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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 (Fee Required)
For The Fiscal Year Ended January 29, 1994
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
Commission File Number 1-09100
Gottschalks Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0159791
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code: (209) 434-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
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 No
Indicate by check mark if the 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 nonaffiliates of the
Registrant as of March 31, 1994:
Common Stock, $.01 par value: $77,268,000
On March 31, 1994 the Registrant had outstanding 10,412,332 shares of Common
Stock.
Documents Incorporated By Reference: Portions of the Registrant's definitive
proxy statement with respect to its Annual Meeting of Stockholders scheduled
to be held on June 23, 1994, which will be filed pursuant to Regulation 14A,
are incorporated by reference into Part III of this Form 10-K.
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc.(the "Company") operates twenty-seven "Gottschalks"
department stores including three junior satellite stores and twenty-three
"Village East" specialty stores. The Company's stores are located primarily
in non-major metropolitan cities in California and in Tacoma, Washington and
Klamath Falls, Oregon.
Gottschalks department stores typically offer brand-name fashion
apparel, shoes and accessories for men, women and children, cosmetics,
jewelry, china, housewares, home appliances and furnishings, electronics and
other goods. The Company's "Village East" specialty stores offer apparel for
larger women. The Company's stores carry primarily moderately priced brand-
name merchandise, complemented with a mix of higher and budget priced
merchandise. The Company services its stores from a 420,000 square foot
distribution facility located in Madera, California. The Company's business
has been under continuous family management since it was founded by Emil
Gottschalk in 1904.
Since the Company's initial public offering in April 1986, the Company
has built or acquired nineteen department stores, sixteen specialty stores,
and a new distribution center. Gross store square footage added during this
expansion period was approximately 1.5 million square feet, resulting in total
Company store square footage of over 2.1 million square feet.
The following table presents statistical information regarding sales at
the Company's Gottschalks and Village East stores for the fiscal years
indicated. The table does not include the sales of the Company's Petites West
specialty stores, which were discontinued in 1991.
1993 1992 1991 1990 1989
Gottschalks
Net sales
(in thousands) (1) $333,062 $321,809 $304,423 $276,521 $228,262
Stores open at end
of period (2) 27 25 23 22 20
Average net sales
per square foot
of selling
space (3) $ 213 $ 209 $ 210 $ 208 $ 207
Village East
Net sales
(in thousands) $ 9,355 $ 9,324 $ 8,403 $ 6,996 $ 5,023
Stores open at
end of period 23 22 21 18 17
Average net sales
per square foot
of selling space (3) $ 216 $ 218 $ 231 $ 217 $ 203
(1) The Company leases the fine jewelry, custom drapery, shoe and maternity
wear departments, restaurants and the beauty salons in its Gottschalks
stores. Included in net sales are leased department sales of $25.3
million, $23.4 million, $20.8 million, $19.7 million and $17.6 million,
in 1993, 1992, 1991, 1990 and 1989, respectively. Net sales include
sales from the Company's clearance center which was opened in 1988 and
closed in January 1994.
(2) The number of stores does not include the Company's clearance center
which opened in 1988 and was closed in January 1994. The Company
closed its Santa Cruz, California store in 1989, after it suffered
major irreparable damage as a result of the October 1989 earthquake.
The Company opened its twenty-sixth and twenty-seventh Gottschalks
department stores in Hanford and Redding, California in March and
November 1993, respectively.
(3) Average net sales per square foot of selling space represents net sales
for the period divided by the number of square feet of selling space in
use during the period. Average net sales per square foot is computed
only for those stores in operation for at least twelve months. "Selling
space" has been determined according to standards set by the National
Retail Federation.
Merchandising and Marketing. The Company's merchandising and marketing
strategy is directed at offering and promoting nationally advertised brand-
name merchandise recognized by its customers for style and value. The
Company's inventory emphasizes brand names such as Estee Lauder, Lancome, Liz
Claiborne, Carole Little, Evan Picone, Calvin Klein, Guess, Levi Strauss and
Sony. The Company's stores also carry private label merchandise purchased
through Frederick Atkins, Inc., a national association of major retailers,
which provides its members with group purchasing opportunities. The Company
offers a wide selection of fashion apparel and other merchandise in an
extensive range of styles, sizes and colors for all members of the family.
The Company seeks to evaluate and respond quickly to current fashion
trends in its markets. The Company's Executive Vice President/General
Merchandise Manager and his staff of 2 general merchandise managers, 9
divisional merchandise managers, 48 buyers and 35 assistant buyers direct the
Company's merchandising activities from its corporate office in Fresno,
California. Management develops a monthly merchandising plan for each store,
measures sales performance against the plan on a daily basis, and continually
updates merchandising strategy. Every Company store carries substantially the
same merchandise, but in different mixes according to individual market
demands. The Company's membership in Frederick Atkins, Inc. also provides it
with current information about marketing and operating trends. Management
also believes that the Company's long and continuous presence in its primary
market areas enables it to evaluate and respond quickly to changing customer
preferences.
Management believes that well-stocked stores and frequent promotional
sales contribute significantly to sales volume. Management monitors store
inventories and sales on a daily basis to assure that its stores are well-
stocked and to provide ample merchandise for promotional sales. During 1993,
the Company focused on increasing sales per selling square foot and improved
gross margins by reallocating selling floor space to higher profit margin
items and narrowing and focusing merchandise assortments, as well as through
the development of strong, strategic alliances with its vendors. The
Company
closed its clearance center in January 1994 as part of its cost savings
program. The Company instead will liquidate slow moving merchandise through
its existing stores, with certain areas of such stores devoted exclusively to
clearance sales.
Management believes that competition in the retailing industry will
continue to intensify in the 1990's and that merchandise cost and shrinkage
control will be critical to improved gross margins in the future. In 1993 the
Company began development of a price lookup system, that will reduce point-of-
sale errors, streamline the sales audit process and reduce inventory shortages
resulting from paperwork errors. The Company is currently implementing the
system in each of its stores and expects the implementation process to be
complete by the end of fiscal 1994. During the second half of 1993 the Company
implemented an automatic markdown system that will reduce heavy markdowns late
in each season and inventory shrinkage resulting from paperwork errors. The
Company is also in the process of acquiring a new merchandise management
system that will enhance its ability to efficiently allocate merchandise to
stores and provide the Company's buying staff with more timely and accurate
information. Management believes that full implementation of these new
merchandise related systems will reduce inventory related costs and increase
inventory turnover rates.
The Company advertises primarily through newspapers, television,
catalogs, and direct mail. Advertising emphasizes brand-name merchandise and
promotional prices. The Company is a major purchaser of television
advertising time in its primary market areas. The Company sends direct
mailings to its charge-card accounts and, through its computer data base,
generates specific lists of customers who may be most responsive to specific
promotional mailings. The Company also conducts 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's stores experience seasonal sales and earnings pattern
typical of the retail industry. Peak sales occur during the Christmas, back-
to-school, and Easter seasons. The Company generally increases its inventory
levels and sales staff for these seasons. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
Customer Service. In addition to merchandising and promoting brand-
name merchandise, the Company seeks to offer to its customers a conveniently
located and attractive shopping environment and high levels of personal sales
assistance not typically associated with major department stores. All of the
Company's stores are designed and maintained to project an attractive, quality
shopping environment. In Gottschalks stores, merchandise is attractively
displayed and arranged by departments, with well-known designer and brand
names prominently displayed. Departments open onto main aisles, and numerous
visual displays are used to maximize the exposure of merchandise to customer
traffic. Village East specialty stores promote the image of style and fashion
for larger women. The Company generally seeks to locate its stores in
regional shopping malls, which are centrally located to access a broad
customer base. Twenty-two of the Company's twenty-seven Gottschalks stores,
and all but two of its specialty stores, are located in regional shopping
malls.
The Company's policy is to employ sufficient sales personnel to provide
its customers with prompt, personal service. Sales personnel are encouraged to
keep notebooks of customers' names, clothing sizes, birthdays, and major
purchases, to telephone customers about promotional sales and to send thank-
you notes and other greetings. Management believes that this type of personal
attention builds customer loyalty. The Company stresses
the training of its sales personnel and offers various financial incentives
based on sales
performance. The Company also offers opportunities for promotions and
management training and leadership classes. Under its liberal return and
exchange policy, the Company will accept without question a return or exchange
of any merchandise that its stores stock. When appropriate, the Company
returns the merchandise to its supplier.
Leased Departments. The Company currently leases the fine jewelry,
shoe and maternity wear departments, custom drapery, restaurants and the
beauty salons in its Gottschalks department stores. The independent operators
supply their own merchandise, sales personnel and advertising and pay the
Company a percentage of gross sales as rent. Net sales from leased
departments, which are included in the Company's net sales results, were $25.3
million, $23.4 million, $20.8 million, $19.7 million and $17.6 million in
1993, 1992, 1991, 1990 and 1989, respectively.
Management believes that, while the cost of sales attributable to
leased department sales is generally higher than other departments, the
relative contribution of leased department sales to earnings is comparable to
that of the Company's other departments because the lessee assumes
substantially all operating expenses of the department. This allows the
Company to reduce its level of selling, advertising and other general and
administrative expenses associated with leased department sales. Cost of
sales from leased departments, which are included in cost of sales, were $21.8
million, $20.1 million, $17.8 million, $16.9 million and $15.1 million in
1993, 1992, 1991, 1990 and 1989, respectively.
Purchase of Merchandise. The Company is a member of Frederick Atkins,
Inc., a national association of major retailers, which provides its members
with group purchasing opportunities. In fiscal year 1993, the Company
purchased approximately 4.8% of its merchandise from Frederick Atkins, Inc.
The Company also purchases merchandise from numerous other suppliers.
Excluding Frederick Atkins, Inc., the Company's ten largest suppliers during
fiscal year 1993 were Estee Lauder, Inc., Liz Claiborne, Inc., Levi Strauss &
Co., Cosmair, Inc., Sony Corporation of America, London Fog, All-That-Jazz,
Haggar Apparel Co., Graff Californiawear and Alfred Dunner. Purchases from
those vendors accounted for approximately 21.1% of the Company's total
purchases during fiscal year 1993. Management believes that alternative
sources of supply are available for each category of merchandise it purchases.
Credit Policy. The Company issues its own credit card, which
management believes contributes significantly to the Company's market
acceptance and increased sales. As discussed more fully in Item 7,
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," the Company sold certain of its
customer credit card accounts receivable in connection with an asset-backed
securitization program on March 30, 1994. The Company
will continue to service the receivables pursuant to the securitization program
and anticipates
no material revisions to its existing credit policies. As of March 30, 1994,
the Company had approximately 420,000 active charge cards outstanding. The
Company's gross revenues from credit card finance charges totalled
approximately $8.1 million in 1993.
In February 1992, the Company implemented a new credit management
software system. The new system enhances the Company's ability to make credit
decisions related to credit authorization, collections and billing and to
provide improved customer service. The Company believes this new system
offers improved flexibility, enhances efficiency and should be sufficient to
meet the Company's future credit requirements.
In October 1993, the Company implemented an Instant Credit program.
Combined with a new credit scoring system installed in September 1993, the
Company can now process hundreds of credit applications daily at a rate of
approximately three minutes per application. In September 1993, the Company
also implemented a "55-Plus Account" program which offers additional
merchandise and service discounts to customers over the age of 55.
The Company maintains reserves for possible credit losses on all of its
receivables, including receivables held for securitization and sale. Over the
past five fiscal years the Company's provision for credit losses ranged from
0.6-1.0% of net sales. Credit losses have consistently been within management
expectations.
The Company offers credit customers three payment plans. Under its
"Option Plan," the Company bills customers monthly for charges, without a
minimum purchase requirement. Finance charges are assessed monthly on any
previously unpaid balance, for all balances greater than $3.00. The Company's
annual interest rate charge is 19.8% in all states except Washington which is
18.0%. Minimum monthly payments of $10.00 or 10% of the new balance
outstanding are required.
Under the "Time Pay Plan," customers may make monthly payments for
purchases of home furnishings, major appliances, and other qualified items of
more than $100. The minimum monthly payment is 5.0% of the highest new
balance owing at any time, but not less than $10, until the balance is
cleared.
Under the "Club Plan," customers may pay monthly for fine china,
silver, crystal, and collectibles of more than $100. The minimum monthly
payment is 4.2% of the highest new balance owing at any time, but not less
than $10, until the balance is cleared. The Company assesses no finance
charge on a club account so long as the customer pays the minimum monthly
payment when due. Otherwise, the Company assesses the same finance charge as
under the "Option" and "Time Pay Plan."
Facilities. The Company's facilities are designed to complement its
strategy of providing customers with an attractive selection of brand-name
merchandise. The Company has computerized its operations, including its
merchandising, inventory, credit, payroll and financial reporting systems.
The Company has installed approximately 2,000 computer terminals in its
stores, executive offices and distribution center. Every store processes each
sale through point-of-sale terminals that connect on-line with the computer
center at the Company's corporate office in Fresno. This system provides
detailed reports on a real-time basis of current sales and inventory levels by
store, department, vendor, class, style, color, and size. Such reports assist
the Company's merchandising staff in analyzing market trends, identifying fast
or slow-moving merchandise, and making prompt reordering and pricing
decisions. The Company's management uses the system to monitor store and
buyer performance against merchandising plans, update merchandising
strategies, and conduct financial and operational modeling.
The Company's distribution facility, designed and equipped to meet the
Company's long-term distribution needs, enhances its ability to respond to
customers' preferences. Completed in October 1989, the Company receives all
merchandise at its 420,000 square foot distribution center in Madera,
California. Merchandise arriving at the distribution center is inspected,
recorded by computer into inventory and tagged with a computer-generated price
label. The Company generally does not warehouse apparel merchandise but
distributes it to stores promptly. The distribution center is centrally
located to serve all of the Company's store locations. Daily distribution
enables the Company to respond to fashion and market trends and assure fully
stocked merchandise displays and store stockrooms.
The Company relocated its corporate headquarters during November 1991
from the downtown Fresno area to an office building in Northeast Fresno.
Management believes that this space will be adequate to meet the Company's
long-term office space requirements.
Store Expansion. Since the Company's initial public offering in April
1986, the Company has constructed or acquired nineteen of its twenty-seven
Gottschalks department stores, and opened sixteen of its twenty-three Village
East specialty stores. Gottschalks intends to open a Village East specialty
store in each mall where a Gottschalks department store opens. In 1992 the
Company opened its first out-of-state stores in Tacoma, Washington and Klamath
Falls, Oregon. The Company opened its twenty-sixth and twenty-seventh
Gottschalk's stores in Hanford and Redding, California, in March and November
1993, respectively and opened its twenty-third Village East specialty store in
Hanford in March 1993.
The Company has historically avoided expansion into major metropolitan
areas, preferring instead to concentrate on secondary cities where management
believes there is a strong
demand for nationally advertised brand-name merchandise and fewer competitors
offering such merchandise. In selecting
sites for new stores, the Company generally seeks prime locations in regional
malls. The Company also considers the demographic characteristics of the
surrounding area, the lease terms, and other factors. The Company does not
typically own its properties, although management would consider doing so if
ownership were financially attractive. A number of factors may affect the
Company's expansion, including the availability of suitable locations,
acceptable lease terms, economic conditions, financing and competition.
During the past several years, the recession in California has negatively
affected the Company's sales and income, the development of regional shopping
malls, the availability of suitable store locations and the availability of
financing for new stores. However, management believes that an improving
economy and the finalization of the Company's long-term financing arrangements
(see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources") will permit the
Company to respond quickly to attractive opportunities for new stores to
continue to pursue its goal of controlled expansion.
Competition. The retail department store and specialty apparel
businesses are highly competitive. The Company's stores compete with
national, regional, and local chain department stores and specialty stores,
some of which are considerably larger than the Company and have substantially
greater financial and other resources. Competition has intensified in recent
years as new competitors have sought to enter the Company's primary markets.
The Company competes primarily on the basis of current merchandise
availability, customer service, price and store location. The Company
believes that its knowledge of its primary California markets developed over
89 years of continuous family management, and its focus on those markets as
its primary areas of operations, give it an advantage that its competitors
cannot readily duplicate. Many of the Company's competitors are national
chains whose operations are not focused specifically on non-major metropolitan
cities in the Western United States. One aspect of the Company's
strategy is to differentiate itself as a home-town, locally oriented store
versus its more nationally focused competitors.
Employees. As of January 29, 1994, the Company had 4,454
employees, of whom 886 were employed part-time (working less than 20 hours a
week on a regular basis). The Company hires additional temporary employees
and increases the hours of part-time employees during seasonal peak selling
periods. To attract and retain qualified employees, the Company offers a 25%
discount on merchandise purchases, participation in a 401(k) Retirement
Savings Plan, vacation, sick and holiday pay benefits as well as health care,
accident, death, disability, dental and vision insurance at a nominal cost to
the employee and eligible beneficiaries and dependents.
None of the Company's employees are covered by a collective bargaining
agreement. 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.
Item 2. PROPERTIES
Corporate Office and Distribution Center. The Company's corporate
office is located in Fresno, California. The Company's corporate office
occupies 89,000 square feet of a 176,000 square foot building, which was built
in 1991 by a limited partnership of which the Company is the sole limited
partner holding a 36% share of the partnership. The Company believes that its
current office space is adequate to meet its long-term office space
requirements.
To facilitate the Company's expansion in recent years, the Company
opened its leased distribution center in October 1989. The 420,000 square
foot facility is located in Madera, California, and was built and equipped to
meet the Company's long-term merchandise distribution needs. The facility is
strategically located to service economically the Company's existing
California store locations and its projected future market areas. The Company
also services its Tacoma, Washington and Klamath Falls, Oregon stores from its
distribution center.
Store Leases and Locations. With the exception of the San Luis Obispo,
Palmdale, Capitola, Yuba City, Antioch, Eureka and Hanford department stores,
all of which the Company owns, the Company leases its stores from unrelated
parties. The store leases generally require the Company to pay either a fixed
rent, a percentage of sales, or a percentage of sales above a minimum rent.
During 1993 the Company incurred an average of $6.80 per square foot in lease
expense, not including common area maintenance expense. The Company is
responsible under many of its store leases for its pro-rata share of promotion
and common-area maintenance expenses and for certain property tax and
insurance expenses.
Twenty-two Gottschalks and all but two of the Village East stores, are
located in regional shopping malls. 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.
The following table contains specific information about each store.
Expiration
Gross Date of
Square Date Current
Feet Opened Lease Renewal Options
GOTTSCHALKS
Antioch............. 90,000 1989 N/A(1) N/A
Aptos............... 9,000 1988 2004 None
Bakersfield:
East Hills........ 92,000 1988 2009 6 five yr. opt.
Valley Plaza...... 60,000 1987 1997 None
Capitola............ 114,000 1990 N/A(1) N/A
Chico............... 92,000 1988 2017 3 ten yr. opt.
Clovis.............. 97,000 1988 2018 None
Eureka.............. 89,000 1989 N/A(1) N/A
Fresno:
Fashion Fair...... 75,000 1970 2001 None
Fig Garden........ 30,000 1983 2005 None
Manchester........ 165,000 1979 2009 1 ten yr. opt.
Hanford............. 80,000 1993 N/A(1) N/A
Klamath Falls....... 65,000 1992 2007 2 ten yr. opt.
Merced.............. 60,000 1983 2013 None
Modesto:
Vintage Faire..... 87,000 1977 2008 4 five yr. opt.
Century Center.... 50,000 1984 2013 1 ten yr. opt.
and
1 four yr. opt.
Palmdale............ 119,000 1990 N/A(1) N/A
Palm Springs........ 65,000 1991 2011 4 Five yr. opt.
San Luis Obispo..... 86,000 1986 N/A(1) N/A
Santa Maria......... 115,000 1976 2006 4 five yr. opt.
Scotts Valley....... 11,000 1988 2001 2 five yr. opt.
Stockton............ 91,000 1987 2009 6 five yr. opt.
Tacoma.............. 120,000 1992 2012 4 five yr. opt.
Visalia............. 80,000 1964 2003 1 twelve yr. opt.
and
2 twenty yr. opt.
Woodland............ 47,000 1987 2017 2 ten yr. opt.
Yuba City........... 82,000 1989 N/A(1) N/A
Redding............. 7,000 1993 60 days None
Total Gottschalks
Square Footage.. 2,078,000(2)
___________________________
(1) Company owned.
(2) Total Gottschalks square footage does not include the
Company's clearance center, consisting of 30,000
gross square feet, that was opened in 1988 and closed
in January 1994.
Expiration
Gross Date of
Square Date Current
Feet Opened Lease Renewal Options
VILLAGE EAST
Antioch............. 2,100 1989 1999 None
Bakersfield:
East Hills........ 2,500 1988 1998 None
Valley Plaza...... 3,700 1991 2002 None
Capitola............ 2,400 1991 1999 None
Chico............... 2,300 1988 2000 None
Clovis.............. 2,200 1988 1998 None
Eureka.............. 2,800 1989 2004 None
Fresno:
Fashion Fair...... 1,500 1970 1996 None
Fig Garden........ 2,800 1986 1999 None
Manchester........ 2,300 1981 2010 None
Hanford............. 2,800 1993 2008 None
Merced.............. 1,800 1976 2001 None
Modesto:
Vintage Faire..... 2,900 1977 1995 None
Century Center.... 1,400 1986 2005 None
Palmdale............ 2,800 1990 2000 None
Palm Springs........ 2,500 1991 2001 None
San Luis Obispo..... 2,100 1987 2011 None
Santa Maria......... 3,000 1976 2001 None
Stockton............ 2,100 1989 1998 None
Tacoma.............. 2,100 1992 2012 None
Visalia............. 1,800 1975 1999 None
Woodland............ 1,800 1987 1999 None
Yuba City........... 3,000 1990 2000 None
Total Village East
Square Footage.... 54,700
Total Square
Footage..........2,132,700
Item 3. LEGAL PROCEEDINGS
The Company plead guilty in July 1992 to certain criminal
charges and paid certain fines in order to settle all federal
criminal matters relating to (i) a tax deduction on the Company's
1985 federal tax return (the "VEBA deduction") and (ii) the
reports and registration statements filed by the Company with the
Securities and Exchange Commission ("SEC"). The U.S. Attorney's
criminal investigation relating to that matter has been
discontinued. Accordingly, the Company's Chairman and Chief
Executive Officer, Joseph Levy is no longer a target of that
investigation.
The Company is a party to three civil lawsuits related to
the VEBA deduction and the Company's guilty pleas. The same law
firm represents the plaintiffs in each of the three lawsuits:
Ponder v. Gottschalks (Superior Court of California,
County of Fresno), which was filed on April 30, 1993 and purports
to be a class action on behalf of the named plaintiffs and others
similarly situated, seeks rescission of the plaintiffs' purchases
of common stock and unspecified money damages, including
compensatory, special and punitive damages and attorneys' fees,
based, in part, upon alleged misrepresentations regarding, among
other matters, the VEBA deduction, in the Company's public
reports. The defendants in this action include, in addition to
the Company, Ernst & Young, the Company's former accountants,
certain former officers of the Company, certain former
consultants to the Company, Joseph Levy, currently Chairman of
the Board and Chief Executive Officer of the Company, and Gerald
Blum, currently Vice Chairman of the Company.
Annoni v. Gottschalks (United States District Court for
the Northern District of California), which was filed on July 15,
1993 and purports to be a federal class action on behalf of the
named plaintiffs and others similarly situated, is based upon the
same facts, names the same defendants and seeks similar relief as
the pending state court class action.
Ponder v. Ernst & Young (Superior Court of California,
County of Fresno), which was filed on May 11, 1993, is a
derivative action purportedly brought by the named nominal
plaintiff on behalf of the Company against a number of the same
defendants named in the state and federal class actions and seeks
to recover from such defendants on behalf of the Company the
money damages alleged to have been suffered by the Company as a
result of the matters alleged in the class actions. The amounts
sought on behalf of the Company include fines, penalties, legal
and accounting fees paid by the Company, a return of salaries,
bonuses and profits derived by the defendants from the Company,
punitive damages, defense costs and attorneys fees.
The Company's motions to dismiss the federal class action,
to assume control of the derivative action, and to stay the state
court class action until resolution of the comparable federal
class action, are presently pending. Extensive discovery has not
yet begun in any of the actions.
Since the ultimate outcome of these lawsuits cannot presently
be determined, no provision for any loss that may result upon
resolution of these lawsuits has been made in the financial
statements.
The Company has supplied documents relating to the VEBA
deduction and its guilty pleas to the SEC, which is conducting
its own investigation to determine whether violations of federal
securities laws occurred.
The Company is a defendant in a lawsuit filed in October
1992 by F&N Acquisition Corp. ("F&N") in the United States
Bankruptcy Court for the Western District of Washington arising
out of the Company's proposed acquisition of a former Frederick
and Nelson store location in Spokane, Washington. On September 8,
1993, the United States District Court of the Western District of
Washington affirmed the bankruptcy court's award of partial
summary judgment in the amount of approximately $3.0 million
against the Company. The Company's appeal of that judgment to
the United States Court of Appeals for the Ninth Circuit is
presently pending.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS
No matter was 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 stock is listed for trading on both the New
York Stock Exchange 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 New York Stock Exchange
Composite Tape under the symbol "GOT" during the periods
indicated:
1993 1992
Fiscal Quarters High Low High Low
1st Quarter......... 9 3/4 7 1/8 22 1/2 12 1/8
2nd Quarter......... 9 6 1/8 13 3/4 7 1/2
3rd Quarter......... 9 6 1/2 10 3/4 8 3/4
4th Quarter......... 10 3/8 7 1/2 11 5/8 8 3/4
On March 31, 1994, the Company had 1,195 stockholders of
record, some of which were brokerage firms or other nominees
holding shares for multiple stockholders.
The Company has not paid a dividend since its initial
public offering in April 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 Wells Fargo Bank, N.A., prohibits the
Company from paying dividends.
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 January 29, 1994, January 30, 1993, February 1, 1992,
February 2, 1991 and February 3, 1990 are referred to herein as
1993, 1992, 1991, 1990 and 1989, respectively. All fiscal years
noted include 52 weeks, except 1989 which includes 53 weeks.
The selected financial data below should be read in
conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Financial
Statements of the Company and related notes included elsewhere
herein.
BALANCE SHEET DATA:
(In thousands of dollars) 1993 1992 1991 1990 1989
Receivables held for
securitization and
sale.................$ 40,000(1) -- -- -- --
Trade accounts
receivable, less
allowance for
doubtful accounts.... 21,460(1) $ 59,508 $ 62,831 $ 60,661 $ 51,809
Merchandise
inventories.......... 60,465 58,777 62,821 51,547 36,462
Property and
equipment, less
accumulated
depreciation and
amortization......... 96,396 95,933 91,114 83,435 64,118
Total assets.......... 248,330 239,910 242,072 207,556 165,425
Long-term obligations,
less current portion. 31,493(2) 14,992 51,290 42,627 44,780
Stockholders' equity.. 82,118 84,529 92,720 55,975 49,936
Working capital....... 32,147(2) 16,827 64,715 34,975 36,455
Current ratio......... 1.30:1 1.15:1 1.89:1 1.41:1 1.59:1
(1) As discussed more fully in Item 7, "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital
Resources" and Note 2 to the Financial Statements,
the Company sold certain of its customer credit card
accounts receivable on March 30, 1994 in connection
with an asset-backed securitization program.
Accordingly, such receivables have been classified as
held for securitization and sale at January 29, 1994.
(2) Working capital increased $15.3 million and long-term
obligations increased $16.5 million from 1992 to 1993
primarily due to the classification of certain debt
as long-term that had been classified as current in
1992. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
INCOME STATEMENT DATA:
1993 1992 1991 1990 1989
(In thousands, except share data)
Net sales(1)........... $342,417 $331,133 $314,633 $287,455 $236,765
Service charges and
other income......... 8,938 9,458 10,830 10,374 7,492
351,355 340,591 325,463 297,829 244,257
Costs and expenses:
Cost of sales(2)..... 233,252 226,319 210,435 189,330 156,575
Selling, general and
administrative
expenses(3)........ 104,138 105,044 96,144 84,916 71,864
Depreciation and
amortization....... 5,877 6,408 5,503 5,266 3,893
Interest expense..... 8,524 6,965 6,793 9,306 7,551
Unusual items(4)..... 3,427 7,852
355,218 352,588 318,875 288,818 239,883
Income (loss) before
income tax expense
(benefit) and
extraordinary loss... (3,863) (11,997) 6,588 9,011 4,374
Income tax expense
(benefit)............ (1,190) (4,006) 2,528 3,398 1,476
Income (loss) before
extraordinary loss... (2,673) (7,991) 4,060 5,613 2,898
Extraordinary loss..... (287)
Net income(loss)....... $ (2,673) $ (7,991) $ 4,060 $ 5,613 $ 2,611
Net income(loss)per
common share:
Before extraordinary
loss................. $ (.26) $ (.77) $ .41 $ .70 $ .36
Extraordinary loss... (.04)
Net income (loss) per
common share......... $ (.26) $ (.77) $ .41 $ .70 $ .32
Weighted average number
of common shares
outstanding..... 10,377 10,410 9,798 8,040 8,075
(1) Net sales includes net sales from leased departments
of $25.3 million, $23.4 million, $20.8 million, $19.7
million and $17.6 million in 1993, 1992, 1991, 1990
and 1989, respectively. See Part I, Item 1,
"Business-Leased Departments."
(2) Cost of sales from leased departments, which are
included in cost of sales, were $21.8 million, $20.1
million, $17.8 million, $16.9 million and $15.1
million in 1993, 1992, 1991, 1990 and 1989,
respectively.
(3) Includes provision for credit losses of $2.2 million,
$2.5 million, $3.0 million, $1.9 million and $1.6
million in 1993, 1992, 1991, 1990 and 1989,
respectively.
(4) See Part I, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and Note 3 to the Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company recorded a net loss of $2,673,000 in 1993 as
compared to a net loss of $7,991,000 in 1992. The operating loss
prior to income taxes and unusual items was $436,000 in 1993 as
compared to $4,145,000 in 1992. The decrease in operating losses
is primarily the result of an increase in sales volume resulting
from the addition of two new stores and improved economic
conditions in certain of the Company's market areas in the
second half of 1993. In addition, the Company initiated various
cost containment programs throughout the Company in 1993
resulting in an overall reduction in its selling, general and
administrative expenses as a percentage of net sales. These
factors, which resulted in reduced operating losses in 1993, were
partially offset by increased interest expense and a reduction in
service charge income on the Company's customer credit cards.
The Company recorded a net loss of $7,991,000 in 1992 as
compared to net income of $4,060,000 in 1991. The loss before
income taxes and unusual items was $4,145,000 in 1992 as compared
to income before income taxes of $6,588,000 in 1991. The loss
before income taxes and unusual items primarily resulted from
lower same store sales, lower gross margins resulting from
increased promotional markdowns, higher occupancy costs
associated with the Company's new corporate headquarters, higher
health care costs and higher than expected operating costs
associated with existing stores and new stores in Tacoma,
Washington and Klamath Falls, Oregon.
As discussed more fully in Note 3 to the Financial
Statements, the net loss in 1993 includes an unusual charge of
$3,427,000 representing legal and accounting fees incurred in
connection with (i) the government's investigation of an employee
benefit plan deduction (the "VEBA deduction") of $3,674,000 on
the Company's 1985 federal tax return, certain of the Company's
financial reporting practices and related stockholder litigation,
and (ii) pending litigation related to the Company's proposed
acquisition of a former Frederick & Nelson store located in
Spokane, Washington. In April 1994 the Company settled and paid
all tax, penalties and interest due to the Internal Revenue
Service in connection with the VEBA deduction.
The net loss in 1992 includes an unusual charge of
$7,852,000 representing (i) fines and penalties paid in
connection with the Company's settlement of federal criminal
charges related to the VEBA deduction on the Company's 1985
federal tax return and certain of the Company's financial
reporting practices, (ii) management's estimate of fines,
interest and penalties payable to the Internal Revenue Service in
connection with the civil aspect of the government's
investigation of such deduction, (iii) management's estimate of
amounts that may ultimately be payable by the Company in
connection with pending litigation related to the Company's
proposed acquisition of the former Frederick & Nelson store
location, and (iv) legal, accounting and other fees related to
the foregoing matters.
In response to the operating losses in 1992 and 1993, the
Company performed an extensive review of all aspects of its
operations during 1993. This review resulted in the
implementation of various cost containment and sales enhancing
programs and resulted in significantly reduced operating expenses
in 1993 as compared to 1992. The Company's objective in 1994 is
to continue to manage its selling, general and administrative
expenses in light of competitive pressures on the Company's gross
margin and management anticipates it will be able to further
reduce operating expenses as a percentage of net sales in the
long-term. In order to increase sales over the long-term, the
Company plans to expand on a controlled basis and achieve
benefits of spreading its overhead costs over an increasing
selling base. The Company believes the competitive environment
in the retailing industry will continue to intensify. In order
to mitigate the effects of the competitive environment,
management initiated new merchandise management programs in 1993
and early 1994 which the Company believes will result in reduced
inventory related costs and improve inventory turnover rates. As
more fully discussed in "Liquidity and Capital Resources," the
Company refinanced certain of its short and long-term credit
facilities in March 1994 with long-term financing arrangements
and sold certain of its customer credit card accounts receivable
in connection with an asset-backed securitization program. In
addition to lower interest rates and loan fees on the new credit
facilities, the Company believes that reduced borrowings on the
line of credit resulting from the application of proceeds from
the securitization and increased efficiencies gained through its
new merchandise management and cost containment programs will
reduce the Company's reliance on more costly short-term
borrowings.
Net Sales, Including Leased Departments
The Company's net sales increased to $342.4 million in 1993
as compared to $331.1 million in 1992, or 3.4%. The increase of
$11.3 million in net sales in 1993 was primarily the result of
strong retail activity and improved economic conditions in
certain of the Company's market areas during the second half of
1993. In addition, the increase is attributable to increased
sales volume generated by the new stores in Hanford and Redding,
California, opened in March and November 1993, respectively.
Comparable store sales increased 1.3% in 1993.
The Company's net sales increased to $331.1 million in 1992
as compared to $314.6 million in 1991, or 5.2%. This increase of
$16.5 million was primarily attributable to increased sales
volume generated by the Palm Springs store, which was open for
the entire year in 1992, and by the Tacoma, Washington and
Klamath Falls, Oregon stores, which opened in March 1992 and June
1992, respectively. Comparable store sales decreased 1% from
1991, primarily as a result of recessionary economic conditions
during the period.
The following table sets forth for the periods indicated
certain items from the Company's Statements of Operations,
expressed as percentages of net sales:
1993 1992 1991
Net sales, including
leased departments............. 100.0% 100.0% 100.0%
Service charges and other
income......................... 2.6 2.9 3.4
102.6 102.9 103.4
Costs and expenses:
Cost of sales................. 68.1 68.4 66.9
Selling, general and
administrative expenses.... 30.4 31.7 30.6
Depreciation and
amortization................ 1.7 1.9 1.7
Interest expense.............. 2.5 2.1 2.1
Unusual items................. 1.0 2.4
103.7 106.5 101.3
Income (loss) before income tax
expense (benefit).............. (1.1) (3.6) 2.1
Income tax expense (benefit)..... (.3) (1.2) .8
Net income (loss)................ (.8)% (2.4)% 1.3%
Service Charges and Other Income
Service charges and other income decreased to $8.9
million in 1993 as compared to $9.5 million in 1992, or
6.3%. Service charges associated with the Company's customer
credit cards decreased to $8.1 million in 1993 from $8.6 million
in 1992, or 5.8%. This decrease was primarily related to a
decrease in Company credit card sales as a percentage of net
sales during the first three quarters of 1993. The Company
experienced a significant increase in Company credit card sales
in the fourth quarter of 1993 primarily as a result of a new
Instant Credit program. Company credit card sales as a
percentage of net sales were 38.8% in 1993 as compared to 38.5%
in 1992. The number of days of credit card sales in receivables,
including amounts held for securitization and sale, was 169.3 in
1993 as compared to 169.8 in 1992. Other income was $838,000 in
1993 as compared to $880,000 in 1992.
As discussed more fully in "Liquidity and Capital
Resources" and Note 2 to the Financial Statements, the Company
sold certain of its customer credit card accounts receivable on
March 30, 1994 in connection with an asset-backed securitization
program. The Company will continue to service the credit card
portfolio and related servicing fee income will be reflected as
other income in the Company's financial statements. The Company
does not anticipate that the securitization will materially
affect service charges and other income in the future.
Service charges and other income decreased to $9.5 million
in 1992 as compared to $10.8 million in 1991, or 12.0%. Service
charges decreased to $8.6 million in 1992 from $9.0 million in
1991, or 4.4%. This decrease was primarily due to a decrease in
Company credit card sales as a percentage of net sales to 38.5%
of net sales in 1992 from 41.0% of net sales in 1991. The number
of days of credit card sales in receivables was 169.8 in 1992 as
compared to 177.4 in 1991. The decrease in days of credit card
sales in receivables resulted from increased efficiencies gained
through the implementation of a new credit management system in
1992. Other income in 1992 was $880,000 as compared to $1.8
million in 1991. Included in other income in 1991 was a gain of
$960,000 on land not being used in operations, a loss of $104,000
on the sale of the Company's downtown Bakersfield store and a
gain on sale of computer equipment of $225,000.
Cost of Sales
Cost of sales increased to $233.3 million in 1993 as
compared to $226.3 million in 1992, or 3.1%. The Company's gross
margin increased to 31.9% in 1993 as compared to 31.6% in 1992.
The increase in gross margin percent was primarily the result of
lower promotional markdowns on increased sales volume. The
Company values merchandise inventories on the retail method using
last-in, first-out (LIFO) cost and capitalizes to inventory
certain indirect purchasing, merchandise handling and inventory
storage costs. The LIFO inventory valuation adjustment ("LIFO
adjustment") in 1993 resulted in an increase to cost of sales of
$969,000 as compared to the 1992 LIFO adjustment which resulted
in an increase to cost of sales of $1.5 million. Excluding the
effects of the LIFO adjustment, the Company's gross margin was
32.2% in 1993 as compared to 32.1% in 1992. Inventory turnover
was 2.9 in 1993 and 1992.
Cost of sales increased to $226.3 million in 1992 as
compared to $210.4 million in 1991, or 7.6%. The Company's gross
margin decreased to 31.6% in 1992 as compared to 33.1% in 1991.
The decrease in gross margin percent was primarily the result of
increased promotional retail activity required to liquidate
merchandise and ongoing recessionary pressures in the Company's
market areas. The 1992 LIFO adjustment resulted in an increase
to cost of sales of $1.5 million as compared to the 1991 LIFO
adjustment which resulted in a decrease to cost of sales of
$211,000. Excluding the effects of the LIFO inventory valuation
adjustment, the Company's gross margin was 32.1% in 1992 as
compared to 33.1% in 1991. Inventory turnover remained unchanged
in 1992 and 1991 at 2.9.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to
$104.1 million in 1993 as compared to $105.0 million in 1992, or
0.9%. Selling, general and administrative expenses as a percent
of net sales decreased to 30.4% in 1993 as compared to 31.7%
in 1992. This decrease as a percent of net sales occurred as a
result of increased sales volume and a reduction in payroll and
related costs through the restructuring of the Company's sales,
buying and support staff, salary reductions, and the
implementation of expense control measures throughout the
Company. The Company also realized the benefit of experience
adjustments resulting in a reduction to required workers'
compensation reserves and the recognition of premium refund
receivables resulting from the Company's reduction of payroll
expense and revisions to certain workers' compensation laws
enacted in 1993. In addition, the Company reduced its health
insurance claim reserves as a result of a reduction in eligible
employees as well as from lower actual claim loss experience.
Selling, general and administrative expenses increased to
$105.0 million in 1992 as compared to $96.1 million in 1991, or
9.3%. Selling, general and administrative expenses as a percent
of net sales increased to 31.7% in 1992 as compared to 30.6% in
1991. This increase resulted primarily from higher corporate
occupancy costs, increased health care costs and higher than
anticipated operating costs associated with the Company's new
stores in Tacoma, Washington and Klamath Falls, Oregon. The
Company also increased advertising expenditures in order to
stimulate sluggish sales throughout the year. The increase in
selling, general and administrative costs as a percent of net
sales was a result of the above factors and lower than
anticipated sales resulting from the economic recession during
the period.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased to $5.9
million in 1993 as compared to $6.4 million in 1992, or 7.8%.
Depreciation and amortization expense as a percent of net sales
decreased to 1.7% in 1993 as compared to 1.9% in 1992. This
decrease resulted primarily from an increase in sales volume and
a decrease in the amortization of pre-opening costs related to
certain of the Company's new stores.
Depreciation and amortization expense increased to $6.4
million in 1992 as compared to $5.5 million in 1991, or 16.4%.
Depreciation and amortization expense as a percent of net sales
increased to 1.9% in 1992 as compared to 1.7% in 1991. This
increase was primarily the result of additional depreciation
expense related to the Company's new credit software and
advertising design systems implemented in 1992, and additional
depreciation and amortization related to the Palm Springs,
Tacoma, Washington and Klamath Falls, Oregon stores.
Interest Expense
Interest expense increased to $8.5 million in 1993 as
compared to $7.0 million in 1992, or 21.4%. Interest expense as
a percent of net sales increased to 2.5% in 1993 as compared to
2.1% in 1992. This increase resulted from increased borrowings
on the Company's line of credit facility to satisfy working
capital requirements and from an increase in the interest rate
charged on outstanding borrowings on the line of credit and
certain of the Company's long-term borrowings. The interest rate
charged on outstanding borrowings on the Company's line of credit
ranged from 1/8% above the prime interest rate through September
1993 to 1% above the prime interest rate thereafter (7.00% at
January 29, 1994). In addition, the increase resulted from
additional amortization of loan fees paid primarily in connection
with certain credit facilities that were refinanced during 1993.
As more fully discussed in "Liquidity and Capital Resources" the
Company refinanced certain of its short and long-term credit
facilities in March 1994. In addition to lower interest rates on
the new credit facilities, the Company believes its reliance on
more costly short-term borrowings will be reduced in 1994 as a
result of the application of proceeds from the securitization and
increased efficiencies related to new merchandise management and
cost containment programs.
Interest expense increased to $7.0 million in 1992 as
compared to $6.8 million in 1991, or 2.9%. Interest expense as a
percent of net sales was 2.1% in 1992 and 1991. The dollar
increase in interest expense in 1992 is consistent with the
Company's increased borrowings under its line of credit facility
to fund working capital requirements during the year, and also
relates to an increase of the interest rate charged on the
Company's line of credit facility from a rate which was at or
below the prime interest rate in 1991 and through September 1992
to a rate of 1/8% above the prime interest rate beginning in
September 1992.
Income Taxes
The Company adopted Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" in 1991. The Company's
effective tax rate in 1993 was a credit of (30.8%) as compared to
a credit of (33.4%) in 1992. The credits in 1993 and 1992
resulted from the combined federal and state statutory tax rates
less the impact of nondeductible fines and penalties incurred
with respect to the government's civil and criminal investigation
of the Company. The Company's effective tax rate in 1991 was
38.4%.
Inflation
The Company, as a result of inflation, has experienced
increases in merchandise cost, salaries, employee benefits and
other general and administrative expenses. As these costs have
increased, the Company has increased its selling prices so that
inflation has not significantly affected gross margins.
Seasonality
The Company's business, like that of most retailers, is
subject to seasonal influences, with the major portion of sales
and operating results realized during the last half of each
fiscal year, which includes the back-to-school and Christmas
selling seasons. In light of this pattern, selling, general and
administrative expenses are typically higher as a percentage of
net sales during the first half of each fiscal year.
The following table sets forth unaudited quarterly results
of operations for the past two years (in thousands, except per
share data). The Company's quarterly results of operations for
the years ended 1993 and 1992 reflect certain reclassifications
to conform with year-end presentation.
1993
Quarter ended May 1 July 31 October 30 January 29
Net sales $65,833 $76,223 $75,747 $124,614
Gross profit 20,861 23,714 24,877 39,713
Income (loss) before
income tax expense
(benefit) (5,724) (3,857) (2,807) 8,525
Net income (loss) (3,606) (2,430) (1,768) 5,131
Income (loss) per
common share (.35) (.23) (.17) .49
1992
Quarter ended May 2 August 1 October 31 January 30
Net sales $67,251 $75,000 $71,853 $117,029
Gross profit 22,217 24,764 23,082 34,751
Loss before income
tax benefit (2,502) (3,969) (3,149) (2,377)
Net loss (1,539) (3,019) (1,937) (1,496)
Loss per
common share (.15) (.29) (.19) (.14)
_________________________________
Liquidity and Capital Resources
Net cash used in operating activities was $1.1 million in
1993 as compared to net cash provided by operating activities of
$6.2 million in 1992. The decrease in cash provided by the
Company's operating activities in 1993 was primarily related to
an increase in receivables, an increase in merchandise
inventories, an increase in certain current assets and an
increase in refundable income taxes. The increase in receivables
occurred as a result of an increased sales volume from two new
stores and the Instant Credit program initiated by the Company in
October 1993. The increase in merchandise inventories in 1993
occurred as a result of the addition of two new stores in 1993.
The increase in current assets relates primarily to certain
refundable deposits, all of which management anticipates will be
returned to the Company in fiscal 1994. The increase in
refundable income taxes represents primarily the carryback of net
operating loss and general business tax credits. Tax refunds of
$1.5 million were received by the Company in the first quarter of
1994.
Net cash provided by operating activities was $6.2 million
in 1992 as compared to net cash used in operating activities of
$82,000 in 1991. The increase in cash provided by operating
activities was primarily related to a decrease in receivables and
merchandise inventories, an increase in accrued expenses and an
increase in refundable income taxes. The decrease in receivables
occurred primarily as a result of a reduction in customer credit
card sales as a percent of net sales. The decrease in
merchandise inventories resulted from improved sales volume in
the fourth quarter of 1992 as well as from increased efforts to
maintain optimal inventory levels. The increase in accrued
expenses resulted from the accrual of litigation related costs,
and the increase in refundable income taxes related to net
operating and tax credits.
Net cash used in investing activities was $5.4 million in
1993 as compared to $10.7 million in 1992. Capital expenditures
in 1993 of $5.5 million related primarily to the construction of
the new store in Hanford, California, the tenant improvements,
fixtures and equipment for the new store in Redding, California,
the addition of new data processing equipment at all of the
Company's stores, the distribution center and corporate
headquarters, and the remodel of certain of the Company's
existing store locations.
Net cash used in investing activities was $10.7 million in
1992 as compared to $13.6 million in 1991. Capital expenditures
of $12.1 million in 1992 consisted primarily of expenditures
related to the Company's new credit software and advertising
design systems, tenant improvements, equipment and fixtures for
the new stores in Tacoma, Washington and Klamath Falls, Oregon
and the remodel of certain existing store locations.
Net cash provided by financing activities was $6.7 million
in 1993 as compared to $2.3 million in 1992. Net cash provided
by financing activities in 1993 consisted primarily of proceeds
from the Company's revolving line of credit and other long-term
borrowings.
Net cash provided by financing activities was $2.3 million
in 1992 as compared to $15.6 million in 1991. Net cash provided
by financing activities in 1992 consisted primarily of proceeds
from the Company's revolving line of credit. Net cash provided
by financing activities in 1991 included net proceeds of $33.8
million from the issuance of common stock and $11.0 million from
the private issuance of senior notes which were paid in March
1994 with proceeds from the securitization.
The Company's ratio of current assets to current
liabilities was 1.30:1 at January 29, 1994, 1.15:1 at January 30,
1993 and 1.89:1 at February 1, 1992.
On March 30, 1994, the Company sold certain of its accounts
receivable arising under its private label consumer revolving
credit card accounts, and entered into new loan agreements with
Wells Fargo Bank, National Association ("Wells Fargo") and
Barclays Business Credit, Inc. ("Barclays"). The Company applied
the aggregate proceeds of these transactions, amounting to
approximately $81 million, to repay all outstanding borrowings on
the Company's revolving line of credit facility with Wells Fargo,
which was due to expire June 30, 1994, and its $11 million Senior
Notes due 1996, which were held by Teachers Insurance and Annuity
Association.
In connection with an asset-backed securitization program,
the Company sold its private label credit card accounts
receivable to a wholly-owned special purpose subsidiary known as
Gottschalks Credit Receivables Corporation ("GCRC") for an
aggregate of approximately $40 million, and GCRC transferred and
conveyed the purchased receivables to a newly-formed trust known
as the Gottschalks Credit Card Master Trust (the "Trust").
Subsequent to March 30, 1994, all receivables arising under all
of the Company's private label credit card accounts will
automatically be sold to GCRC and conveyed to the Trust. The
Company will continue to service and administer the receivables
for a monthly servicing fee.
The Trust issued $40 million 7.35% Fixed Base Class A-1
Credit Card Certificates (the "Fixed Base Certificates") to two
third-party investors on March 30, 1994. At the same time, the
Trust issued an Exchangeable Certificate and a Subordinated
Certificate to GCRC, representing GCRC's retained interest in the
receivables as of that date. The Trust has also been authorized
to issue a $15 million Variable Base Class A-2 Credit Card
Certificate (the "Variable Base Certificate"), although no such
issuance has yet occurred. Upon issuance, the Variable Base
Certificate will bear interest at a LIBOR-based variable rate to
be determined at issuance, in any event not to exceed 12%. In
addition to the Fixed Base Certificates and Variable Base
Certificate, GCRC may, upon the satisfaction of certain
conditions, offer additional series of certificates to be issued
by the Trust.
The Company's loan agreement with Barclays provides the
Company with a three-year senior secured credit facility,
including a revolving line of credit of up to $35 million, as
limited to a restrictive borrowing base. The arrangement requires
the Company to repay all outstanding borrowings on the line of
credit for thirty consecutive days during the period of December
1 through January 31 of each year and provides for interest to be
charged on outstanding borrowings at a rate equal to LIBOR plus
3.0%. The Company's obligations to Barclays are collateralized by
a first priority security interest in all of the Company's non-
real property assets, other than certain property and equipment,
and a second priority security interest in certain real property
assets of the Company, including certain property and equipment.
The Company's previous financing arrangement with Wells
Fargo provided the Company with a revolving line of credit
facility with an availability for borrowings of up to a maximum
of $85 million, as limited to a restrictive borrowing base. At
January 29, 1994, $49.7 million was outstanding on the line of
credit. Interest on outstanding borrowings was charged at a rate
of 1% above the prime interest rate through March 30, 1994 (7.00%
at January 29, 1994). On March 30, 1994, the Company repaid
all outstanding borrowings under that revolving line of credit
facility. Pursuant to the terms of the Company's new loan
agreement with Wells Fargo, the revolving credit facility was
cancelled and Wells Fargo provided the Company with a $6.0
million term loan. The term loan, a 90-day note, due on June 28,
1994, bears interest at a rate of 10.0%. Certain provisions of
the Company's pre-existing term loan with Wells Fargo with an
outstanding principal balance of $18.6 million at January 29,
1994, were revised under the new agreement, primarily with
respect to certain restrictive covenants and the
collateralization of the note. The term loans are collateralized
by a first priority security interest in certain real property
assets and certain property and equipment of the Company, and by
a second priority security interest in all of the Company's non-
real property assets other than certain property, plant and
equipment.
The Barclays and Wells Fargo agreements contain various
restrictive covenants including, but not limited to: restrictions
on the payment of dividends, limitations of capital expenditures
and maintenance of minimum quick, working capital, tangible net
worth, total debt to tangible net worth and coverage ratios. In
addition, the agreements require the maintenance of minimum
adjusted earnings from operations and interest earned ratios and
minimum inventory and payables turnover rates.
In connection with the Barclays and Wells Fargo loan
agreements, the Company has agreed to enter into additional long-
term financing arrangements prior to June 30, 1994 and use the
proceeds of such arrangements to repay the $6.0 million term loan
with Wells Fargo and to reduce by $5.0 million the Company's
outstanding indebtedness to Barclays. The Company is currently
evaluating several alternative financing sources, including
issuance of the Variable Base Certificate under the asset-backed
securitization program, the sale and leaseback of certain
property, fixtures and/or equipment and the mortgage of certain
property. Management believes the new financing arrangements will
be finalized prior to June 30, 1994. The Company believes the
previously described financing arrangements, together with the
additional arrangements contemplated to be finalized prior to
June 30, 1994, will provide the Company with adequate cash
resources for its anticipated needs.
As discussed in Item 3, Legal Proceedings, and Note 9 to the
Financial Statements, class action lawsuits have been filed against
the Company. The ultimate outcome of these lawsuits cannot presently
be determined. Accordingly, no provision for any loss that may result
upon resolution of these lawsuits has been made in the 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
Not applicable.
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 the
Company's definitive proxy statement with respect to the Annual
Stockholders' Meeting scheduled to be held on June 23, 1994, to
be filed pursuant to Regulation 14A.
The following table lists the executive officers of the
Company:
Name Age(1) Position
Joseph W. Levy 62 Chairman of the Board and
Chief Executive Officer
Stephen J. Furst(2) 51 President, Chief Operating
Officer and Director
Gary L. Gladding 54 Executive Vice President/
General Merchandise Manager
Alan A. Weinstein 49 Senior Vice President and
Chief Financial Officer
Michael J. Schmidt 52 Senior Vice President/
Director of Stores
__________________________
(1) As of March 31, 1994
(2) Mr. Furst became Executive Vice President and Chief
Operating Officer of the Company in July 1993 and
President of the Company in November 1993. In March
1994, Mr. Furst was also elected a director of the
Company.
Joseph Levy became Chairman of the Board and Chief
Executive Officer of the Company's predecessor and former
subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk") in April
1982 and of the Company in March 1986. He was Executive Vice
President from 1972 to April 1982 and first joined E. Gottschalk
in 1956. Mr. Levy was formerly Chairman of the California
Transportation Commission and has served on numerous other state
and local commissions and public service agencies.
Steven J. Furst became Executive Vice President and Chief
Operating Officer of the Company in July 1993 and President in
November 1993. He was also elected a director of the Company in
March 1994. Mr. Furst is the first non-family member to serve as
the Company's President in its 89 year history. From 1963 to
1993, Mr. Furst served in a variety of capacities with Hess's
Department Store based in Allentown, Pennsylvania, including
Chief Operating Officer and President.
Mr. Gladding has been Executive Vice President since May
1987, and joined E. Gottschalk as Vice President/General
Merchandise Manager in February 1983. From 1980 to February
1983, he was Vice President and General Merchandise Manager for
Lazarus Department Stores, a division of Federated Department
Stores, Inc., and he previously held merchandising manager
positions with the May Department Stores Co.
Alan A. Weinstein became Senior Vice President and Chief
Financial Officer of the Company in June 1993. Prior to joining the Company,
Mr. Weinstein, a Certified Public Accountant, was the Chief Financial
Officer of The Wet Seal, Inc. based in Irvine, California for three
years. From 1987 to 1990 he was Vice President and Chief Financial
Officer of Wildlife Enterprises, Inc. which filed a petition under the
federal bankruptcy laws in November 1989. Aside from his position with
Wet Seal, he served general and specialty retailers in California, New
York and Texas for over twenty-five years.
Mr. Schmidt became Vice President/Director of Stores of E.
Gottschalk in February 1985. He had been Manager of the
Gottschalks Fashion Fair store since October 1983, and was
General Manager of the Liberty House store in Fresno from January
1981 to October 1983. Before 1981, Mr. Schmidt held management
positions with Allied Corporation and R.H. Macy & Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) The following financial statements of
Gottschalks Inc. are included in Item 8:
Balance sheets -- January 29, 1994 and January 30, 1993
Statements of operations -- Fiscal years ended January 29,
1994, January 30, 1993 and February 1, 1992
Statements of stockholders' equity -- Fiscal years ended
January 29, 1994, January 30, 1993 and February 1, 1992
Statements of cash flows -- Fiscal years ended January 29,
1994, January 30, 1993 and February 1, 1992
Notes to financial statements - Three years ended January
29, 1994
Independent auditors' reports
(a)(2) The following financial statement schedules of
Gottschalks Inc. are included in Item 14(d):
Schedule V -- Property and equipment
Schedule VI -- Accumulated depreciation, depletion
and amortization of property and
equipment
Schedule VIII -- Valuation and qualifying accounts
Schedule IX -- Short-term borrowings
Schedule X -- Supplementary income statement
information
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are included in the 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 the Regulation S-K and Item 14(c):
Exhibit
No. Description
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 By-Laws of the Registrant, as amended.*****
10.1 1993 Amended and Restated Credit Agreement dated
August 26, 1993, by and between Gottschalks Inc. and
Wells Fargo Bank, N.A. and related intercreditor
and
security agreements*********
10.2 Agreement of Limited Partnership dated March 16, 1990, by
and between River Park Properties I and Gottschalks Inc.
relating to the Company's corporate headquarters.*****
10.3 General Guaranty executed by Gottschalks Inc. in favor of
Security Pacific National Bank relating to the Company's
corporate headquarters.*****
10.5 Loan Agreement dated December 1, 1985 by and between E.
Gottschalk & Co., Inc. and City of San Luis Obispo relating
to $5,500,000 City of San Luis Obispo Commercial Revenue
Bonds.*****
10.14 Lease dated December 27, 1978 by and between E. Gottschalk
& Co., Inc. and Triple "F" Investments relating to the
Gottschalks Fresno Fashion Fair department store.*
10.16 Lease dated January 24, 1980 by and between E. Gottschalk &
Co., Inc. and Fred J. Russell relating to the Gottschalks
Fresno Manchester department store, as amended.*
10.18 Lease dated December 19, 1975 by and between E. Gottschalk
& Co., Inc. and Ernest W. Hahn, Inc. relating to the
Gottschalks Modesto Vintage Faire department store, as
amended.*
10.20 Leases dated October 17, 1974 and March 21, 1979 by and
between E. Gottschalk & Co., Inc. and Santa Maria Town
Center Associates relating to the Gottschalk Santa Maria
department store, as amended.*
10.21 Lease dated December 31, 1963 by and between E. Gottschalk
& Co., Inc. and Despond Mactavish and Associates relating
to the Gottschalks Visalia department store, as amended.*
10.23 Assignment of Option dated December 1, 1985 by E.
Gottschalk & Co., Inc. in favor of City of San Luis Obispo
relating to the Gottschalks San Luis Obispo department
store.*
10.50 Participation Agreement dated as of December 1, 1988 among
Gottschalks Inc., General Foods Credit Investors No. 2
Corporation and Manufacturers Hanover Trust Company of
California relating to the sale-leaseback of the
Stockton and Bakersfield Gottschalks department stores and
the Madera distribution facility.
10.51 Lease Agreement dated December 1, 1988 by and between
Manufacturers Hanover Trust Company of California and
Gottschalks Inc. relating to the sale-leaseback of
department stores in Stockton and Bakersfield,
California and the Madera distribution facility.
10.52 Ground Lease dated December 1, 1988 by and between
Gottschalks Inc., and Manufacturers Hanover Trust
Company of California relating to the sale-leaseback
of the Bakersfield department store.
10.53 Memorandum of Lease and Lease Supplement dated July 1,
1989 by and between Manufactures Hanover Trust Company
of California and Gottschalks Inc. relating to the
sale-leaseback of the Stockton department store.
10.54 Ground Lease dated August 17, 1989 by and between
Gottschalks Inc. and Manufacturers Hanover Trust
Company of California relating to the sale-leaseback
of the Madera distribution facility.
10.55 Lease Supplement and Amendment to the Participation
Agreement dated as of August 17, 1989 by and between
Manufacturers Hanover Trust Company of California and
Gottschalks Inc. relating to the sale-leaseback of the
Madera distribution facility.
10.56 Tax Indemnification agreement dated as of August 1,
1989 by and between Gottschalks Inc. and General Foods
Credit Investors No. 2 Corporation relating to the
sale-leaseback of the Stockton and Bakersfield
department stores and the Madera distribution
facility.
10.68 Lease Agreement dated as of March 16, 1990 by and
between Gottschalks Inc. and River Park Properties I
relating to the Company's corporate
headquarters.
******
10.72 Receivables Purchase Agreement dated as of March 30,
1994 by and between Gottschalks Credit Receivables
Corporation and Gottschalks Inc.********
10.73 Pooling and Servicing Agreement dated as of March 30,
1994 by and among Gottschalks Credit Receivables
Corporation, Gottschalks Inc. and Bankers Trust
Company.********
10.74 Series 1994-1 Supplement To Pooling and Servicing
Agreement dated as of March 30, 1994 by and among
Gottschalks Credit Receivables Corporation,
Gottschalks Inc. and Bankers Trust Company.********
10.75 Loan and Security Agreement dated March 30, 1994 by
and between Barclays Business Credit, Inc. and
Gottschalks Inc.********
10.76 Intercreditor Agreement dated March 30, 1994 by and
among Gottschalks Inc., Barclays Business Credit, Inc.
and Wells Fargo Bank, National Association.********
10.77 Assignment and Acceptance by and between Wells Fargo
Bank, National Association and Barclays Business
Credit, Inc.********
10.78 1994 Amended and Restated Credit Agreement dated as of
March 30, 1994 by and between Gottschalks Inc. and
Wells Fargo Bank, National Association.********
10.79 First Amendment to Second Amended and Restated
Security Agreement dated as of March 30, 1994 by and
between Gottschalks Inc. and Wells Fargo Bank,
National Association.********
16.1 Letter of Ernst & Young.******
23.1 Consent of Deloitte & Touche.
23.2 Consent of Ernst & Young.
Management Contracts, Compensatory Plans and Arrangements
10.6 Employment Agreement dated February 1, 1986 by and between
the Registrant and Joseph W. Levy.*
10.7 Employment Agreement dated February 1, 1986 by and between
the Registrant and Gerald H. Blum.*
10.9 Employment Agreement dated April 1, 1986 by and between E.
Gottschalk & Co., Inc. and Gary L. Gladding.*
10.10 1986 Employee Incentive Stock Option Plan with form of
stock option agreement thereunder.*
10.11 1986 Employee Nonqualified Stock Option Plan with form of
stock option agreement thereunder.*
10.12 Gottschalks Inc. Stock Purchase Plan.*
10.41 Wage Continuation Agreement dated November 24, 1980 by and
between E. Gottschalk & Co., Inc. and Joseph W. Levy.*
10.42 Wage Continuation Agreement dated November 24, 1980 by and
between E. Gottschalk & Co., Inc. and Gerald H. Blum.*
10.48 Employment Agreement dated June 1, 1987 by and between E.
Gottschalks & Co., Inc. and Michael J. Schmidt.
_____________________________
* Filed as an exhibit to Registration Statement on Form
S-1, (File No. 33-3949), wherein they bore the same
exhibit number, and incorporated herein by reference.
** Filed as an exhibit to the Annual Report on Form 10-K
for the year ended January 30, 1988 (File No. 1-9100)
wherein they bore the same exhibit number, and
incorporated herein by reference.
*** Filed as an exhibit to the Annual Report On Form 10-K
for the year ended January 28, 1989 (File No. 1-9100)
wherein it bore the same exhibit number, and
incorporated herein by reference.
**** Filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended July 29, 1989 (File No.
1-9100), wherein it bore the same exhibit number, and
incorporated herein by reference. Confidential
portions of this Exhibit have been omitted and filed
separately with the Commission.
***** Filed as an exhibit to the Annual Report on Form 10-K
for the year ended February 2, 1991 (File No. 1-9100)
wherein it bore the same exhibit number, and
incorporated herein by reference.
****** Filed as an exhibit to the Annual
Report on Form 10-K for the year ended
February 1, 1992 (File No. 1-9100)
wherein it bore the same exhibit
number, and incorporated herein by
reference.
******* Filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended October 31, 1992 (File No. 1-
9100), wherein it bore the same exhibit number, and
incorporated herein by reference.
********
Filed as an exhibit to the Current Report on Form 8-K
dated March 30, 1994 (File No. 1-09100) wherein they
bore the same exhibit number, and incorporated herein
by reference.
*********
Filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended July 31, 1993 (File No. 1-9100)
wherein it bore the same exhibit number, and incorporated
herein by reference.
(b) Reports on Form 8-K--The Company did not file any
Reports on Form 8-K during the fourth quarter of
1993.
(c) Exhibits--The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules--The response to this
portion of Item 14 is submitted as a separate section
of this report.
OTHER INFORMATION
For the purpose of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statement on Form S-8
No. 33-35064 (filed May 25, 1990):
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) and (2), (c) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JANUARY 29, 1994
GOTTSCHALKS INC.
FRESNO, CALIFORNIA