognized in fiscal 2000 amounted to $5,632,000.
(3) Income (loss) before income tax expense (benefit) in the
three month period ended January 29, 2000 includes a non-
recurring, pre-tax charge for $1,933,000 to reflect the
impairment of an investment accounted for under the cost
method.
Recently Issued Accounting Standards
____________________________________
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after
June 15, 2000. SFAS No. 133, as amended, establishes accounting
and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and
for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the
definition of a derivative. The Company will adopt SFAS No. 133
effective as of the beginning of fiscal 2001. Management does not
expect its adoption to have a significant impact on the financial
position, results of operations, or cash flows of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," was issued
in September 2000 and replaces SFAS No. 125. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001,
with certain disclosure requirements effective for fiscal years
ending after December 15, 2000 (fiscal 2000 for the Company). The
statement carries over most of the provisions of SFAS No. 125
without reconsideration and, accordingly, the adoption of SFAS
No. 140 is not expected to materially affect the Company's
financial position or the results of its operations. The Company
adopted the disclosure provisions of SFAS No. 140 for its fiscal
2000 financial statements.
Effective as of the end of fiscal 2000, the Company adopted the
provisions of Emerging Issues Task Force ("EITF") Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs," which
requires that all amounts billed to a customer in a sale
transaction for shipping and handling, including customer
delivery charges, be classified as revenue, and that all prior
periods presented be reclassified to conform with the required
presentation. The Company had previously included shipping and
handling revenues and costs in its selling, general and
administrative costs.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risks in the normal
course of business due to changes in interest rates on short-term
borrowings under its revolving line of credit, the Series 2000-1
certificate and on one of its long-term borrowing arrangements.
As of February 3, 2001, borrowings subject to a variable interest
rate represented 57.0% of the Company's total outstanding
borrowings (both on and off-balance sheet). The Company does not
engage in financial transactions for speculative or trading
purposes, nor does the Company purchase or hold any derivative
financial instruments.
The interest payable on the Company's revolving line of
credit, 2000-1 Series certificate and one of its long-term
borrowing arrangements, are based on variable interest rates and
are therefore affected by changes in market interest rates. An
increase of 88 basis points on existing floating rate borrowings
(a 10% change from the Company's weighted-average interest rate
as of February 3, 2001) would reduce the Company's pre-tax net
income and cash flow by approximately $869,000. This 88 basis
point increase in interest rates would not materially affect the
fair value of the Company's fixed rate financial instruments.
(See Note 1 to the Consolidated Financial Statements.)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under Part IV,
Item 14, included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 of Form 10-K, other
than the following information required by Paragraph (b) of Item
401 of Regulation S-K, is incorporated by reference from those
portions of the Company's definitive proxy statement with respect
to the Annual Stockholders' Meeting scheduled to be held on June
28, 2001, to be filed pursuant to Regulation 14A (the "2001
Proxy") under the headings "Nominees for Election as Director"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
As of March 31, 2001, the name, age and title of the
senior executive officers of the Company are as follows:
Name Age(1) Position
- ---- ------ --------
James R. Famalette 49 President and Chief
Executive Officer
Gary L. Gladding 61 Executive Vice President/
General Merchandise Manager
Michael S. Geele 50 Senior Vice President and
Chief Financial Officer
Michael J. Schmidt 59 Senior Vice President/
Director of Stores
David K. Vernon 45 Senior Vice
President/General Merchandise
Manager - Home and Merchandise
Planning
James R. Famalette became President and Chief Executive
Officer of the Company on June 25, 1999 after serving as
President and Chief Operating Officer of the Company since April
14, 1997. Prior to joining the Company, Mr. Famalette was
President and Chief Executive Officer of Liberty House, a
department and specialty store chain based in Honolulu, Hawaii,
from 1993 through 1997, and served in a variety of other
positions with Liberty House from 1987 through 1993, including
Vice President, Stores and Vice President, General Merchandise
Manager. From 1982 through 1987, he served as Vice President,
General Merchandise Manager and later as President of Village
Fashions/Cameo Stores in Philadelphia, Pennsylvania, and from
1975 to 1982 served as a Divisional Merchandise Manager for
Colonies, a specialty store chain, based in Allentown,
Pennsylvania. Mr. Famalette serves on the Board of Directors of
the National Retail Federation.
Gary L. Gladding has been Executive Vice President of
the Company since 1987, and joined the Company as Vice
President/General Merchandise Manager in 1983 (1). Prior to 1983,
he served in a variety of management positions with Lazarus
Department Stores, a division of Federated Department Stores,
Inc., and the May Department Stores Co.
Michael S. Geele became Senior Vice President and Chief
Financial Officer of the Company on January 21, 1999. Prior to
joining the Company, Mr. Geele was Chief Financial Officer of
Southwest Supermarkets in Phoenix, Arizona from 1995 to 1998.
From 1991 to 1995, Mr. Geele served as Vice President of Finance
for Smitty's Super Valu in Phoenix, Arizona, and from 1981 to
1991 served in various financial positions with Smitty's,
including Senior Director and Corporate Controller. Mr. Geele is
a Certified Public Accountant.
Michael J. Schmidt became Senior Vice
President/Director of Stores of the Company in 1985(1). From 1983
through 1985, he was Manager of the Gottschalks Fashion Fair
store. Prior to joining the Company, he held management positions
with Liberty House, Allied Corporation and R.H. Macy & Co., Inc.
David K. Vernon became Senior Vice President/General
Merchandise Manager - Home and Merchandise Planning in 1999,
after serving as Vice President/General Merchandise Manager -
Home since 1996. From 1993 to 1996, he was the Divisional Vice
President of Broadway Department Stores, and prior to that held
senior merchandising manager positions with various other
department stores, including Macy's, Rich's and Bullocks.
(1) References to the Company prior to 1986 are more
specifically to the Company's predecessor and former subsidiary,
E. Gottschalk and Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated
by reference from those portions of the Company's 2001 Proxy
under the headings "Executive Compensation" and "Director
Compensation For Fiscal Year 2000."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated
by reference from the portion of the Company's 2001 Proxy under
the heading "Security Ownership of Certain Beneficial Owners and
Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated
by reference from the portion of the Company's 2001 Proxy under
the heading "Certain Relationships and Related Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a)(1) The following consolidated financial statements of
Gottschalks Inc. and Subsidiary as required by Item 8
are included in this Part IV, Item 14:
Consolidated balance sheets - As of February 3, 2001
and January 29, 2000
Consolidated income statements -- Fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999
Consolidated statements of stockholders' equity --
Fiscal years ended February 3, 2001, January 29, 2000
and January 30, 1999
Consolidated statements of cash flows -- Fiscal years
ended February 3, 2001, January 29, 2000 and January
30, 1999
Notes to consolidated financial statements -- Three
years ended February 3, 2001
Independent auditors' report
(a)(2) The following financial statement schedule of
Gottschalks Inc. and Subsidiary is included in Item
14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are included in the consolidated financial statements,
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are required by Item 601 of
Regulation S-K and Item 14(c):
Incorporated by
Reference From
the
Exhibit Following
No. Description Document
- ------- ------------------------------- ------------------
3.1 Certificate of Incorporation Registration
of the Registrant, as amended Statement on Form
S-1 (File No. 33-3949)
3.2 By-Laws of the Registrant, Filed electronically
herewith
10.1 Agreement of Limited Partnership Annual Report on
dated March 16, 1990, by and Form 10-K for the
between River Park Properties I year ended February
and Gottschalks Inc. relating to 2, 1991 (File No.
the Company's corporate 1-09100)
headquarters
10.2 Gottschalks Inc. Retirement Registration
Savings Plan(*) Statement on Form
S-1 (File No.
33-3949)
10.3 Participation Agreement dated Annual Report on
as of December 1, 1988 among Form 10-K for the
Gottschalks Inc., General Foods year ended January
Credit Investors No. 2 Corporation 29, 1994 (File No.
and Manufacturers Hanover Trust 1-09100)
Company of California relating to
the sale-leaseback of the Stockton
and Bakersfield department stores
and the Madera distribution facility
10.4 Lease Agreement dated December 1, Annual Report on
1988 by and between Manufacturers Form 10-K for the
Hanover Trust Company of California year ended January
and Gottschalks Inc. relating to 29, 1994 (File No.
the sale-leaseback of department 1-09100)
stores in Stockton and Bakersfield,
California and the Madera
distribution facility
10.5 Ground Lease dated December 1, Annual Report on
1988 by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback 1-09100)
of the Bakersfield department store
10.6 Memorandum of Lease and Lease Annual Report on
Supplement dated July 1, 1989 by Form 10-K for the
and between Manufacturers Hanover year ended January
Trust Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Stockton
department store
10.7 Ground Lease dated August 17, Annual Report on
1989 by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback of 1-09100)
the Madera distribution facility
10.8 Lease Supplement dated as of Annual Report on
August 17, 1989 by and between Form 10-K for the
Manufacturers Hanover Trust year ended January
Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Madera
distribution facility
10.9 Tax Indemnification Agreement Annual Report on
dated as of August 1, 1989 by Form 10-K for the
and between Gottschalks Inc. year ended January
and General Foods Credit 29, 1994 (File No.
Investors No. 2 Corporation 1-09100)
relating to the sale-leaseback
of the Stockton and Bakersfield
department stores and the
Madera distribution facility
10.10 Lease Agreement dated as of Annual Report on
March 16, 1990 by and between Form 10-K for the
Gottschalks Inc. and River year ended January
Park Properties I relating to the 29, 1994 (File No.
Company's corporate headquarters 1-09100)
10.11 Consulting Agreement dated Quarterly Report on
May 27, 1994 by and between Form 10-Q for the
Gottschalks Inc. and Gerald quarter ended April
H. Blum(*) 30, 1994 (File No.
1-09100)
10.12 Form of Severance Agreement Annual Report on
dated March 31, 1995 by and Form 10-K for the
between Gottschalks Inc. and year ended January
the following senior executives 28, 1995 (File No.
of the Company: Joseph W. Levy, 1-09100)
Gary L. Gladding and Michael
J. Schmidt(*)
10.13 1994 Key Employee Incentive Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54789)
10.14 1994 Director Nonqualified Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54783)
10.15 Promissory Note and Security Annual Report on
Agreement dated December 16, Form 10-K for the
1994 by and between year ended January
Gottschalks Inc. and 28, 1995 (File No.
Heller Financial, Inc. 1-09100)
10.16 Agreement of Sale dated June 27, Quarterly Report on
1995, by and between Gottschalks Form 10-Q for the
Inc. and Jack Baskin relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.17 Lease and Agreement dated June 27, Quarterly Report on
1995, by and between Jack Baskin Form 10-Q for the
and Gottschalks Inc. relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.18 Promissory Notes and Security Quarterly Report on
Agreements dated October 4, 1995 Form 10-Q for the
and October 10, 1995 by and quarter ended
between Gottschalks Inc. and October 28, 1995
Midland Commercial Funding (File No. 1-09100)
10.19 Promissory Note and Security Quarterly Report on
Agreement dated October 2, Form 10-Q for the
1996, by and between Gottschalks year ended November
Inc. and Heller Financial, Inc. 2, 1996 (File No.
1-09100)
10.20 Loan and Security Agreement dated Annual Report on
December 29, 1996, by and between Form 10-K for the
Gottschalks Inc. and Congress year ended February
Financial Corporation 1, 1997 (File No.
1-09100)
10.21 Gottschalks Inc. 1998 Stock Registration
Option Plan(*) Statement on Form
S-8 (File #33-61471)
10.22 Gottschalks Inc. 1998 Registration
Employee Stock Purchase Statement on Form
Plan(*) S-8 (File #33-61473)
10.23 Asset Purchase Agreement dated Current Report on
as of July 21, 1998 among Form 8-K dated July
Gottschalks Inc., The Harris 21, 1998 (File No.
Company and El Corte Ingles, 1-09100)
S. A. together with all
Exhibits thereto
10.24 Non-Negotiable, Extendable, Current Report on
Subordinated Note due Form 8-K dated
August 20, 2003 issued to August 20, 1998
The Harris Company (File No. 1-09100)
10.25 Registration Rights Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.26 Tradename License Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.27 Stockholders' Agreement among Current Report on
El Corte Ingles, S. A., Gottschalks Form 8-K dated
Inc., Joseph Levy and Bret Levy August 20, 1998
dated August 20, 1998 (File No. 1-09100)
10.28 Standstill Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.29 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: East Hills (File No. 1-09100)
Mall, Bakersfield, California
10.30 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Moreno (File No. 1-09100)
Valley Mall at Towngate,
Moreno Valley, California
10.31 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Antelope (File No. 1-09100)
Valley Mall at Palmdale, California
10.32 Form of Severance Agreement Annual Report on
dated January 21, 1999 by Form 10-K for the
and between Gottschalks Inc. year ended January
and Michael S. Geele (*) 30,1999 (File No.
1-09100)
10.33 Receivables Purchase Annual Report on
Agreement dated March 1, 1999 Form 10-K for the
By and between Gottschalks year ended January
Credit Receivables Corporation 30, 1999 (File No.
and Gottschalks Inc. 1-09100)
10.34 Pooling and Servicing Annual Report on
Agreement dated as of March 1, Form 10-K for the
1999 by and among Gottschalks year ended January
Credit Receivables Corporation, 30, 1999 (File No.
Gottschalks Inc. and Bankers 1-09100)
Trust Company
10.35 Series 1999-1 Supplement to Annual Report on
Pooling and Servicing Form 10-K for the
Agreement dated March 1, 1999 year ended January
by and among Gottschalks Credit 30, 1999 (File No.
Receivables Corporation, 1-09100)
Gottschalks Inc. and Bankers
Trust Company
10.36 Sixth Amendment to Loan and Quarterly Report on
Security Agreement dated August Form 10-Q for the
12, 1999, by and between Gottschalks quarter ended
Inc. and Congress Financial July 31, 1999 (File
Corporation (Western). No. 1-09100)
10.37 Employment Agreement dated June Quarterly Report on
25, 1999 by and between Form 10-Q for the
Gottschalks Inc. and James R. quarter ended July
Famalette(*). 31, 1999 (File No.
1-09100)
10.38 Seventh Amendment to Loan and Annual Report on
Security Agreement dated March Form 10-K for the
27, 2000, by and between year ended January
Gottschalks Inc. and Congress 29, 2000 (File No.
Financial Corporation (Western). 1-09100)
10.41 Asset Purchase Agreement dated Annual Report on
April 24, 2000 by and between Form 10-K for the
Gottschalks Inc. and Lamonts year ended January
Apparel, Inc. 29, 2000 (File No.
1-09100)
10.42 Eighth Amendment to Loan and Quarterly Report on
Security Agreement dated Form 10-Q for the
May 19, 2000 by and between quarter ended April
Gottschalks Inc. and Congress 29, 2000 (File No.
Financial Corporation (Western). 1-09100)
10.43 Ninth Amendment to Loan and Quarterly Report on
Security Agreement dated Form 10-Q for the
June 28, 2000 by and between quarter ended July
Gottschalks Inc. and Congress 29, 2000 (File No.
Financial Corporation (Western). 1-09100)
10.44 Amendment No. 1 to the Asset Quarterly Report on
Purchase Agreement dated May Form 10-Q for the
16, 2000 by and between quarter ended July
Gottschalks Inc. and Lamonts 29, 2000 (File No.
Apparel, Inc. 1-09100)
10.45 Promissory Note dated July 24, Quarterly Report on
2000 by and between Gottschalks Form 10-Q for the
Inc. and Heller Financial Quarter ended July
Leasing, Inc. 29, 2000 (File No.
1-09100)
10.46 Series 2000-1 Supplement to the Filed electronically
Pooling and Servicing herewith
Agreement dated as of November 16,
2000 by and among Gottschalks
Credit Receivables Corporation,
Gottschalks Inc. and Bankers
Trust Company
10.47 Amendment No. 1 to Pooling and Filed electronically
Servicing Agreement and the herewith
Series 1999-1 Supplement by
and among Gottschalks Credit
Receivables Corporation,
Gottschalks Inc. and Bankers
Trust Company
21. Subsidiary of the Registrant Annual Report on
Form 10-K for the
year ended January
28, 1995 (File No.
1-09100)
23. Independent Auditors' Consent Filed electronically
herewith
(*) Management contract, compensatory plan or arrangement.
________________________________________________________________
(b) Reports on Form 8-K -- The Company did not file
any Reports on Form 8-K during the fourth quarter
of fiscal 2000.
(c) Exhibits -- The response to this portion of Item
14 is submitted as a separate section of this
report.
(d) Financial Statement Schedule--The response to this
portion of Item 14 is submitted as a separate
section of this report.
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) and (2), (c) and (d)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 3, 2001
GOTTSCHALKS INC. AND SUBSIDIARY
FRESNO, CALIFORNIA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Gottschalks Inc.
Fresno, California
We have audited the accompanying consolidated balance sheets of
Gottschalks Inc. and Subsidiary (the "Company") as of February 3,
2001 and January 29, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended February 3, 2001.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Gottschalks Inc. and Subsidiary at February 3, 2001 and January
29, 2000, and the results of their operations and their cash
flows for each of the three years in the period ended February 3,
2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
______________________________
Deloitte & Touche LLP
February 27, 2001
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
__________________________________________________________________________
February 3, January 29,
ASSETS 2001 2000
----------- -----------
CURRENT ASSETS:
Cash $ 2,827 $ 1,901
Retained interest in receivables sold 19,853 29,138
Receivables - net 8,840 7,597
Merchandise inventories 185,226 130,028
Other 21,622 11,826
------- -------
Total current assets 238,368 180,490
PROPERTY AND EQUIPMENT - net 143,670 120,393
OTHER ASSETS:
Intangibles - net 18,564 8,708
Other 6,619 6,573
------- -------
25,183 15,281
------- -------
$407,221 $316,164
======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
______________________________________________________________________
February 3, January 29,
2001 2000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Trade accounts payable and accrued
expenses $ 80,944 $ 61,136
Revolving line of credit 32,828 5,479
Current portion of long-term obligations 6,537 4,479
Deferred income taxes 3,007 4,677
------- -------
Total current liabilities 123,316 75,771
LONG-TERM OBLIGATIONS, less current portion 113,012 80,674
OTHER LIABILITIES 19,216 20,911
DEFERRED INCOME TAXES 12,801 7,609
SUBORDINATED NOTE PAYABLE TO AFFILIATE - net 21,303 20,961
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.10 per share;
2,000,000 shares authorized; none issued
Common stock, par value of $.01 per share;
30,000,000 shares authorized; 12,656,769
and 12,596,837 issued 127 126
Additional paid-in capita 71,015 70,760
Retained earnings 46,431 39,352
------- -------
117,573 110,238
------- -------
$407,221 $316,164
======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
_______________________________________________________________________
2000 1999 1998
-------- -------- --------
Net sales $663,868 $541,275 $478,538
Net credit revenues 9,150 8,709 6,988
Net leased department revenues 3,948 4,209 5,944
------- ------- -------
Total revenues 676,966 554,193 491,470
------- ------- -------
Costs and expenses:
Cost of sales 433,724 354,010 313,431
Selling, general and
administrative expenses 201,765 167,561 152,231
Depreciation and amortization 11,505 9,465 8,040
New store pre-opening costs 6,183 495 421
Asset impairment charge 1,933
Acquisition related expenses 859
------- ------- -------
Total costs and expenses 653,177 533,464 474,982
------- ------- -------
Operating income 23,789 20,729 16,488
Other (income) expense:
Interest expense 13,750 11,408 9,470
Miscellaneous income (1,414) (1,555) (2,011)
------- ------- ------
12,336 9,853 7,459
------- ------- ------
Income before income tax expense 11,453 10,876 9,029
Income tax expense 4,374 4,240 3,747
------- ------- -------
Net income $ 7,079 $ 6,636 $ 5,282
======= ======= =======
Net income per common share -
basic and diluted $ 0.56 $ 0.53 $ 0.46
======= ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
_____________________________________________________________________________
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
----------------- ---------- -------- -----
BALANCE, JANUARY 31, 1998 10,478,415 $105 $56,366 $27,434 $83,905
Net income 5,282 5,282
Shares issued for
business acquisition 2,095,900 21 14,252 14,273
Shares issued under
stock option plan 1,250 8 8
---------- --- ------ ------ -------
BALANCE, JANUARY 30, 1999 12,575,565 126 70,626 32,716 103,468
Net income 6,636 6,636
Shares issued under
stock purchase plan 21,272 134 134
---------- --- ------ ------ -------
BALANCE, JANUARY 29, 2000 12,596,837 126 70,760 39,352 110,238
Net income 7,079 7,079
Shares issued under
stock purchase plan 59,932 1 255 256
---------- --- ------ ------ -------
BALANCE, FEBRUARY 3, 2001 12,656,769 $127 $71,015 $46,431 $117,573
========== === ====== ====== =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
_____________________________________________________________________________
2000 1999 1998
OPERATING ACTIVITIES: -------- ------- -------
Net income $ 7,079 $ 6,636 $ 5,282
Adjustments:
Depreciation and amortization 11,505 9,465 8,040
Deferred income taxes 3,522 3,562 633
Amortization of deferred income and
other deferred items (1,695) (3,201) (950)
Provision for credit losses 1,025 982 992
Net loss from sale of assets 151 86 26
Asset impairment charge 1,933
Other non-cash items, net (41) 343 (106)
Decrease (increase) in assets, excluding
effect of business acquisition:
Receivables (1,883) (2,643) (1,312)
Merchandise inventories (54,409) (6,117) (4,524)
Other current and long-term assets ( 9,977) 4,923 5,611
Increase (decrease) in liabilities, excluding
effect of business acquisition:
Trade accounts payable and accrued
expenses 13,748 (7,868) (2,571)
Other current and long-term
liabilities (5,373) (2,296) 373
Net cash (used in) provided by ------- ------- -------
operating activities (36,348) 5,805 11,494
INVESTING ACTIVITIES:
Available-for-sale securities:
Maturities (330,131) (305,926) (262,357)
Purchases 321,416 304,795 256,571
Purchases of property and equipment (25,704) (16,059) (16,801)
Acquisitions of assets and business (19,522) (1,369)
Proceeds from property and equipment
sales and other 194 317 878
Net cash used in investing ------- ------- -------
activities (53,747) (16,873) (23,078)
FINANCING ACTIVITIES:
Net proceeds (repayments) under
revolving line of credit 57,349 (4,794) 29,506
Net proceeds from issuances of 2000-1
and 1999-1 Series certificates 18,000 53,000
Principal payments on retired certificates (30,900) (15,800)
Proceeds from long-term obligations 10,000 500
Principal payments on long-term obligations (6,016) (4,515) (4,065)
Changes in cash management liability 11,433 (2,149) 2,035
Proceeds from sale of stock under employee
stock purchase plan 255 134
------- ------- -------
Net cash provided by financing activities 91,021 11,276 11,676
------- ------- -------
INCREASE IN CASH 926 208 92
CASH AT BEGINNING OF YEAR 1,901 1,693 1,601
------- ------- -------
CASH AT END OF YEAR $ 2,827 $ 1,901 $ 1,693
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
INVESTING ACTIVITIES:
Consideration for acquisition of business:
Issuance of 2,095,900 shares of common stock $ 14,273
Issuance of 8% Subordinated Note 20,467
-------
$ 34,740
=======
FINANCING ACTIVITIES:
Acquisition of equipment under
capital leases $ 411 $ 620 $ 1,273
======= ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Gottschalks Inc. is a regional department and specialty store
chain based in Fresno, California. As of February 3, 2001, the
Company operated 79 full-line department stores located in seven
Western states, with 39 stores located in California, 21 in
Washington, seven in Alaska, five in Idaho, four in Oregon, two
in Nevada and one in Utah. The Company also operated 17 specialty
apparel stores which carry a limited selection of merchandise as
of that date. The Company's department stores typically offer a
wide range of better to moderate brand-name and private-label
merchandise, including men's, women's, junior's and children's
apparel, cosmetics, shoes and accessories, and also a wide array
of home furnishings, including domestics, china, housewares,
small electrics and, in certain locations, furniture and
mattresses.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Such estimates and
assumptions are subject to inherent uncertainties which may cause
actual results to differ from reported amounts.
Principles of Consolidation - The accompanying financial
statements include the accounts of Gottschalks Inc., and its
wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"), (collectively, the "Company"). All
significant intercompany transactions and balances have been
eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on the Saturday
nearest January 31. Fiscal years 2000, 1999 and 1998, ended on
February 3, 2001, January 29, 2000 and January 30, 1999,
respectively. Fiscal 2000 included 53 weeks and fiscal 1999 and
1998 each included 52 weeks.
Revenue Recognition - Net retail sales are recorded at the point-
of-sale and include sales of merchandise, net of estimated
returns 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 has been paid for in
its entirety. The Company does not sell merchandise on layaway.
Net leased department revenues consist of rental income from
lessees and sub-lessees. Sales generated in such leased
departments totaled $27,738,000, $29,029,000 and $40,216,000 in
2000, 1999 and 1998, respectively.
Transfers and Servicing of Financial Assets - The Company
currently accounts for the transfer and sale of receivables
pursuant to its receivables securitization program in accordance
with Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (see the following "Recently
Issued Accounting Standards"). SFAS No. 125 requires the Company
to recognize gains and losses on transfers of financial assets
(securitizations) that qualify as sales and to recognize as
assets certain financial components that are retained as a result
of such sales, which consist primarily of the retained interest
in receivables sold and the retained rights to future interest
income from the serviced assets in excess of the contractually
specified servicing fee (interest-only strips). The estimated
cost to service the assets is currently equal to the
contractually specified servicing fee, resulting in no servicing
assets or liabilities in 2000 or 1999.
The retained interest in receivables sold is initially recorded
at the date of the sale by allocating the previous carrying
amount between the assets sold and the retained interests based
on their relative fair values. Any gain or loss on the sale is
dependent upon the allocation of the previous carrying amount of
the receivables sold to the retained interests. Retained
interests are subsequently carried at fair value, which are
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 repayment
speeds, discount rates and other factors necessary to derive an
estimate of fair value.
The certificated portion of the retained interest is considered
readily marketable and is classified as available-for-sale in
accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Due to the short-term revolving
nature of the credit card portfolio, the carrying value of the
Company's retained interest approximates its fair value,
resulting in no unrealized gains or losses.
Receivables - Receivables consist primarily of customer credit
card receivables that do not meet certain eligibility
requirements of the Company's receivables securitization program
and vendor claims (Note 3). The credit card receivables are not
certificated and include revolving charge accounts with terms
which, in some cases, provide for payments with terms in excess
of one year. In accordance with usual industry practice such
receivables are included in current assets.
The Company maintains reserves for possible credit losses on such
receivables which are based on their expected collectibility.
Concentrations of Credit Risk - The Company extends credit to
individual customers based on their credit worthiness and
generally requires no collateral from such customers.
Concentrations of credit risk with respect to the Company's
credit card receivables are limited due to the large number of
customers comprising the Company's customer base.
Merchandise Inventories - Inventories, which consist of
merchandise held for resale, are valued by the retail method and
are stated at last-in, first-out (LIFO) cost, which is not in
excess of market. Current cost, which approximates replacement
cost, under the first-in, first-out (FIFO) method is equal to the
LIFO value of inventories at February 3, 2001 and January 29,
2000.
The Company includes in inventory the capitalization of certain
indirect purchasing, merchandise handling and inventory storage
costs to better match sales with these related costs.
New Store Pre-Opening Costs - New store pre-opening costs are
expensed as incurred and may vary significantly from year to year
depending on the number of new stores opened.
Property and Equipment - Property and equipment is stated on the
basis of cost or appraised value as to certain contributed land.
Depreciation and amortization is computed by the straight-line
method for financial reporting purposes over the shorter of the
estimated useful lives of the assets or the lease term, which
range from 20 to 40 years for buildings and leasehold
improvements and 3 to 15 years for furniture, fixtures and
equipment. The amortization of buildings and equipment under
capital leases is computed by the straight-line method over the
term of the lease or the estimated economic life of the asset,
depending on the criteria used to classify the lease, and such
amortization is combined with depreciation in the accompanying
income statements. Maintenance and repairs are charged to expense
as incurred and major improvements are capitalized.
Software Development Costs - Effective the beginning of fiscal
1999, costs associated with the acquisition or development of
software for internal use that meet the criteria of AICPA
Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" are capitalized
and amortized over the expected useful life of the software,
which generally ranges from 3 to 10 years. Software development
costs capitalized under SOP No. 98-1 in fiscal 2000 totaled
$242,000 (none in 1999).
Goodwill - The excess of acquisition costs over the fair value of
the net assets acquired (goodwill) is amortized on a straight-
line basis over 20 years. The Company periodically analyzes the
value of net assets acquired to determine whether any impairment
in the value of such assets has occurred. The primary indicators
of recoverability used by the Company are current and forecasted
cash flows of the related acquired assets as compared to their
carrying values.
Favorable Lease Rights - Favorable lease rights associated with
acquired leases are amortized on a straight-line basis over the
respective lease terms, including option renewal periods if
renewal of the lease is probable, which range from 1 to 40 years.
Cash Management Liability - Under the Company's cash management
program, checks issued by the Company and not yet presented for
payment frequently result in overdraft balances for accounting
purposes. Such amounts represent interest-free, short-term
borrowings by the Company. (See Note 6).
Deferred Income - Deferred income consists primarily of donated
land and cash incentives received to construct a store and enter
into a lease arrangement. Land contributed to the Company is
included in land and recorded at appraised fair market values.
Deferred income is amortized to income over the average
depreciable life of the related fixed assets built on the land
for locations that are owned by the Company, and over the minimum
lease periods of the related building leases with respect to
locations that are leased by the Company, ranging from 10 to 32
years. Deferred income, net of accumulated amortization, totaling
$14,342,000 as of February 3, 2001 and $15,344,000 as of January
29, 2000, is included in other liabilities.
Deferred Lease Payments - Certain of the Company's department
store operating leases provide for rent abatements and scheduled
rent increases during the lease terms. The Company recognizes
rental expense for such leases on a straight-line basis over the
lease term and records the difference between rental expense and
amounts payable under the leases as deferred lease payments.
Deferred lease payments, totaling $4,588,000 at February 3, 2001
and $5,058,000 at January 29, 2000, are included in other
liabilities.
Advertising Costs - Advertising costs, totaling $30,111,000,
$24,327,000 and $22,270,000 in 2000, 1999 and 1998, respectively,
are expensed when the related advertisement first takes place.
Income Taxes - Deferred tax assets and liabilities are generally
recognized for the expected future tax consequences of events
that have been included in the financial statements or tax
returns, determined based on the differences between the
financial statement and tax basis of assets and liabilities and
net operating loss and tax credit carryforwards, and by using
enacted tax rates in effect when the differences are expected to
reverse.
Fair Value of Financial Instruments - The carrying value of the
Company's cash and cash management liability, receivables, notes
receivable, trade payables and other accrued expenses, revolving
line of credit and stand-by letters of credit approximate their
estimated fair values because of the short maturities or variable
interest rates underlying those instruments. The retained
interest in receivables sold, the retained right to future
interest income (interest-only strip) and the Subordinated Note
are carried at their estimated fair values. The following methods
and assumptions were used to estimate the fair values for each
remaining class of financial instruments:
Long-Term Obligations - The fair values of the Company's
mortgage loans and notes payable are estimated using
discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of
borrowing arrangements. Borrowings with aggregate carrying
values of $33,673,000 and $27,937,000 at February 3, 2001
and January 29, 2000, had estimated fair values of
$35,287,000 and $28,664,000 at February 3, 2001 and January
29, 2000, respectively.
Off-Balance Sheet Financial Instruments - The Company's off-
balance sheet financial instruments consist primarily of
certificates issued under the securitization program. The
estimated fair value of the fixed rate certificate, based on
similar issues of certificates at current rates for the same
remaining maturities, with a face value of $53,000,000 as of
both February 3, 2001 and January 29, 2000, is $50,995,000
and $50,469,000, respectively. The estimated fair value of
the floating rate certificate approximates its reported
value due to the variable interest rate underlying that
instrument.
Stock-Based Compensation - The Company accounts for stock-based
awards to employees using the intrinsic value method in
accordance with APB No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense has been
recognized in the 2000, 1999 and 1998 financial statements for
employee stock arrangements. Pro forma information regarding net
income and earnings per share, as calculated under the provisions
of SFAS No. 123, "Accounting for Stock Based Compensation", is
disclosed in Note 12.
Long-Lived Assets - The Company periodically evaluates the
carrying value of long-lived assets to be held and used,
including goodwill and other intangible assets, when events and
circumstances warrant such a review. When the anticipated
undiscounted cash flow from a long-lived asset is less than its
carrying value, a loss is recognized based on the amount by which
its carrying value exceeds its fair market value. Fair market
value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risks involved. In
1999, the Company recognized a non-recurring asset impairment
charge of $1,933,000 related to an investment in a cooperative
merchandise buying group that was accounted for under the cost
method. There were no impairment losses recognized in 2000 or
1998.
Segment Reporting - The Company operates in one reportable
segment, which includes the Company's proprietary credit card
operation. The proprietary credit card operation is considered an
integral component of the Company's retail store segment, as its
primary purpose is to support and enhance this segment's retail
operations.
Comprehensive Income - There were no items of other comprehensive
income in 2000, 1999 or 1998, and therefore net income is equal
to comprehensive income for each of those years.
Recently Issued Accounting Standards - SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective
for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under
SFAS 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The
Company will adopt SFAS No. 133 effective as of the beginning of
fiscal 2001. Management does not expect the adoption to have a
significant impact on the financial position, results of
operations, or cash flows of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," was issued
in September 2000 and replaces SFAS No. 125. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001,
with certain disclosure requirements effective for fiscal years
ending after December 15, 2000 (fiscal 2000 for the Company). The
statement carries over most of the provisions of SFAS No. 125
without reconsideration and, accordingly, the adoption of SFAS
No. 140 is not expected to materially affect the Company's
financial position or the results of its operations. The Company
adopted the disclosure provisions of SFAS No. 140 for its fiscal
2000 financial statements.
Reclassifications - Effective as of the end of fiscal 2000, the
Company adopted the provisions of Emerging Issues Task Force
("EITF") Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," which requires that all amounts billed to a customer
in a sale transaction for shipping and handling, including
customer delivery charges, be classified as revenue, and that all
prior periods presented be reclassified to conform with the
required presentation. The Company had previously included
shipping and handling revenues and costs in its selling, general
and administrative costs. These items and certain other amounts
in the accompanying 1999 and 1998 consolidated financial
statements have been reclassified to conform with the 2000
presentation.
2. ACQUISITIONS
Asset Acquisition.
On April 24, 2000, the Company entered into a definitive asset
purchase agreement (the "Agreement") with Lamonts Apparel, Inc.
("Lamonts"). The Agreement, as subsequently amended, provided for
the Company to acquire 37 of Lamonts' 38 store leases, related
store fixtures and equipment, and one store building for a cash
purchase price of $20,100,000. Concurrent with the closing of the
transaction on July 24, 2000, the Company sold one of the store
leases for $2,500,000, and subsequently terminated two other
store leases, resulting in a net cash purchase price of
$17,600,000 for 34 store leases, related store fixtures and
equipment, and one store building. The Company did not acquire
any of Lamonts' merchandise inventory, customer credit card
receivables or other corporate assets in the transaction, nor did
the Company assume any material liabilities, other than the 34
store leases. The 34 stores are located in five Western states,
with 19 stores in Washington, seven in Alaska, five in Idaho, two
in Oregon and one in Utah, and significantly expanded the
Company's presence in the Pacific Northwest and Alaska. The newly
acquired stores were converted to the Gottschalks banner, re-
merchandised and re-opened in stages, beginning in late August
with all stores completely open by September 7, 2000. The Company
incurred $5,632,000 of non-recurring new store pre-opening costs
in connection with the re-opening of the stores.
The $17,600,000 net cash purchase price for the assets was
partially financed with proceeds from a $10,000,000 note payable
(Note 7), with the remainder provided from existing financial
resources. Direct transaction costs include investment banking,
legal and accounting fees and other costs. The asset acquisition
was accounted for under the purchase method of accounting and,
accordingly, the results of operations of the acquired stores are
included in the Company's financial statements from the
acquisition date of July 24, 2000.
The purchase price has been allocated to the acquired assets on
the basis of their estimated fair values as of the date of the
acquisition, as follows (in thousands):
Fair value of note payable $10,000
Cash 7,580
Direct transaction costs 1,942
------
Total purchase price $19,522
======
Favorable lease rights $ 9,857
Property and equipment 9,000
Goodwill 665
------
Total purchase price $19,522
======
Business Acquisition.
On August 20, 1998, the Company completed the acquisition of
substantially all of the assets and business of The Harris
Company ("Harris"), pursuant to an Asset Purchase Agreement
entered into with Harris and El Corte Ingles, S. A. ("ECI") of
Spain, the parent company of Harris. Harris operated nine full-
line department stores located throughout southern California.
Assets acquired and liabilities assumed were recorded at their
estimated fair values, and the excess of cost over the estimated
fair values of the net assets acquired, totaling $8,400,000, is
being amortized on a straight-line basis over 20 years. The
purchase price for the assets consisted of the issuance to Harris
of 2,095,900 shares of common stock of the Company and the
issuance of an 8% Non-Negotiable, Extendable, Subordinated Note
(the "Subordinated Note") in the principal amount of $22,179,000
(see Note 8). The business acquisition was accounted for under
the purchase method of accounting and, accordingly, the results
of operations of the acquired stores are included in the
Company's financial statements from the acquisition date of
August 20, 1998.
3. RECEIVABLES
Receivable Securitization Program.
The Company sells all of its accounts receivable arising under
its private label customer credit cards on a daily basis to its
wholly-owned subsidiary, GCRC, and those receivables that meet
certain eligibility requirements of the program are
simultaneously conveyed to Gottschalks Credit Card Master Trust
("GCC Trust"), to be used as collateral for securities issued to
investors. GCC Trust is a qualified special purpose entity under
both SFAS No. 125 and 140, and is not consolidated in the
Company's financial statements. Accordingly, all transfers of
receivables to GCC Trust are accounted for as sales of
receivables for financial reporting purposes and such transferred
receivables are removed from the Company's balance sheet. The
Company services and administers the portfolio for a 3% monthly
servicing fee, which totaled $1,926,000 in 2000.
On March 1, 1999, GCC Trust issued a $53,000,000 principal amount
7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1
Series") to a single investor through a private placement.
Proceeds from the issuance of the 1999-1 Series were used to
repay the outstanding balances of previously issued certificates,
totaling $26,950,000 as of that date, and the remaining funds
were used to purchase additional receivables from the Company.
The holder of the 1999-1 Series certificate earns interest on a
monthly basis at a fixed interest rate of 7.66%. The outstanding
principal balance of the certificate, which is off-balance sheet
for financial reporting purposes, is to be repaid in twelve equal
monthly installments commencing September 2003 and continuing
through August 2004.
On November 16, 2000, GCC Trust issued a Variable Base Class A-1
Credit Card Certificate (the "2000-1 Series") in a principal
amount of up to $24,000,000. The Company can borrow against the
2000-1 Series certificate on a revolving basis, similar to a
revolving line of credit arrangement. Such borrowings are limited
to a specified percentage of the outstanding balance of
receivables underlying the certificate. As of February 3, 2001,
$18,000,000 was issued and outstanding against the certificate,
which was the maximum amount available for borrowings as of that
date. The 2000-1 Series certificate was issued under an initial
364-day commitment period (expiring October 31, 2001), and is
renewable for subsequent 364-day periods each, at the option of
GCC Trust and the certificate holder, through July 31, 2003. The
outstanding principal balance of the certificate, which is
treated as off-balance sheet for financial reporting purposes, is
to be repaid in six equal monthly installments commencing in the
month following the end of the commitment period. In the event
the commitment period is renewed through July 31, 2003, the
principal is to be repaid in twelve equal monthly installments
commencing September 2003 and continuing through August 2004. The
holder of the 2000-1 Series certificate earns interest on a
monthly basis at a variable rate equal to one-month LIBOR plus
1.5% (7.38% at February 3, 2001).
Monthly cash flows generated by the Company's receivables
portfolio, consisting of principal, interest and service fee
collections, are first used to pay certain costs of the program,
which include the payment of monthly principal (when required)
and interest to the investors, and monthly servicing fees to the
Company. Any excess cash flows are then available to fund
additional purchases of newly generated receivables from the
Company. The Company is required, among other things, to maintain
certain portfolio performance standards under the program.
Management believes the portfolio performance has exceeded such
standards since the issuance date. Subject to certain conditions,
the master trust permits further expansion of the program to meet
future receivables growth.
The Company retains an ownership interest in certain of the
receivables sold under the program, represented by Exchangeable
and Subordinated Certificates, and also retains an uncertificated
ownership interest in the retained interest to future interest
income (interest-only strip) and other receivables that do not
meet certain eligibility requirements of the program. The fair
value of the retained interests totaled $19,853,000 at February
3, 2001. Key assumptions used to measure the retained interests
at the dates of securitization throughout fiscal 2000 were:
Repayment speed (monthly rate) 30.4%
Expected credit losses
as a % of net sales (annual rate) 0.55%
Residual cash flows discount rate 12.0%
Weighted-average life (in months) 3.5
At February 3, 2001, the reduction in the carrying amount of the
retained interests caused by immediate 10% and 20% adverse
changes in those key assumptions are as follows (in thousands):
Prepayment speed:
Impact on fair value of 10% adverse change $(111)
Impact on fair value of 20% adverse change (170)
Expected credit losses:
Impact on fair value of 10% adverse change ( 13)
Impact on fair value of 20% adverse change ( 26)
Residual cash flows discount rate:
Impact on fair value of 10% adverse change ( 1)
Impact on fair value of 20% adverse change ( 2)
These sensitivities are hypothetical and are presented for
illustrative purposes only. Changes in the carrying amount based
on a change in assumptions generally cannot be extrapolated
because the relationship of the change in an assumption to the
change in the carrying amount may not be linear. The changes in
assumptions presented in the above table were calculated without
changing any other assumption; in reality, changes in one factor
may result in changes in another, which could magnify or
counteract the sensitivities.
As of February 3, 2001, the outstanding balance of the serviced
portfolio totaled $93,488,000, with $3,387,000 of that amount in
delinquency as of that date. Delinquent receivables are defined
as any account for which the required minimum payment has not
been received for more than 30 days. Credit losses as a
percentage of net sales were 0.55% in 2000.
Receivables.
Receivables consist of the following:
February 3, January 29
(In thousands) 2001 2000
___________________________________________________________________________
Credit card receivables $3,974 $ 3,995
Vendor claims 5,311 4,089
----- ------
9,285 8,084
Less allowance for doubtful accounts ( 445) ( 487)
----- -----
$8,840 $ 7,597
===== =====
Net Credit Revenues.
Net credit revenues associated with the Company's credit card
receivable portfolio, including securitized receivables, consists of
the following:
(In thousands) 2000 1999 1998
___________________________________________________________________________
Service charge revenues $16,832 $15,618 $13,522
Interest expense on securitized
receivables (4,425) (4,069) (3,314)
Charge-offs on receivables sold and
provision for credit losses on
receivables ineligible for sale (3,642) (3,013) (3,175)
Gain (loss) on sale of receivables 385 173 (45)
------ ------ ------
$ 9,150 $ 8,709 $ 6,988
====== ====== ======
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
February 3, January 29,
(In thousands) 2001 2000
_____________________________________________________________________
Furniture, fixtures and equipment $104,964 $ 86,155
Buildings and leasehold improvements 83,763 69,196
Land 15,108 15,108
Buildings and equipment under
capital leases 13,178 12,768
Construction in progress 1,020 892
------- -------
218,033 184,119
Less accumulated depreciation
and amortization (74,363) (63,726)
------- -------
$143,670 $120,393
======= =======
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
February 3, January 29,
(In thousands) 2001 2000
____________________________________________________________________
Goodwill $11,464 $10,799
Favorable lease rights(Note 2) 9,857
------ ------
21,321 10,799
Less accumulated amortization (2,757) (2,091)
------ ------
$18,564 $ 8,708
====== ======
The amortization of intangibles, totaling $666,000, $536,000 and
$291,000 in 2000, 1999 and 1998, respectively, is included in
depreciation and amortization in the accompanying financial
statements.
6. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Trade accounts payable and accrued expenses consist of the following:
February 3, January 29,
(In thousands) 2001 2000
_____________________________________________________________________
Trade accounts payable $27,303 $15,617
Cash management liability 21,460 10,027
Accrued expenses 15,952 12,118
Accrued payroll and related liabilities 8,791 6,861
Taxes, other than income taxes 3,808 11,141
Federal and state income taxes payable 3,630 5,372
------ ------
$80,944 $61,136
====== ======
7. DEBT
Revolving Line of Credit.
The Company has a $180.0 million revolving line of credit
facility with Congress Financial Corporation through March 31,
2002. Borrowings under the facility are generally limited to a
restrictive borrowing base equal to 75% of eligible merchandise
inventories, and at the Company's option, such borrowings may be
increased to 80% of eligible inventories during the period of
November 1 through December 31 of each year to provide for
increased seasonal inventory requirements. Interest under the
facility is charged at a rate of approximately one-month LIBOR
plus 1.875% (7.90% at February 3, 2001), with no interest charged
on the unused portion of the line of credit. The maximum amount
available for borrowings under the line of credit was
$131,135,000 as of February 3, 2001, of which $112,828,000 was
outstanding as of that date. Outstanding borrowings under the
facility which are not expected to be repaid within one year of
the respective balance sheet dates, totaling $80,000,000 as of
February 3, 2001 and $50,000,000 as of January 29, 2000, are
classified as long-term in the accompanying financial statements.
The agreement contains one financial covenant, pertaining to the
maintenance of a minimum adjusted net worth, as defined in the
agreement, with which the Company was in compliance as of
February 3, 2001.
Long-Term Obligations.
Long-term obligations consist of the following:
February 3, January 29,
(In thousands) 2001 2000
_______________________________________________________________________
Revolving line of credit $ 80,000 $50,000
9.39% mortgage loans payable, due 2010 18,645 18,958
Variable rate note payable, due 2003 8,611
9.97% mortgage loan payable, due 2004 2,714 3,643
Capital lease obligations 5,876 7,216
Other mortgage loans and notes payable 3,703 5,336
------- ------
119,549 85,153
Less current portion 6,537 4,479
------- ------
$113,012 $80,674
======= ======
The Company issued a $10,00,000 original principal amount
variable rate note payable, due 2003, to a third party lender on
July 24, 2000. Proceeds from the note were used to finance a
portion of the purchase price for the Lamonts acquisition (Note
2). The note is payable in thirty-six monthly principal
installments of $278,000 each and bears interest at a variable
rate equal to LIBOR plus 3.0% (8.63% at February 3, 2001).
The Company's various mortgage loans and notes payable are
collateralized by certain real property, assets or equipment.
The scheduled annual principal maturities of the Company's
mortgage loans and notes payable are $5,836,000, $4,773,000,
$3,436,000, $906,000 and $660,000 for 2001 through 2005, with
$18,062,000 payable thereafter.
Deferred debt issuance costs related to the Company's various
financing arrangements are included in other current and long-
term assets and are charged to income as additional interest
expense on a straight-line basis over the life of the related
indebtedness. Such costs, net of accumulated amortization,
totaled $1,997,000 at February 3, 2001 and $1,552,000 at January
29, 2000.
Interest paid, net of amounts capitalized, was $17,713,000 in
2000, $14,536,000 in 1999 and $12,063,000 in 1998. Capitalized
interest expense was $360,000 in 2000, $188,000 in 1999 and
$134,000 in 1998. The weighted-average interest rate charged on
the Company's revolving line of credit was 8.76% in 2000, 7.52%
in 1999 and 7.88% in 1998.
Certain of the Company's long-term financing arrangements include
various restrictive financial covenants, including the
requirement to maintain a minimum tangible net worth. The Company
was in compliance with all such financial covenants as of
February 3, 2001.
8. SUBORDINATED NOTE PAYABLE TO AFFILIATE
As described more fully in Note 2, the Company issued the
Subordinated Note to Harris on August 20, 1998 as partial
consideration for the Harris acquisition. The Subordinated Note,
discounted to an effective interest rate of 10% at issuance,
bears interest at a fixed rate of 8%, payable semi-annually. The
principal portion of the Subordinated Note is due and payable on
August 20, 2003, unless such payment would result in a default on
any of the Company's other credit facilities, in which case its
maturity could be extended by three years to August 2006. The
Subordinated Note is unsecured, contains no restrictive financial
covenants and is subordinate to the payment of all debt,
including trade credit, of the Company. The discount on the
Subordinated Note is being amortized as additional interest
expense over the five year term of the note. The unamortized
discount totaled $876,000 as of February 3, 2001 and $1,218,000
as of January 29, 2000. Interest paid to Harris totaled
$2,117,000 in both 2000 and 1999 and $935,000 in 1998.
9. LEASES
The Company leases certain retail department stores, specialty
apparel stores, land, furniture, fixtures and equipment under
capital and noncancellable operating leases that expire in
various years through 2021. Certain of the leases provide for the
payment of additional contingent rentals based on a percentage of
sales, require the payment of property taxes, insurance and
maintenance costs and have renewal options for one or more
periods ranging from five to twenty years. The Company also
leases three of its department stores from ECI, an affiliate of
the Company (see Note 2). Rent paid to ECI, which reflects
current market rates, totaled $886,000 in 2000, $900,000 in 1999
and $391,000 in 1998.
Future minimum lease payments as of February 3, 2001, by year and
in the aggregate, under capital leases and noncancellable
operating leases with initial or remaining terms in excess of one
year are as follows:
Capital Operating
(In thousands) Leases Leases
_____________________________________________________________________
2001 $1,269 $ 25,149
2002 1,232 23,393
2003 1,031 22,611
2004 752 21,777
2005 752 20,026
Thereafter 4,914 121,852
----- -------
Total minimum lease payments 9,950 $234,808
Amount representing interest (4,074) ======
-----
Present value of minimum lease payments 5,876
Less current portion ( 701)
-----
$5,175
=====
Rental expense consists of the following:
(In thousands) 2000 1999 1998
____________________________________________________________________
Operating leases:
Buildings:
Minimum rentals $15,946 $15,441 $14,395
Contingent rentals 2,994 2,461 2,236
Fixtures and equipment 2,342 3,158 3,275
------ ------ ------
$21,282 $21,060 $19,906
====== ====== ======
One of the Company's lease agreements contains a restrictive
financial covenant pertaining to the debt to tangible net worth
ratio with which the Company was in compliance at February 3,
2001.
10. INCOME TAXES
The components of income tax expense are as follows:
(In thousands) 2000 1999 1998
_________________________________________________________________________
Current:
Federal $ 302 $ 219 $2,737
State 550 459 377
----- ----- -----
852 678 3,114
Deferred:
Federal 3,548 3,337 210
State (26) 225 423
----- ----- -----
3,522 3,562 633
----- ----- -----
$4,374 $4,240 $3,747
===== ===== =====
The principal components of deferred tax assets and liabilities
are as follows (in thousands):
February 3, January 29,
2001 2000
__________________ __________________
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------- ----------- ------ -----------
Current:
Accrued employee benefits $ 1,489 $ 1,213
Credit losses 156 132
State income taxes 239 267
LIFO inventory reserve $ (2,920) $ (2,958)
Supplies inventory (1,070) (1,035)
Workers' compensation (614) (542)
Gain on sale of receivables (205) (120)
Other items, net 865 (947) 183 (1,817)
----- ------ ------ -------
2,749 (5,756) 1,795 (6,472)
Long-Term:
Net operating loss and tax
credit carryforwards 3,407 5,906
State income taxes 572 580
Depreciation expense (12,206) (10,716)
Accounting for leases 738 (2,995) 805 (3,253)
Deferred income 1,080 (2,793) 1,291 (2,571)
Other items, net 601 (1,205) 973 (624)
----- ------- ------ -------
6,398 (19,199) 9,555 (17,164)
----- ------- ------ -------
$ 9,147 $(24,955) $11,350 $(23,636)
===== ======= ====== =======
Income tax expense varies from the amount computed by applying
the statutory federal income tax rate to the income before income
taxes. The reasons for this difference are as follows:
2000 1999 1998
_________________________________________________________________________
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 3.0 4.2 5.8
General business credits (2.9) (2.2) (1.7)
Amortization of goodwill .4 .4 .4
Other items, net 2.7 1.6 2.0
---- ---- ----
Effective rate 38.2% 39.0% 41.5%
==== ==== ====
The Company paid income taxes, net of refunds, of $2,541,000 in
2000, $109,000 in 1999 and $138,000 in 1998. At February 3, 2001,
the Company has, for federal tax purposes, general business
credits of $1,192,000 which expire in the years 2012 through
2020, and alternative minimum tax credits of $784,000 which may
be used for an indefinite period. At February 3, 2001, the
Company also has, for state tax purposes, $1,431,000 of
enterprise zone credits which may be used for an indefinite
period. These carryforwards are available to offset future
taxable income.
11. EARNINGS PER SHARE
Net earnings per common share is computed by dividing net income
by the weighted-average number of common shares outstanding
during the year. Stock options represent potential common shares
and are included in computing diluted earnings per share when the
effect is dilutive. A reconciliation of the weighted-average
shares used in the basic and diluted earnings per share
calculation is as follows:
(Shares in thousands) 2000 1999 1998
____________________________________________________________________
Weighted average number of
shares - basic 12,614 12,577 11,418
Effect of assumed option exercises 18 39 31
------ ------ ------
Weighted average number of
shares - diluted 12,632 12,616 11,449
====== ====== ======
Options with an exercise price greater than the average market
price of the Company's common stock during the period are
excluded from the computation of the weighted-average number of
shares on a diluted basis as such options are anti-dilutive. Anti-
dilutive options were outstanding for 924,728, 511,861 and
426,698 shares as of the end of 2000, 1999 and 1998,
respectively.
12. STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans.
The Company has stock option plans for directors, officers and
key employees which provide for the grant of non-qualified and
incentive stock options. Under the plans, the option exercise
price may not be lower than 100% of the fair market value of such
shares at the date of the grant. Options granted generally vest
on a ratable basis over five years and expire ten years from the
date of the grant. At February 3, 2001, options for 161,000
shares were available for future grants under the plans.
Option activity under the plans is as follows:
2000 1999 1998
----------------- --------------- ---------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ -------- ------ ------- ------ --------
Options outstanding
at beginning of
year 953,000 $8.47 771,000 $8.45 500,500 $9.05
Granted 457,500 5.08 209,000 8.45 329,000 7.73
Exercised (1,250) 5.75
Cancelled (46,000) 8.30 (27,000) 8.10 (57,250) 9.46
--------- ---- ------- ---- ------- ----
Options outstanding
at end of year 1,364,500 $7.34 953,000 $8.47 771,000 $8.45
========= ==== ======= ==== ======= ====
Options exercisable
at end of year 590,500 $8.70 465,750 $9.01 366,000 $9.50
========= ==== ======= ==== ======= ====
Additional information regarding options
outstanding as of February 3, 2001 is as
follows:
Weighted-Avg.
Remaining Weighted-Avg.
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (yrs.) Price
- --------------- ----------- ------------- ------------
$4.25 to $ 7.50 727,500 8.54 $5.81
$7.63 to $ 9.21 341,000 7.95 $8.32
$9.75 to $10.87 296,000 3.44 $9.95
- --------------- ---------- ---- ----
$4.25 to $10.87 1,364,500 7.28 $7.34
=============== ========== ==== ====
Employee Stock Purchase Plan.
The Company also has a statutory Employee Stock Purchase Plan,
which allows its employees to purchase Company common stock at a
15% discount. Employees can purchase stock under the Plan through
payroll deductions ranging from 1% to 10% of their annual
compensation, up to a maximum of $21,250 per year. A total of
500,000 shares were originally registered under the Plan, with
81,210 shares issued through February 3, 2001.
Accounting for Stock Based Compensation.
If the Company had elected to follow the measurement provisions
of SFAS No. 123 in accounting for its stock option and employee
stock purchase plans, compensation expense would be recognized
based on the fair value of the options at the date of grant. To
estimate compensation expense which would be recognized under
SFAS No. 123, the Company used the Black-Scholes options pricing
model with the following weighted-average assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate 4.8% 6.7% 4.6%
Expected dividend yield --- --- ---
Expected volatility 51.21% 47.95% 51.08%
Expected option life (years) 5 5 5
Fair value of options granted $3.01 $5.10 $4.38
Had the computed fair values of the 2000, 1999 and 1998 awards been
amortized to expense over the vesting period of the awards, pro-
forma net income and earnings per share (in thousands, except per
share data) would have been as follows:
2000 1999 1998
---- ---- ----
Pro forma net income $6,254 $6,237 $5,176
Pro forma net income per share -
basic and diluted $ 0.50 $ 0.50 $ 0.45
As allowed by SFAS No. 123, the impact of outstanding non-vested
stock options granted prior to 1995 has been excluded from the
pro-forma calculations; accordingly the 2000, 1999 and 1998 pro
forma adjustments presented above are not indicative of future
period pro forma adjustments.
13. RETIREMENT SAVINGS PLAN
The Company has a Retirement Savings Plan ("Plan") which
qualifies as an employee retirement plan under Section 401(k) of
the Internal Revenue Code. Full-time employees meeting certain
requirements are eligible to participate in the Plan and may
elect to have up to 20% of their annual eligible compensation,
subject to certain limitations, deferred and deposited with a
qualified trustee. Participants in the Plan may receive an
employer matching contribution of up to 4% of the participants'
eligible compensation, depending on the Company's quarterly and
annual financial performance. Effective for 2001, the Company has
amended the Plan to provide for a guaranteed annual match of 3%,
including the ability for participants to earn an additional 1%
depending on the Company's annual financial performance. The
Company recognized $1,073,000, $541,000 and $424,000 in expense
related to the Plan in 2000, 1999 and 1998, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company is party to legal proceedings and claims which have
arisen during the ordinary course of business. In the opinion of
management, the ultimate outcome of such litigation and claims is
not expected to have a material adverse effect on the Company's
financial position or results of its operations.
The Company arranges for the issuance of letters of credit in the
ordinary course of business. As of February 3, 2001, the Company
had outstanding letters of credit amounting to $498,000.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for 2000 and 1999 (in thousands, except per share
data):
2000
___________________________________________
Quarter Ended April 29 July 29 October 28 February 3
- -------------- -------- ------- ---------- ----------
Net sales (1) $121,335 $129,939 $153,694 $258,900
Gross profit 41,034 45,067 57,316 86,727
Income (loss) before
income tax expense
(benefit)(2) (1,390) 17 (4,086) 16,912
Net income (loss) ( 841) 11 (2,472) 10,381
Net income (loss)
per common share -
basic and diluted $ (0.07) $ (0.00) $ (0.20) $ 0.83
Weighted-average
number of common
shares outstanding:
Basic 12,597 12,605 12,621 12,582
Diluted 12,597 12,629 12,621 12,616
1999
_____________________________________________
Quarter Ended May 1 July 31 October 30 January 29
- ------------- ----- ------- ---------- ----------
Net sales (1) $111,502 $119,209 $123,330 $187,234
Gross profit 37,930 41,351 44,366 63,618
Income (loss) before
income tax expense
(benefit)(3) (1,851) ( 180) 615 12,292
Net income (loss) (1,079) ( 105) 358 7,462
Net income (loss)
per common share -
basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59
Weighted-average
number of common
shares outstanding:
Basic 12,575 12,575 12,575 12,581
Diluted 12,575 12,575 12,646 12,615
(1) The Company's net sales by quarter in
both fiscal 2000 and 1999 have been increased
to include shipping and handling fees charged
to customers, in accordance with EITF No. 00-
10 (Note 1). Such amounts were previously
credited to selling, general and
administrative expenses.
(2) Income (loss) before income tax expense (benefit) in the
three month periods ended July 29, 2000 and October 28, 2000
include non-recurring, pre-tax charges for costs incurred in
the reopening of the 34 stores acquired from Lamonts
totaling $977,000 and $4,655,000, respectively. The total of
such costs recognized in fiscal 2000 amounted to $5,632,000.
(3) Income (loss) before income tax expense (benefit) in the
three month period ended January 29, 2000 includes a non-
recurring, pre-tax charge for $1,933,000 to reflect the
impairment of an investment accounted for under the cost
method.
********
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC. AND SUBSIDIARY
________________________________________________________________________________
COL. A COL. B COL. COL. D COL. E COL. F
________________________________________________________________________________
ADDITIONS
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
DESCRIPTION of Period Expenses Describe Describe Period
________________________________________________________________________________
Year ended February 3, 2001:
- ---------------------------
Allowance for doubtful
accounts $ 406,688 $1,024,964(1) $ $(1,063,018)(2) $368,634
Allowance for vendor
claims
receivable $ 80,000 $ ( 4,000)(3) $ 76,000
Year ended January 29, 2000:
- ---------------------------
Allowance for doubtful
accounts $1,535,165 $ 982,260(1) $ (177,000)(4) $(1,933,737)(2)$406,688
Allowance for vendor
claims
receivable $ 120,700 $ ( 40,700)(5)$ 80,000
Year ended January 30, 1999:
- ---------------------------
Allowance for doubtful
accounts $ 437,179 $ 991,523(1) $ 881,759(6) $(775,296)(2) $1,535,165
Allowance for vendor
claims
receivable $ 80,000 $ 40,700(7) $ 120,700
Notes:
(1) Represents the provision for credit losses on receivables
ineligible for sale.
(2) Represents uncollectible accounts written off, net of recoveries,
pertaining to receivables ineligible for sale.
(3) Represents a change in estimate for the allowance for
vendor claims receivable.
(4) Represents a change in estimate for the allowance for
doubtful accounts related to receivables
which were ineligible for sale. This amount is
included in net credit revenues in the fiscal
1999 consolidated income statement.
(5) Represents a change in estimate for the allowance for
vendor claims receivable applicable to
vendor claims acquired from Harris (see Note 2 to the
Consolidated Financial Statements.)
(6) Represents the allowance for doubtful accounts applicable
to the receivables acquired from Harris (see Note 2 to
the Consolidated Financial Statements).
(7) Represents the allowance for vendor claims receivable
applicable to the outstanding vendor claims
acquired from Harris (see Note 2 to the Consolidated
Financial Statements.)
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 17, 2001 GOTTSCHALKS INC.
By:/s/ James R.Famalette
----------------------
James R. Famalette
President and Chief Executive
Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report
has been signed below by the following persons
on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- ------------ ------ ----
/s/ Joseph W. Levy Chairman April 17, 2001
- -------------------------
Joseph W. Levy
President, Chief
Executive Officer April 17, 2001
/s/ James R. Famalette and Director (principal
- ------------------------- executive officer)
James R. Famalette
Senior Vice President
and Chief Financial
Officer (principal April 17, 2001
financial and
/s/ Michael S. Geele accounting officer)
- --------------------------
Michael S. Geele
/s/ O. James Woodward III Director April 17, 2001
- --------------------------
O. James Woodward III
/s/ Bret W. Levy Director April 17, 2001
- --------------------------
Bret W. Levy
/s/ Sharon Levy Director April 17, 2001
- --------------------------
Sharon Levy
/s/ Joseph J. Penbera Director April 17, 2001
- --------------------------
Joseph J. Penbera
/s/ Fred Ruiz Director April 17, 2001
- --------------------------
Fred Ruiz
/s/ Max Gutmann Director April 17, 2001
- --------------------------
Max Gutmann
/s/ Isidoro Alvarez Alvarez Director April 17, 2001
- ---------------------------
Isidoro Alvarez Alvarez
/s/ Jorge Pont Sanchez Director April 17, 2001
- ---------------------------
Jorge Pont Sanchez