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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 January 31, 1998
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 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 February 28, 1998:
Common Stock, $.01 par value: $57,736,429
On February 28, 1998 the Registrant had outstanding 10,478,415
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 25, 1998, 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. is a regional department and
specialty store chain based in Fresno, California,
currently consisting of thirty-seven "Gottschalks"
department stores and twenty-two "Village East"
specialty stores located primarily in non-major
metropolitan cities throughout California, and in
Oregon, Washington and Nevada. Gottschalks and Village
East sales totaled $448.2 million for the year ended
January 31, 1998 (referred to herein as fiscal 1997),
with Gottschalks sales comprising 97.5%, and Village
East sales comprising 2.5%, of total sales.
Gottschalks department stores typically offer a
wide range of moderate to better brand-name and
private-label merchandise, including men's, women's,
junior's and children's apparel; cosmetics and
accessories; shoes and fine jewelry; home furnishings
including china, housewares, electronics (in fourteen
locations); and small electric appliances and other
consumer goods. Village East specialty stores offer
apparel for larger women. Brand-name apparel, cosmetic
and accessory lines carried by the Company include
Estee Lauder, Lancome, Dooney & Bourke, Liz Claiborne,
Carole Little, Calvin Klein, Ralph Lauren, Guess,
Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan
Picone, Haggar, Koret and Levi Strauss. Brand-name
merchandise carried in the Company's home divisions
include Sony, Mitsubishi, Lenox, Krups, Calphalon,
Royal Velvet, KitchenAid and Samsonite. The Company's
stores also carry private-label merchandise and a mix
of higher and budget priced merchandise. Gottschalks
stores are generally anchor tenants of regional
shopping malls, with Village East specialty stores
generally located in the regional malls in which a
Gottschalks department store is located or as a
separate department within some of the Company's larger
Gottschalks stores. The Company services all of its
stores, including its store locations outside
California, from a 420,000 square foot distribution
facility centrally located in Madera, California.
Gottschalks and its predecessor, E. Gottschalk &
Co., have operated continuously for over 93 years since
it was founded by Emil Gottschalk in 1904. Since the
Company first offered its stock to the public in 1986,
it has added twenty-nine of its thirty-seven
Gottschalks stores, opened twenty of its twenty-two
Village East specialty stores and constructed its
distribution center. Gottschalks is currently the
largest independent department store chain based in
California. (See Part I, Item I, "Business--Store
Location and Growth Strategy".)
Gottschalks Inc. also includes the accounts of
its wholly-owned subsidiary, Gottschalks Credit
Receivables Corporation ("GCRC" and, together with Gottschalks,
the "Company"),which was formed in 1994 in connection with
a receivables securitization program. (See Notes 2 and
3 to the Consolidated Financial Statements and Part II,
Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".)
OPERATING STRATEGY
Merchandising Strategy. The Company's
merchandising strategy is directed at offering and
promoting nationally advertised, brand-name merchandise
recognized by its customers for style and value. The
Company's stores also carry private-label merchandise
purchased through Frederick Atkins, Inc., ("Frederick
Atkins"), a national association of major retailers
which provides its members with group purchasing
opportunities, and a mix of higher and budget priced
merchandise. The Company offers a wide selection of
fashion apparel, cosmetics and accessories, home
furnishings and other merchandise in an extensive range
of styles, sizes and colors for all members of the
family and home.
The following table sets forth for the periods
indicated a summary of the Company's total sales by
division, expressed as a percent of net sales:
1997 1996 1995 1994 1993
Softlines:
Cosmetics & Accessories.. 17.8% 17.5% 17.2% 16.6% 16.5%
Women's Clothing.......... 16.8 15.9 15.5 16.1 16.5
Men's Clothing............ 14.0 14.4 14.3 13.9 13.6
Women's Dresses, Coats
& Lingerie.............. 7.9 7.9 7.8 7.9 7.8
Shoes & Other Leased
Departments............. 7.8 7.8 7.4 7.1 7.4
Junior's Clothing......... 5.2 5.5 6.0 6.3 7.0
Children's Clothing....... 5.3 5.3 4.9 4.9 4.9
Village East.............. 2.5 2.5 2.6 2.6 2.7
Total Softlines......... 77.3 76.8 75.7 75.4 76.4
Hardlines:
Housewares & Stationery . 10.6 10.4 11.0 10.9 10.7
Domestics & Luggage....... 8.1 7.9 8.1 8.1 7.1
Electronics & Furniture... 4.0 4.9 5.2 5.6 5.8
Total Hardlines......... 22.7 23.2 24.3 24.6 23.6
Total Sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
The Company's merchandising activities are
conducted from its corporate offices in Fresno,
California by its buying division consisting of an
Executive Vice President/General Merchandise Manager, 2
Vice President/General Merchandise Managers, 2 Vice
President/Divisional Merchandise Managers, 4 Divisional
Merchandise Managers, 51 buyers and 28 assistant
buyers. The Company also has a merchandise planning and
allocation division which works closely with the buying
division to develop merchandising plans and to link the
Company's merchandising activities with actual
performance in its stores. Management believes the
experience of its buying division, combined with the
Company's long and continuous presence in its primary
market areas, enhances its ability to evaluate and
respond quickly to emerging fashion trends and changing
consumer preferences. One of the Company's most
important sources of current information about
marketing and emerging fashion trends is derived from
its membership in Frederick Atkins.
The Company's overall merchandising strategy
includes the development of monthly, seasonal and
annual merchandising plans for each division,
department and store. Management monitors sales and
gross margin performance and inventory levels against
the plan on a daily basis. The merchandising plan is
designed to be flexible in order to allow the Company
to respond quickly to changing consumer preferences and
opportunities presented by individual item performance
in the stores. The Company's buying and merchandise
planning and allocation divisions meet frequently with
store management to ensure that the Company's
merchandising programs are executed efficiently at the
store level. Management has devoted considerable
resources towards enhancing the Company's merchandise-related
information systems as a means to more
efficiently monitor and execute its merchandising plan.
(See Part I, Item I, "Business--Information Systems and
Technology.")
Each of the Company's stores carry substantially
the same merchandise, but in different mixes according
to individual market demands. Some of the previously
described brand-name merchandise may not be currently
available in all of the Company's store locations. The
mix of merchandise in a particular market may also vary
depending on the size of the facility. Management seeks
to continuously refine its merchandise mix with the
goals of increasing sales of higher gross margin items,
inventory turnover and sales per selling square foot,
thus increasing its gross margins. The Company has also
continued to reallocate selling floor space to higher
profit margin items and narrow and focus its
merchandise assortments. For example, the Company has
continued to reduce the number of stores that carry
electronics, a traditionally lower gross margin line of
business, and reduce the number of stores with
restaurants. The Company also closed its clearance
center in 1993 in connection with its cost-savings
efforts and now liquidates slow-moving merchandise
through certain of its existing stores.
The Company's membership in Frederick Atkins
provides it with the ability to obtain better prices by
purchasing a larger volume of merchandise along with
all of the members of the organization. The Company
also purchases its private-label merchandise through
Frederick Atkins. In fiscal 1997, the Company purchased
approximately 4.75% of its merchandise from Frederick
Atkins. The Company also purchases merchandise from
numerous other suppliers. Excluding purchases from
Frederick Atkins, the Company's ten largest suppliers
in fiscal 1997 were Estee Lauder, Inc., Liz Claiborne,
Inc., Levi Strauss & Co., Cosmair, Inc. (Lancome),
Koret of California, Calvin Klein Cosmetics, Haggar
Apparel, All-That-Jazz, Alfred Dunner and Bugle Boy
Industries. Purchases from those vendors accounted for
approximately 20.5% of the Company's total purchases in
fiscal 1997. Management believes that alternative
sources of supply are available for each category of
merchandise it purchases.
Sales Promotion Strategy. The Company commits
considerable resources to advertising, using a
combination of media types which it believes to be most
efficient and effective by market area, including
newspapers, television, radio, direct mail and
catalogs. The Company is a major purchaser of
television advertising time in its primary market
areas. The Company's sales promotion strategy includes
seasonal promotions, promotions directed at selected
items and frequent storewide sales events to highlight
brand-name merchandise and promotional prices. The
Company also conducts a variety of special events
including 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 certain of
its vendors.
Management has continued to focus on enhancing
its information systems in order to increase the
effectiveness of its sales promotion strategy. The
Company uses direct marketing techniques to access
niche markets by generating specific lists of customers
who may be most responsive to specific promotional
mailings and sending mailings only to those specific
credit card holders. The Company has also implemented a
telemarketing program, which, through the use of an
advanced call management system and the Company's
existing credit department personnel, the Company is
able to auto-dial potential customers within a selected
market area and deliver a personalized message
regarding current promotions and events. In early
fiscal 1998, management expects to complete the
installation of a new targeted marketing system through
which the Company will be able to better target
specific promotions to the Company's credit card
holders. The new program will also enable the Company
to better analyze the purchasing patterns of third
party bank card users and, for the first time, enable
the Company to direct targeted marketing activities at
those customers. (See Part I, Item I, "Business--Private-Label
Credit Card" and "Business--Information Systems and Technology.")
In addition to targeted advertising efforts, the
Company also uses a variety of other marketing formats
as part of its sales promotion strategy. One of the
Company's most significant recent sales promotion
projects is the inception of "Emil's Market", named
after the Company's founder, Emil Gottschalk, which is
being introduced to thirty-four of the Company's stores
in fiscal 1998. Emil's Market is a complete marketing
strategy for the Company's housewares division and is
intended to present houseware products in a specialty
store format within the main department store. The
Emil's Market marketing strategy includes a consistent
theme with visual presentation, advertising and
packaging, and a large portion of the funding for the
project will be received from participating vendors. In
early fiscal 1998, the Company also launched its new
"KidZone" program, which offers additional discounts and
special services to its members. The program is
designed to offer additional value to customers with
children, improve customer loyalty and increase sales
in this potentially underdeveloped line
of business.
The Company offers selected merchandise and
general corporate information on the World Wide Web at
http://www.gottschalks.com, and in fiscal 1997, the
Company linked its complete Bridal Registry service to
its web site. The Company is also continuing efforts to
develop its mail order service. In addition to the
previously described marketing efforts, the Company
also has a wide variety of credit-related programs
aimed at improving sales, including the new
"Gottschalks Rewards" program, launched in fiscal 1997.
(See Part I, Item I, "Business--Private-Label Credit
Card.")
The Company's stores experience seasonal sales
and earnings patterns typical of the retail industry.
Peak sales occur during the Christmas selling months of
November and December, and to a lesser extent, during
the Back-to-School and Easter selling seasons. The
Company generally increases its inventory levels and
sales staff for these seasons. (See Part II, Item 7,
"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality").
Store Location and Growth Strategy. The
Company's stores are located primarily in diverse,
growing, non-major metropolitan areas. Management
believes the Company has a competitive advantage in
offering moderate to better brand-name merchandise and
a high level of service to customers in secondary
markets in the western United States where there is a
strong demand for nationally advertised, brand-name
merchandise and fewer competitors offering such
merchandise. Some of the Company's stores are located
in agricultural areas and cater to mature customers
with above average levels of disposable income.
Gottschalks stores are generally anchor tenants of
regional shopping malls. Other anchor tenants in the
malls generally complement the Company's goods with a
mixture of competing and noncompeting merchandise, and
serve to increase customer "foot traffic" within the
mall. Gottschalks strives to be the "hometown store" in
each of the communities it serves.
The Company generally seeks to open two new
stores per year, although more stores may be opened in
any given year if it is believed to be financially
attractive to the Company. As part of its growth
strategy, the Company may also pursue selective
strategic acquisitions. The Company has also continued
to invest in the renovation and refixturing of its
existing store locations in order to maintain and
improve market share in those market areas. During
fiscal 1997, the Company launched a five-year store
renovation program designed to update the appearance of
certain of the Company's aging stores. The store
renovation program is aimed at updating decor,
improving in-store lighting, improving fixturing and
wall merchandising and improving signage throughout
those stores. The Company sometimes receives
reimbursement for certain of its new store construction
costs and costs associated with the renovation and
refixturing of existing store locations from mall
owners and vendors.
The following table presents selected data
regarding the Company's expansion for the fiscal years
indicated:
Stores open at
year-end: 1997 1996 1995 1994 1993
Gottschalks (1) 37 35 34 29 27
Village East 22 (2) 24 (2) 26 24 23
TOTAL 59 59 60 53 50
Gross store
square footage
(in thousands) 3,485 3,276 2,984 2,425 2,202
(1) The number of stores does not include the Company's
clearance center (opened -1988, closed - 1993).
(2) The Company incorporated two Village East stores
into larger Gottschalks stores as separate
departments during both fiscal 1997 and 1996, reducing
the total number of free-standing Village East stores
open to twenty-two and twenty-four as of the end of
fiscal 1997 and 1996, respectively. The Company has
continued to combine sales generated by these
departments with total sales reported for Village East.
______________________
Since the Company's initial public offering in
1986, the Company has constructed or acquired twenty-nine of its
thirty-seven Gottschalks department stores,
including four junior satellite stores of less than
30,000 square feet each. During this period the Company
also opened twenty of its twenty-two Village East
specialty stores. Gross store square footage added
during this period was approximately 2.7 million square
feet, resulting in approximately 3.5 million total
Company gross square feet. As of the end of fiscal
1997, the Company's operations included thirty-three
department stores located in California, two stores in
Nevada and one store in each of Oregon and Washington.
Recent store expansion included the opening of
two new stores in California located in Sonora (August
1997) and Santa Rosa (September 1997). The Company
intends to open one new store in Redding, California in
the second half of 1998; however, there can be no
assurance that the opening will not be delayed, subject
to a variety of conditions precedent or other factors.
The Company generally seeks prime locations in
regional malls as sites for new department stores, and
has historically avoided expansion into major
metropolitan areas. Although the majority of the
Company's department stores are larger than 50,000
gross square feet, during the past several years, the
Company has, where the opportunities have been
attractive, established four junior satellite stores
each with less than 30,000 gross square feet. The
Company also seeks to open a Village East specialty
store in each mall where a Gottschalks department store
is located, except when the Company finds it more
profitable to establish a Village East department
within the Gottschalks store, rather than as a separate
specialty shop. In selecting new store locations, the
Company 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. The Company
has been able to minimize capital requirements
associated with new store openings during the past
several years through the negotiation of significant
contributions from mall owners or developers of certain
of the projects for tenant improvements, construction
costs and fixtures and equipment. 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.
Customer Service. The Company attempts to build
customer loyalty by providing a high level of service
and by having well-stocked stores. Product seminars and
other training programs are frequently conducted in the
Company's stores so that sales personnel will be able
to provide useful product information to customers. In
addition to providing a high level of personal sales
assistance, the Company seeks to offer to its customers
a conveniently located and attractive shopping
environment. In Gottschalks stores, merchandise is
displayed and arranged by department, 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. Gottschalks stores also offer a wide
assortment of merchandise for petites. The Company
generally seeks to locate its stores in regional
shopping malls which are centrally located to access a
broad customer base. Thirty of the Company's thirty-seven
Gottschalks stores, and all but two of its
Village East 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, and to telephone
customers about promotional sales and send thank-you
notes and other greetings to their customers during
their normal working hours. 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 a return or
exchange of any merchandise that its stores stock. When
appropriate, the Company returns the merchandise to its
supplier.
Distribution of Merchandise. The Company's
distribution facility, designed and equipped to meet
the Company's long-term distribution needs, enhances
its ability to quickly respond to changing customers'
preferences. Completed in 1989, the Company receives
all of its merchandise at its 420,000 square foot
distribution center in Madera, California. The
distribution center is centrally located to serve all
of the Company's store locations, including its store
locations outside California. Daily distribution
enables the Company to respond quickly to fashion and
market trends and ensure merchandise displays and store
stockrooms are well stocked.
Currently, most merchandise arriving at the
distribution center is inspected, recorded by computer
into inventory and tagged with a bar-coded price label.
Approximately 25% of the Company's merchandise is
currently received using technology that enables the
Company to "cross-dock" merchandise. Cross docking
partners provide the Company with an advanced shipping
notice ("ASN"), which is an electronic document
transmitted by a vendor that details the contents of
each carton en route to the distribution center, and
ship only "floor-ready" merchandise which requires that
the merchandise be placed on approved hangers and pre-tagged
with universal product code ("UPC") tickets, a
bar coded price label containing retail prices.
Merchandise purchased from vendors that have UPC
capabilities arrives at the Company's distribution
center already tagged with a bar-coded UPC price label
that can be electronically translated by the Company's
inventory systems, thus ready for immediate
distribution to stores. During fiscal 1997, the Company
established formal guidelines for vendors with respect
to shipping, receiving and invoicing for merchandise
under its new "Partners in Technology" program. Vendors
that do not comply with the guidelines for shipping
merchandise using ASN's and in floor-ready status are
charged specified fees depending upon the violation.
Such fees are intended to offset higher costs
associated with the processing of such merchandise.
Although the Company has been cross-docking
merchandise for several years, until fiscal 1997 many
of the related processes were still manual and labor-intensive.
During fiscal 1997, the Company began the
implementation of a more sophisticated logistical
system, the same system that many of the Company's
larger competitors have also put into place. The
primary benefit of the upgraded logistical system is
the ability to minimize the manual processing of
incoming merchandise and speed the shipments to the
stores by cross-docking the merchandise in minutes and
hours as compared to several days under the more manual
cross-docking system previously in place. Management
believes the technology enhancements will also improve
accuracy by scanning shipment information from bar-coded
labels and transmitting the information
electronically into the Company's inventory systems
rather than having it input manually. Certain aspects
of the new system were operational in fiscal 1997, with
the system expected to be fully operational during the
first quarter of fiscal 1998. (See Part I, Item I,
"Business--Information Systems and Technology.")
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 sales and other revenues for
the Company. The Company has one of the highest levels
of proprietary credit card sales in the retail
industry, with credit sales as a percent of total
sales of 45.2%, 44.7%, 44.7%, 43.0% and 38.4% in fiscal
1997, 1996, 1995, 1994 and 1993. Service charge
revenues associated with the Company's customer credit
cards were $11.6 million, $10.5 million, $10.9 million,
$8.9 million and $8.1 million in fiscal 1997, 1996,
1995, 1994 and 1993, respectively. The Company had
approximately 460,000 active credit accounts as of
February 28, 1998. Active credit accounts are defined
as accounts with charges within the previous nine
months. As described more fully in Part II, Item 7,
"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and
Capital Resources," the Company sells all of its
customer credit card receivables on an ongoing basis in
connection with an asset-backed securitization program.
The Company has, however, continued to service and
administer the receivables pursuant to the
securitization program.
The Company has implemented a variety of credit-related
programs which have resulted in enhanced
customer service and increased service charge revenues.
The Company has 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 days'
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; and "Gold Card" and "55-Plus Gold
Card" programs, which offer special services at a
discount for customers who have a net minimum spending
history on their charge accounts of $1,000 per year. In
fiscal 1997, the Company implemented 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. The Company also has
an ongoing credit card reactivation program designed to
recapture credit cardholders who have not utilized
their credit card for a specified period of time.
Management believes holders of the Company's credit
card typically buy more merchandise from the Company
than other customers.
The Company's credit management software system
has automated substantially all aspects of the
Company's credit authorization, collection and billing
process, and enhances the Company's ability to provide
customer service. The credit management system also
enables the Company to access target markets with
sophisticated direct marketing techniques. This system,
combined with a credit scoring system, enables the
Company to process thousands of credit applications
daily at a rate of less than three minutes per
application. The Company also has an automated advanced
call management system through which the Company
manages the process of collecting delinquent customer
accounts. As described more fully in Part I, Item I,
"Business--Sales Promotion Strategy", the Company is
also able to utilize the advanced call management
system for telemarketing activities.
The credit authorization process is centralized
at the Company's corporate headquarters in Fresno,
California. Credit is extended to applicants based on a
scoring model. The Company's credit extension policy is
nearly identical for instant and non-instant credit
applicants. Applicants who meet pre-determined criteria
based on prior credit history, occupation, number of
months at current address, income level and geographic
location are automatically assigned an account number
and awarded a credit limit ranging from $300 to $2,000.
Credit limits may be periodically revised. The
Company's credit system also provides full on-line
positive authorization lookup capabilities at the
point-of-sale. Within seconds, each charge, credit and
payment transaction is approved or referred to the
Company's credit department for further review. Sales
associates speed-dial the credit department for an
approval when a transaction has been referred by the
system.
The Company offers credit to customers under
several payment plans: the "Option Plan", under which
the Company bills customers monthly for charges without
a minimum purchase requirement; the "Time-Pay Plan",
under which customers may make monthly payments for
purchases of home furnishings, major appliances and
other qualified items of more than $100; and the "Club
Plan", under which customers may make monthly payments
for purchases of fine china, silver, crystal and
collectibles of more than $100. The Company also
periodically offers special promotions to its credit
card holders through which customers are given the
opportunity to obtain discounts on merchandise
purchases or purchase merchandise under special
deferred billing and deferred interest plans. Finance
charges may be assessed on unpaid balances at an annual
percentage rate of up to 21.6%; a late charge fee on
delinquent charge accounts may be assessed at a rate of
up to $15 per late payment occurrence. Such charges may
vary depending on applicable state law.
Information Systems and Technology. The Company
has continued to invest in technology and systems
improvements in its efforts to improve customer service
and reduce inventory-related costs and operating costs.
The Company's information systems include IBM mainframe
technology, which was upgraded in late fiscal 1997. The
primary benefits of the upgraded mainframe computer
include the ability to process information more
quickly, combined with expected cost savings to result
from the more efficient use of power and a reduction in
required maintenance. The new mainframe computer will
also enable the Company to test its existing programs
for year 2000 compliance, a process which could not be
performed under the Company's previous mainframe
computer. (See Part I, Item I, "Business--Year 2000
Conversion"). In addition to the mainframe computer,
the Company runs multiple platforms with applications
on mid-range, local area network and departmental
levels. All of the Company's major information systems
are computerized, including its sales, inventory,
credit, accounts payable, payroll and financial
reporting systems. The Company has installed
approximately 2,000 computer terminals throughout its
stores, corporate offices and distribution center.
Every store processes each sales transaction through
point-of-sale ("POS") terminals that connect on-line
with the Company's mainframe computer located at its
corporate offices in Fresno, California. This system
provides detailed reports on a real-time basis of
current sales, gross margin and inventory levels by
store, department, vendor, class, style, color, and
size.
Management believes the continued enhancement of
its merchandise-related systems is essential for
merchandise cost and shrinkage control. The Company has
an automatic markdown system which has assisted in the
more timely and accurate processing of markdowns and
reduced inventory shortage resulting from paperwork
errors. The Company's price management system has
improved the Company's POS price verification
capabilities, resulting in fewer POS errors and
enhanced customer service. Combined with enhanced
physical inventory procedures and improved security
systems in the Company's stores, these systems have
resulted in the Company's inventory shrinkage remaining
unchanged at 1.1% of net sales in fiscal 1997 and 1996,
after achieving reductions from 1.3%, 1.4% and 2.1%
fiscal 1995, 1994 and 1993, respectively.
Management also believes improved technology is
critical for future reductions in costs related to the
purchase, handling and distribution of merchandise,
traditionally labor-intensive tasks. The Company's
merchandise management and allocation ("MMS") system
has enhanced the Company's ability to allocate
merchandise to stores more efficiently and make prompt
reordering and pricing decisions. The MMS system also
provides merchandise-related information used by the
Company's buying division in its analysis of market
trends and specific item performance in stores. The
Company is in process of enhancing certain aspects of
the MMS system and expects such enhancements to be
fully complete during the first half of fiscal 1998.
The Company has also implemented a variety of programs
with its vendors, including an automatic replenishment
inventory system for certain basic merchandise and an
electronic data interchange ("EDI") system providing
for on-line purchase order, invoicing and charge-back
entry. Such systems have automated certain processes
associated with the purchasing and payment for
merchandise.
In addition to the previously described systems,
the Company is in the process of installing an enhanced
logistical system at the Company's distribution center.
This new logistical system is expected to enhance the
automation of certain processes related to the receipt
and distribution of apparel and non-apparel merchandise
and enable the Company to deliver merchandise to stores
more quickly. (See Part I, Item I, "Business--Distribution
of Merchandise.") The new system is also
expected to result in reducing certain distribution
center payroll and related overhead costs. During
fiscal 1997, the Company completed the installation of
a workflow and imaging system, designed to automate
certain aspects of its merchandise and general expense
payables systems and enable the Company's payables
departments to become essentially "paperless".
Management expects this system to improve efficiency
and reduce certain costs associated with the payment
for merchandise. The Company also intends to utilize
the imaging technology to reduce operating costs and
improve efficiencies in other areas of the Company,
including the credit department and human resources department.
In fiscal 1998, the Company also expects to install a new
Bridal Registry system which will allow for the scanning of
selected merchandise and the automatic updating of registry
information. The new Bridal Registry system will also be
accessible through the Company's Web site (see Part I, Item I,
"Business--Sales Promotion Strategy".)
Other systems implemented by the Company in its
efforts to control its selling, general and
administrative costs include the following: (i) a
payroll system, which has enhanced the Company's
ability to manage payroll-related costs; (ii) an
advertising management software system, which enables
the Company to measure individual item sales
performance derived from a particular advertisement;
and (iii) the Company's credit management system,
described in Part I, Item I "Business--Private Label-Credit Card".
Year 2000 Conversion. The Company has
established a task force to coordinate the
identification, evaluation and implementation of
changes to computer systems and applications necessary
to achieve a Year 2000 date conversion with no
disruption to business operations. These actions are
necessary to ensure that the systems and applications
will recognize and process data in the year 2000 and
beyond. Major areas of potential business impact have
been identified and are being dimensioned, and initial
conversion efforts are underway. The Company is also
communicating with suppliers, dealers, financial
institutions and others with which it does business to
coordinate the year 2000 conversion. The total cost of
the conversion is currently estimated to be $350,000
and is not expected to materially affect the Company's
results of operations during the fiscal 1998-1999
conversion period. Such costs are expected to consist
primarily of external consulting fees and costs in
excess of normal software upgrades and replacements and
will be incurred throughout fiscal 1999. The year 2000
issue affects virtually all companies and
organizations.
Competition. The Company operates in a highly
competitive environment. The Company's stores compete
with national, regional, and local chain department 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,
including specialty stores, general merchandise stores,
discount and off-price retailers and outlet malls, have
entered the Company's primary market areas. The trend
towards consolidation of competitors within the retail
industry has also intensified competition. The Company
competes primarily on the basis of current merchandise
availability, customer service, price and store
location and the availability of services, including
credit and product delivery.
The Company's larger national and regional
competitors have the ability to purchase larger
quantities of merchandise at lower prices. Management
believes its buying practices partially counteract this
competitive pressure. Such practices include: (i) the
ability to accept smaller or odd-sized orders of
merchandise from vendors than its larger competitors
may be able to accept; (ii) the ability to structure
its merchandise mix to more closely reflect the
different regional, local and ethnic needs of its
customers; and (iii) the ability to react quickly and
make opportunistic purchases of individual items. The
Company's membership in Frederick Atkins also provides
it with increased buying power in the marketplace.
Management also believes that its knowledge of its
primary market areas, developed over more than 93 years
of continuous operations, and its focus on those
markets as its primary areas of operations, give the
Company 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.
Leased Departments. The Company currently
leases the fine jewelry, shoe and maternity wear
departments, custom drapery, certain of its
restaurants, coffee bars 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. 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. Leased
department sales as a percent of total sales were 7.8%,
7.8%, 7.4%, 7.1% and 7.4% in fiscal 1997, 1996, 1995,
1994 and 1993, respectively. Gross margin applicable to
the leased departments was 14.6%, 14.6%, 14.4%, 14.1%
and 13.8% in fiscal 1997, 1996, 1995, 1994 and 1993,
respectively.
Employees. As of January 31, 1998, the Company
had 5,661 employees, of whom 1,478 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. None of
the Company's employees are covered by a collective
bargaining agreement. Management considers its
employee relations to be good.
To attract and retain qualified employees, the
Company offers a 25% discount on most merchandise
purchases; participation in a 401(k) Retirement Savings
Plan to which the Company makes quarterly and annual
contributions depending upon the profitability of the
Company; and 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. The
Company also has performance-based incentive pay
programs for certain of its officers and key employees
and has stock option plans that provide for the grant
of stock options to certain officers and key employees
of the Company.
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 Offices and Distribution Center. The
Company's corporate headquarters are located in an
office building in Northeast Fresno, California,
constructed in 1991 by a limited partnership of which
the Company is the sole limited partner holding a 36%
share of the partnership. 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. (See Note 1 to the Consolidated Financial
Statements.) The Company believes that its current
office space is adequate to meet its long-term office
space requirements.
The Company's distribution center, completed in
1989, was constructed and equipped to meet the
Company's long-term merchandise distribution needs. The
420,000 square foot distribution facility is
strategically located in Madera, California to service
economically the Company's existing store locations in
the western United States and its projected future
market areas. The Company leases the distribution
facility from an unrelated party under a 20-year lease
expiring in the year 2009, and has six consecutive
five-year renewal options.
Store Leases and Locations. The Company owns
six of its thirty-seven Gottschalks stores and leases
its remaining Gottschalks and Village East stores from
unrelated parties. The store leases generally require
the Company to pay either a fixed rent, rent based on a
percentage of sales, or rent based on a percentage of
sales above a specified minimum rent amount. Certain of
the Company's leases also provide for rent abatements
and scheduled rent increases over the lease terms. The
Company is generally responsible for a pro-rata share
of promotion, common area maintenance, property tax and
insurance expenses under its store leases. On a
comparative store basis, the Company incurred an
average of $4.73, $5.38, $5.58, $5.61 and $5.57 per
gross square foot in lease expense in fiscal 1997,
1996, 1995, 1994 and 1993, respectively, not including
common area maintenance and other allocated expenses.
In certain cases, the Company has been able to add
gross square feet to certain existing store locations
under favorable rental conditions.
Thirty-two of the Company's thirty-seven
Gottschalks stores and all but two of its twenty-two
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 of the Company's stores open as of the end of fiscal 1997:
Expiration
Gross(1) Selling Date of
Square Square Date Current
Feet Feet Opened Lease Renewal Options
GOTTSCHALKS
Antioch............. 80,000 71,875 1989 N/A (2) N/A
Aptos............... 11,200 10,397 1988 2004 None
Auburn.............. 40,000 36,764 1995 2005 1 five yr. opt.
Bakersfield:
East Hills........ 74,900 70,857 1988 2009 6 five yr. opt.
Valley Plaza...... 90,000 70,376 1987 2017 2 five yr. opt.
Capitola............105,000 90,580 1990 2015 4 five yr. opt.
Carson City, Nevada. 68,000 58,480 1995 2005 2 five yr. opt.
Chico............... 85,000 77,059 1988 2017 3 ten yr. opt.
Clovis..............101,400 100,792 1988 2018 None
Eureka.............. 96,900 69,878 1989 N/A (2) N/A
Fresno:
Fashion Fair......163,000 126,635 1970 2016 4 five yr. opt.
Fig Garden........ 36,000 32,689 1983 2005 None
Manchester........175,600 125,394 1979 2009 1 ten yr. opt.
Hanford............. 98,800 75,303 1993 N/A (2) N/A
Klamath Falls,
Oregon............ 65,400 53,084 1992 2007 2 ten yr. opt.
Merced.............. 60,000 53,008 1983 2013 None
Modesto:
Vintage Faire.....161,500 121,779 1977 2007 1 eight yr. opt.
and
5 five yr. opt.
Century Center.... 65,000 62,250 1984 2013 1 ten yr. opt.
and
1 four yr. opt.
Oakhurst............ 25,600 22,075 1994 2005 4 five yr. opt.
and
1 six yr. opt.
Palmdale............114,900 93,268 1990 N/A (2) N/A
Palm Springs........ 68,100 55,670 1991 2011 4 five yr. opt.
Redding............. 7,800 5,135 1993 60 days(3) None
Reno, Nevada........138,000 108,718 1996 2016 2 ten yr. opt.
Sacramento..........194,400 145,351 1994 2014 5 five yr. opt.
San Bernardino......204,000 161,119 1995 2017 4 five yr. opt.
San Luis Obispo..... 99,300 89,477 1986 N/A (2) N/A
Santa Maria.........114,000 97,377 1976 2006 4 five yr. opt.
Santa Rosa..........127,000 100,529 1997 2017(4) 1 ten yr. opt.
and
1 four year opt.
Scotts Valley....... 11,200 8,642 1988 2001 2 five yr. opt.
Sonora.............. 55,000 46,054 1997 2017(4) 2 five yr. opt.
Stockton............ 90,800 74,449 1987 2009 6 five yr. opt.
Tacoma, Washington..119,300 92,745 1992 2012 4 five yr. opt.
Tracy...............113,000 90,012 1995 2015 4 five yr. opt.
Visalia.............150,000 133,116 1995 2014 3 five yr. opt.
Watsonville......... 75,000 66,170 1995 2006 4 five yr. opt.
Woodland............ 55,300 52,684 1987 2017 2 ten yr. opt.
Yuba City........... 80,000 68,307 1989 N/A(2) N/A
Total Gottschalks
Square Footage..3,420,400 2,818,098
VILLAGE EAST
Antioch............. 2,100 1,472 1989 1999 None
Bakersfield:
East Hills........ 3,350 2,847 1988 1998(5) None
Capitola............ 2,360 2,006 1991 1999 None
Carson City, Nevada. 3,400 2,800 1995 2005 None
Chico............... 2,300 1,920 1988 2000 None
Clovis.............. 2,300 1,955 1988 1998(5) None
Eureka.............. 2,820 2,397 1989 2004 None
Fresno:
Fig Garden........ 2,800 2,521 1986 1999 None
Manchester........ 5,950 5,375 1981 2010 None
Hanford............. 2,800 2,480 1993 2008 None
Modesto:
Century Center.... 2,730 2,320 1986 2005 None
Palmdale............ 2,716 2,309 1990 2000 None
Palm Springs........ 2,480 2,108 1991 2001 None
Sacramento.......... 2,700 2,470 1994 2004 None
San Luis Obispo..... 2,500 1,472 1987 2011 None
Santa Maria......... 3,000 2,720 1976 2001 None
Stockton............ 1,799 1,530 1989 1998(6) None
Tacoma.............. 4,000 3,220 1992 2012 None
Tracy............... 3,428 2,914 1995 2006 None
Visalia............. 3,400 2,880 1975 1999 None
Woodland............ 2,022 1,719 1987 1999 None
Yuba City........... 3,200 3,045 1990 2000 None
Total Village East
Square Footage.... 64,155 54,480
Total Square
Footage........3,484,555 2,872,578
__________________________
(1) Reflects total store square footage,
including office space, storage, service
and other support space that is not
dedicated to direct merchandise sales.
(2) These stores are Company owned and have
been pledged as security for various debt
obligations of the Company. (See Note 4 to
the Consolidated Financial Statements.)
(3) This lease is automatically renewed every
60 days. Either party can terminate the
lease upon 60 days' notice. The Company
intends to terminate this lease during the
second half of 1998 upon completion of a
new 90,000 square foot Gottschalks store
at a nearby location. (See Part I, Item I,
"Business--Store Location and Growth
Strategy").
(4) Represents new leases entered into during
fiscal 1997.
(5) The Company has notified the respective
landlords that these leases will be
terminated upon their expiration in fiscal
1998 unless the landlord revises certain
aspects of the lease agreements. In the
event the leases are terminated in fiscal
1998, the Company would incorporate these
locations into the nearby Gottschalks
stores as separate departments.
(6) This lease will become renewable on a
month-to-month basis upon its expiration in fiscal
1998.
Item 3. LEGAL PROCEEDINGS
Not Applicable.
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 ("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:
1997 1996
Fiscal Quarters High Low High Low
1st Quarter...... .6 1/2 5 1/8 7 3/8 5 5/8
2nd Quarter....... 9 5 1/2 7 1/4 5 3/4
3rd Quarter....... 9 7/8 7 11/16 6 1/2 5 1/8
4th Quarter....... 9 1/8 6 3/4 7 5 1/8
On February 28, 1998, the Company had 946
stockholders of record, some of which were brokerage
firms or other nominees holding shares for multiple
stockholders. The sales price of the Company's common
stock as reported by the NYSE on February 28, 1998 was
$8 3/16 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.
There were no sales of unregistered securities
by the Company during fiscal 1997.
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 31, 1998, February 1, 1997,
February 3, 1996, January 28, 1995 and January 29,
1994 are referred to herein as fiscal 1997, 1996, 1995,
1994 and 1993, respectively. All fiscal years noted
include 52 weeks, except for fiscal 1995 which includes
53 weeks.
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.
RESULTS OF OPERATIONS:
1997 1996 1995 1994 1993
(In thousands, except per share data)
Net sales(1)........... $448,192 $422,159 $401,041 $363,603 $342,417
Net credit revenues(2). 6,385 4,198 4,896 4,210 5,911
454,577 426,357 405,937 367,813 348,328
Costs and expenses:
Cost of sales(3)..... 304,558 287,164 278,827 247,423 233,715
Selling, general and
administrative
expenses........... 130,922 123,860 120,637 101,516 101,486
Depreciation and
amortization(4).... 6,667 6,922 8,092 5,860 5,877
442,147 417,946 407,556 354,799 341,078
Operating income (loss) 12,430 8,411 (1,619) 13,014 7,250
Other (income) expense:
Interest expense...... 7,325 8,111 7,718 7,599 8,524
Miscellaneous income.. (1,955) (2,792) (726) (755) (838)
Acquisition related
expenses(5).......... 673
Unusual items(6)...... 3,833 3,427
6,043 5,319 6,992 10,677 11,113
Income (loss) before
income tax expense
(benefit)............. 6,387 3,092 (8,611) 2,337 (3,863)
Income tax expense
(benefit)............ 2,657 1,258 (2,972) 821 (1,190)
Net income (loss)...... $ 3,730 $ 1,834 $ (5,639) $ 1,516 $ (2,673)
Net income (loss)
per common share -
basic and diluted(7). $ .36 $ .18 $ (.54) $ .15 $ (.26)
Weighted-average
number of common
shares outstanding.... 10,474 10,461 10,416 10,413 10,377
SELECTED BALANCE SHEET DATA:
1997 1996 1995 1994 1993
(In thousands of dollars)
Retained interest in
receivables sold, net(8) $15,813 $20,871 $25,892 $25,745 $ ---
Receivables, net(9)...... 3,085 1,818 1,575 1,566 21,460
Merchandise
inventories(10)......... 99,544 89,472 87,507 80,678 60,465
Property and
equipment, net(11)...... 99,057 87,370 89,250 93,809 96,396
Total assets............. 242,311 232,400 239,041 233,353 248,330
Working capital (12)..... 67,579 70,231 42,904 37,900 32,147
Long-term obligations,
less current portion(12) 62,420 60,241 34,872 33,672 31,493
Stockholders' equity..... 83,905 80,139 77,917 83,577 82,118
SELECTED OPERATING DATA:
1997 1996 1995 1994 1993
Sales growth:
Total store sales(13)... 6.2% 5.3% 10.3% 6.2% 3.4%
Comparable store sales... 3.3% 1.4% (3.1%) 3.3% 1.3%
Average net sales per
square foot of selling
space(14):
Gottschalks........... $160 $170 $181 $196 $198
Village East.......... 157 163 161 164 176
Gross margin percent:
Owned sales........... 33.5% 33.4% 31.8% 33.3% 33.2%
Leased sales.......... 14.6% 14.6% 14.4% 14.1% 13.8%
Credit sales as a %
of total sales........ 45.2% 44.7% 44.7% 43.0% 38.4%
SELECTED FINANCIAL DATA:
1997 1996 1995 1994 1993
Capital expenditures,
net of reimbursements.. . $14,976 $6,845 $12,773 $4,539 $5,456
Current ratio.............. 2.11:1 2.10:1 1.45:1 1.43:1 1.30:1
Inventory turnover
ratio(15)................. 2.6 2.6 2.7 2.9 2.9
Days credit sales
in receivables(16)........ 128.1 132.9 136.8 157.3 170.8
__________________
(1) Includes net sales from leased departments of
$35.2 million, $32.8 million, $29.8 million,
$26.0 million and $25.3 million in fiscal 1997,
1996, 1995, 1994 and 1993, respectively. (See
Part I, Item 1, "Business--Leased Departments.")
(2) Net credit revenues in fiscal 1997 includes a
$1.1 million credit recognized in connection
with the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 125. (See Note
2 to the Consolidated Financial Statements.) Net
credit revenues were higher in fiscal 1993 than
in fiscals 1994 - 1996 as there was no reduction
for interest expense related to securitized
receivables in that year. (See note (8) below.)
(3) Includes cost of sales attributable to leased
departments of $30.0 million, $28.0 million,
$25.5 million, $22.3 million and $21.8 million
in fiscal 1997, 1996, 1995, 1994 and 1993,
respectively. (See Part I, Item 1, "Business--Leased Departments.")
(4) Includes the amortization of new store pre-opening costs of
$589,000, $1.3 million, $2.5
million, $438,000 and $429,000 in fiscal 1997,
1996, 1995, 1994 and 1993, respectively.
(5) See Note 8 to the Consolidated Financial
Statements.
(6) As described more fully in the Company's 1995
Annual Report on Form 10-K, the provision for
unusual items in fiscal 1994 totaling $3.8
million, includes a provision of $3.5 million
representing costs incurred in connection with
an agreement reached to settle the stockholder
litigation previously pending against the Company
and related legal fees and other costs. The
provision for unusual items in fiscal 1993,
totaling $3.4 million, includes interest expense,
legal and accounting fees and other costs incurred
primarily in connection with the settlement of all
pending federal civil matters related to an income
tax deduction taken on the Company's 1985 federal
tax return.
(7) The Company adopted the provisions of SFAS No.
128, "Earnings per Share" in fiscal 1997 and in
accordance with the statement has restated all
prior period earnings per share amounts
presented. There were no differences between
previously reported earnings (loss) per share
amounts and restated amounts. (See Note 1 to the
Consolidated Financial Statements.)
(8) The retained interest does not include
receivables sold totaling $53.7 million as of
the end of fiscal 1997, $46.0 million as of the
end of fiscal 1996 and $40.0 million as of the
end of both fiscal 1995 and 1994. The Company
did not securitize its receivables prior to
fiscal 1994. (See Notes 1, 2 and 3 to the
Consolidated Financial Statements and Part II,
Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity
and Capital Resources" for additional
information related to receivables
securitization program.)
(9) Receivables as of the end of fiscal 1994 - 1997
consist of customer credit card receivables that
do not meet certain eligibility requirements of
the securitization program, net of an allowance
for doubtful accounts. Receivables as of the end
of fiscal 1993 are presented net of $40.0 million
of receivables held for securitization and sale
as of that date.
(10) The increase in merchandise inventories is
generally attributable to new store openings.
(See Part I, Item I, "Business--Store Location
and Growth Strategy", for table of number of
stores open at each fiscal year-end.)
(11) The increase in property and equipment from
fiscal 1996 to 1997 is primarily related to new
store openings and the refurbishing of certain
existing store locations, information system
enhancements, and additional assets acquired
under capital lease obligations. The decreases in
property and equipment from fiscal 1993 through
fiscal 1996 are primarily due to various sale and
leaseback financings and, in fiscal 1996, to the
write-off of assets under terminated capital
leases. (See Note 5 to the Consolidated Financial
Statements.)
(12) The increase in working capital and long-term
obligations from fiscal 1995 to 1996 is primarily
due to the classification of certain debt as
long-term that was classified as current in the
previous year.
(13) See Part I, Item I, "Business--Store Location and
Growth Strategy", for table of number of stores
open at each fiscal year-end.
(14) 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 for comparable store sales
only. 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. The Company has added
larger stores, some of which have generated lower
sales per square foot, over the past several
years.
(15) The inventory turnover ratio excludes certain
inventory received at year-end if held for stores
opened early in the subsequent fiscal year.
(16) Days credit sales in receivables include
receivables sold ($53.7 million as of the end of
fiscal 1997, $46.0 million as of the end of 1996
and $40.0 million as of the end of both fiscal
1995 and 1994 and $40.0 million of receivables
held for securitization and sale as of the end of
fiscal 1993), the retained interest in
receivables sold, and other receivables. The
Company services and administers all receivables,
including receivables sold, pursuant to the
securitization program.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The following table sets forth for the periods
indicated certain items from the Company's Consolidated
Statements of Operations, expressed as a percent of net
sales:
1997 1996 1995
Net sales........................ 100.0% 100.0% 100.0%
Net credit revenues.............. 1.4 1.0 1.2
101.4 101.0 101.2
Costs and expenses:
Cost of sales................. 68.0 68.0 69.5
Selling, general and
administrative expenses..... 29.2 29.3 30.1
Depreciation and amortization. 1.5 1.7 2.0
98.7 99.0 101.6
Operating income (loss).......... 2.7 2.0 (0.4)
Other (income) expense:
Interest expense.............. 1.6 1.9 1.9
Miscellaneous income.......... (0.4) (0.6) (0.2)
Acquisition related expenses.. 0.1
1.3 1.3 1.7
Income (loss) before income tax
expense (benefit)............. 1.4 0.7 (2.1)
Income tax expense (benefit)..... 0.6 0.3 (0.7)
Net income (loss)................ 0.8% 0.4% (1.4)%
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales increased by approximately $26.0
million to $448.2 million in fiscal 1997 as compared to
$422.2 million in fiscal 1996, an increase of 6.2%.
This increase resulted from a 3.3% increase in
comparable store sales, combined with additional sales
volume generated by new store openings in fiscal 1997
and 1996. Fiscal 1997 new store openings included one
new store in Sonora, California, opened in August 1997,
and one additional store in Santa Rosa, California,
opened in September 1997, increasing the total number
of Gottschalks stores to thirty-seven as of the end of
fiscal 1997 as compared to thirty-five as of the end of
fiscal 1996. Stores operating in fiscal 1997 which were
not open for the entire year in fiscal 1996 include one
new store in Reno, Nevada (March 1996) and two larger
replacement stores in Modesto and Fresno, California
(March and April 1996).
The Company has entered into an agreement
to open one additional store in Redding, California in
fiscal 1998. While this store is expected to open in
the second half of fiscal 1998, there can be no
assurance that such opening will not be delayed,
subject to a variety of conditions precedent or other
factors.
Net Credit Revenues
Net credit revenues associated with the
Company's private label credit card increased by
approximately $2.2 million to $6.4 million in fiscal
1997 as compared to $4.2 million in fiscal 1996, an
increase of 52.1%. As a percent of net sales, net
credit revenues increased to 1.4% in fiscal 1997 as
compared to 1.0% in fiscal 1996. This increase is
primarily due a gain of $1.1 million recognized in
connection with the adoption of Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments
of Liabilities," in addition to a $1.1 million increase
in service charges associated with the Company's
customer credit cards. The gain on sale of receivables
of $1.1 million includes a non-recurring credit of
$898,000 resulting from a change in estimate for the
allowance for doubtful accounts related to receivables
which were ineligible for sale. (See Notes 1, 2 and 3
to the Consolidated Financial Statements.)
Service charges increased by approximately
$1.1 million to $11.6 million in fiscal 1997 as
compared to $10.5 million in fiscal 1996, an increase
of 10.7%. The increase in service charges is primarily
due to an increase in credit sales as a percent of
total sales (45.2% in fiscal 1997 as compared to 44.7%
in fiscal 1996), combined with additional income
generated as a result of modifications made to credit
terms in selected states initiated in late fiscal 1996.
The increase in credit sales is primarily due to the
Company's new "Gottschalks Rewards" program, introduced
during early fiscal 1997, which offers a rebate of up
to 5% of annual credit purchases on the Company's
credit card which can be applied towards future
purchases of merchandise.
As described more fully in Note 1 to the
Consolidated Financial Statements, service charges are
presented net of the following amounts: (1) interest
expense related to securitized receivables, which
remained unchanged at $3.6 million in fiscal 1997 and
fiscal 1996; and (2) charge-offs related to receivables
sold and the provision for credit losses related to
receivables which were ineligible for sale, which
remained unchanged at $2.7 million in fiscal 1997 and
fiscal 1996. Management does not expect the impact of
SFAS No. 125 to be material to the Company's results of
operations in fiscal 1998.
Cost of Sales
Cost of sales increased by approximately
$17.4 million to $304.6 million in fiscal 1997 as
compared to $287.2 million in fiscal 1996, an increase
of 6.1%. As a percentage of sales, cost of sales
remained unchanged at 68.0% in fiscal 1997 and 1996 and
the Company's gross margin percentage also remained
unchanged at 32.0% in fiscal 1997 and 1996. Inventory
shrinkage remained unchanged at 1.1% of net sales in
fiscal 1997 and 1996. Due to additional promotional
activity, markdowns as a percentage of net sales
increased in fiscal 1997 as compared to 1996. This
increase was offset by lower costs related to the
buying and distribution of merchandise in fiscal 1997,
primarily driven by improved technology implemented at
the Company's distribution center during the year. (See
Part I, Item 1, "Business--Distribution of
Merchandise.") Excluding the effect of indirect costs
related to the buying and distribution of merchandise
which are reclassified to cost of sales by the Company
for financial reporting purposes, the gross margin
percentage decreased to 36.5% in fiscal 1997 as
compared to 36.8% in fiscal 1996. (See Note 1 to the
Consolidated Financial Statements.)
Management is continuing efforts to improve
its gross margin, primarily by maintaining tight
controls over inventory levels, shifting inventories
into more profitable lines of business based on current
selling trends, expanding guaranteed gross margin
arrangements with key vendors, and by continuing to
focus on the enhancement of its information systems and
technology as a means to reduce inventory-related
costs. Management also intends to intensify its
private-label merchandise programs, traditionally
higher gross margin merchandise, in fiscal 1998 as a
means to improve gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses increased by approximately $7.0 million to
$130.9 million in fiscal 1997 as compared to $123.9
million in fiscal 1996, an increase of 5.7%. Due to the
increase in sales volume, selling, general and
administrative expenses as a percent of net sales
decreased to 29.2% in fiscal 1997 as compared to 29.3%
in fiscal 1996. Including the effects of certain
indirect costs related to the buying and distribution
of merchandise which are reclassified to cost of sales
for financial reporting purposes, selling, general and
administrative costs as a percent of sales decreased to
33.8% in fiscal 1997 as compared to 34.0% in fiscal
1996. (See Note 1 to the Consolidated Financial
Statements.) The Company's sales have continued to
increase at a faster rate than its selling, general and
administrative costs, primarily due to ongoing Company-wide
expense control measures.
Charge-offs related to receivables sold and the
provision for credit losses related to receivables
which were ineligible for sale in fiscal 1997, are reflected
in "net credit revenues" and not in selling, general and
administrative costs.
Depreciation and Amortization
Depreciation and amortization expense,
which includes the amortization of new store pre-opening costs,
decreased by approximately $200,000 to
$6.7 million in fiscal 1997 as compared to $6.9
million in fiscal 1996, a decrease of 3.7%. As a
percent of net sales, depreciation and amortization
expense decreased to 1.5% in fiscal 1997 as compared to
1.7% in fiscal 1996. The decrease (in dollars) is
primarily due to the amortization of new store pre-opening costs,
which decreased by $748,000 as compared
to the prior year, due to the full amortization of
fiscal 1996 new store pre-opening costs early in fiscal
1997. This decrease was partially offset by additional
depreciation related to capital expenditures for new
stores opened and capital lease obligations entered
into during the year. Excluding the amortization of new
store pre-opening costs, depreciation and amortization
expense as a percent of net sales increased to 1.4% in
fiscal 1997 as compared to 1.3% in fiscal 1996.
Interest Expense
Interest expense, which includes the
amortization of deferred financing costs, decreased by
approximately $800,000 to $7.3 million in fiscal 1997
as compared to $8.1 million in fiscal 1996, a decrease
of 9.7%. Due to the increase in sales volume, interest
expense as a percent of net sales decreased to 1.6% in
fiscal 1997 as compared to 1.9% in fiscal 1996. The
decrease (in dollars) is primarily due to a decrease in
the weighted-average interest rate charged on
outstanding borrowings under the Company's line of
credit and the Variable Base Certificate (8.16% in
fiscal 1997 as compared to 8.62% in fiscal 1996), due
to a lower interest rate applicable to the Company's
new line of credit agreement with Congress Financial
Corporation ("Congress"), and lower average outstanding
borrowings under those facilities in fiscal 1997 as
compared to fiscal 1996. This decrease was partially
offset by higher interest expense associated with
additional long-term financing arrangements entered
into during late fiscal 1996, including the issuance of
the $6.0 million Fixed Base Certificate and the $6.0
million mortgage loan with Heller Financial, Inc.
("Heller"). (See "Liquidity and Capital Resources".)
As previously described in the "Net Credit
Revenues" portion of this section, pursuant to SFAS No.
125, interest expense related to securitized
receivables is presented as a reduction to net credit
revenues. Such interest remained unchanged at $3.6
million in fiscal 1997 and 1996.
Miscellaneous Income
Miscellaneous income, which includes the
amortization of deferred income and other miscellaneous
income and expense items, decreased by approximately
$800,000 to $2.0 million in fiscal 1997 as compared to
$2.8 million in fiscal 1996. Other income in fiscal
1997 includes a credit of $400,000 to a deferred lease
incentive resulting from the revision of certain terms
of the related lease. Other income in fiscal 1996
included a pre-tax gain of $1.3 million resulting from
the termination of two leases previously accounted for
as capital leases by the Company. (See Note 5 to
Consolidated Financial Statements.)
Acquisition Related Expenses
Acquisition related expenses of $673,000
were incurred in connection with the proposed
acquisition of The Harris Company ("Harris"). Such
costs, consisting primarily of investment banking,
legal and accounting fees, were recognized by the
Company after the parties were unable to agree on the
terms of the transaction and discontinued negotiations
in October 1997. (See Note 9 to the Consolidated
Financial Statements.)
Income Taxes
The Company's effective tax rate was 41.6%
in fiscal 1997 as compared to 40.7% in fiscal 1996.
(See Note 6 to the Consolidated Financial Statements.)
Net Income
As a result of the foregoing, the Company's
net income improved by approximately $1.9 million to
$3.7 million in fiscal 1997 as compared to $1.8 million
in fiscal 1996. On a per share basis (basic and
diluted), net income improved by $.18 per share to $.36
per share in fiscal 1997 as compared to $.18 per share
in fiscal 1996. (See Note 1 to the Consolidated
Financial Statements.) Net income in fiscal 1997
includes a pre-tax credit of $1.1 million resulting
from the adoption of SFAS No. 125 and a pre-tax charge
of $673,000 for expenses incurred in connection with
the previously described proposed acquisition of
Harris. Net income in fiscal 1996 includes a pre-tax
gain of $1.3 million resulting from the termination of
two capital leases. Excluding these non-recurring
items, net income increased by $2.4 million, or $.23
per share, to $3.5 million, or $.34 per share in fiscal
1997 as compared to $1.1 million, or $.11 per share, in
fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Net Sales
Net sales increased by $21.2 million to
$422.2 million in fiscal 1996 as compared to $401.0
million in fiscal 1995, an increase of 5.3%. This
increase resulted from a 1.4% increase in comparable
store sales, combined with additional sales volume
generated by new store openings in fiscal 1996 and
1995. Fiscal 1996 included 52 weeks of sales as
compared to 53 weeks of sales in fiscal 1995. Excluding
the 53rd week in fiscal 1995, net sales increased by
6.4% in fiscal 1996, with a 2.4% increase in comparable
store sales.
Fiscal 1996 new store openings included one
new store in Reno, Nevada, in March 1996 and two larger
replacement stores for pre-existing stores in Modesto
and Fresno, California, in March and April 1996,
respectively. Stores operating in fiscal 1996 not open
for the entire year in fiscal 1995 included five new
stores located in California in Auburn (February 1995),
San Bernardino (April 1995), a larger replacement store
for a pre-existing store in Visalia (August 1995),
Watsonville (August 1995) and Tracy (October 1995), and
one new store opened in Nevada in Carson City (March
1995).
Net Credit Revenues
Net credit revenues decreased by
approximately $700,000 to $4.2 million in fiscal 1996
as compared to $4.9 million in fiscal 1995, a decrease
of 14.3%. As a percent of net sales, net credit
revenues decreased to 1.0% in fiscal 1996 as compared
to 1.2% in fiscal 1995.
Service charges associated with the
Company's customer credit cards decreased by $400,000
to $10.5 million in fiscal 1996 as compared to $10.9
million in fiscal 1995, a decrease of 3.7%. Credit
sales as a percent of total sales remained unchanged at
44.7% in fiscal 1996 and 1995. The decrease in service
charges (in dollars) is primarily due to the more
timely payment of customer credit card balances in
fiscal 1996 as compared to fiscal 1995. This decrease
was partially offset by additional income generated as
a result of modifications made to credit terms in
selected states initiated in late fiscal 1996. Interest
expense associated with securitized receivables
remained unchanged at $3.6 million in fiscal 1996 and
1995. The provision for credit losses increased by
approximately $300,000 to $2.7 million in fiscal 1996
as compared to $2.4 million in fiscal 1995, primarily
due to higher bankruptcies during the period.
Cost of Sales
Cost of sales increased by $8.4 million to
$287.2 million in fiscal 1996 as compared to $278.8
million in fiscal 1995, an increase of 3.0%. Cost of
sales as a percentage of sales decreased to 68.0% in
fiscal 1996 as compared to 69.5% in fiscal 1995,
resulting in an increase to the Company's gross margin
percent to 32.0% in fiscal 1996 as compared to 30.5% in
fiscal 1995. Excluding the effect of indirect costs
related to the buying and distribution of merchandise
which are reclassified to cost of sales by the Company
for financial reporting purposes, the gross margin
percent increased to 36.8% in fiscal 1996 as compared
to 35.6% in fiscal 1995. This increase in gross margin
percent is primarily due to increased sales of higher
gross margin men's, women's and children's apparel, a
higher initial inventory mark-on percentage on certain
merchandise (through favorable vendor pricing), and a
reduction of seasonal clearance and storewide sale
event markdowns as compared to the prior year. The
Company's inventory shrinkage also continued to
improve, decreasing to 1.1% of net sales in fiscal 1996
as compared to 1.3% in fiscal 1995. The Company's gross
margin percent in fiscal 1995 was negatively impacted
by (i) increased competition resulting from pricing
policies of two financially troubled retailers
operating in certain of the Company's market areas;
(ii) increased markdowns taken in an attempt to improve
sales of slow-moving apparel and in connection with a
revision in the Company's women's apparel merchandising
strategy; and (iii) increased promotional activity
related to new store openings and storewide sale
events.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased by approximately $3.3 million to $123.9
million in fiscal 1996 as compared to $120.6 million in
fiscal 1995, an increase of 2.7%. As a percent of net
sales, selling, general and administrative expenses
decreased to 29.3% in fiscal 1996 as compared to 30.1%
in fiscal 1995. Including the effect of indirect costs
related to the buying and distribution of merchandise
which are reclassified to cost of sales for financial
reporting purposes, selling, general and administrative
costs as a percent of net sales decreased to 34.0% in
fiscal 1996 as compared to 35.1% in fiscal 1995. This
decrease as a percent of net sales is primarily due to
the increase in sales volume. The Company's sales
increased at a faster rate than its selling, general
and administrative expenses in fiscal 1996, primarily
due to ongoing Company-wide expense control measures.
As previously described in the fiscal 1997 "Net
Credit Revenues" portion of this statement, the
provision for credit losses is presented as a reduction
to net credit revenues in the accompanying financial
statements. The provision for credit losses increased
to $2.7 million in fiscal 1996 as compared to $2.5
million in fiscal 1995, primarily due to higher
bankrupcies during the period.
Depreciation and Amortization
Depreciation and amortization, which includes
the amortization of new store pre-opening costs,
decreased by $1.2 million to $6.9 million in fiscal
1996 as compared to $8.1 million in fiscal 1995, a
decrease of 14.5%. This decrease (in dollars) is
primarily due to the amortization of new store pre-opening
costs, which decreased by $1.2 million as
compared to the prior year as a result of fewer new
store openings during the period. Excluding the
amortization of new store pre-opening costs,
depreciation and amortization as a percent of net sales
decreased to 1.3% in fiscal 1996 as compared to 1.4% in
fiscal 1995. Higher depreciation expense (in dollars)
related to capital expenditures for new stores was
fully offset by lower depreciation expense resulting
from sale and leaseback arrangements completed in
fiscal 1996 and 1995, including that of the Company's
department store in Capitola, California, and by the
termination of two capital leases in fiscal 1996. (See
Note 5 to the Consolidated Financial Statements).
Interest Expense
Interest expense increased by $400,000 to $8.1
million in fiscal 1996 as compared to $7.7 million in
fiscal 1995, an increase of 5.1%. Due to the increase
in sales volume, interest expense as a percent of net
sales remained unchanged at 1.9% in fiscal 1996 and
1995. The increase (in dollars) resulted primarily from
additional long-term financing arrangements entered
into late in fiscal 1995 and in fiscal 1996 and higher
loan fees associated with the Company's former line of
credit facility with Fleet Capital Corporation
("Fleet"). These increases were partially offset by a
decrease in the weighted-average interest rate charged
on outstanding borrowings under the Company's line of
credit and Variable Base Certificate (8.62% in fiscal
1996 as compared to 8.75% in fiscal 1995), which
resulted from (i) a decrease in LIBOR during the
period; (ii) a higher percentage of borrowings
outstanding under more cost-effective financing
arrangements, including the Variable Base Certificate
with Bank Hapoalim and the securitization program; and
(iii) a lower interest rate applicable to the new line
of credit agreement with Congress, entered into in
December 1996, which replaced the Fleet facility. (See
"Liquidity and Capital Resources.")
As previously described in the fiscal 1997 "Net
Credit Revenues" portion of this section, interest
expense related to securitized receivables is presented
as a reduction of net credit revenues in the
accompanying financial statements. Such interest
remained unchanged at $3.6 million in fiscal 1996 and
1995.
Miscellaneous Income
Miscellaneous income, which includes the
amortization of deferred income and other miscellaneous
income and expense items, increased by $2.1 million to
$2.8 million in fiscal 1996 as compared to $726,000 in
fiscal 1995. Other income in fiscal 1996 includes a
gain of $1.3 million resulting from the termination of
two leases and income related to the amortization of a
lease incentive (see Note 5 to the Consolidated
Financial Statements). Other income in fiscal 1995 was
reduced by certain general claim and valuation
reserves.
Income Taxes
The Company's effective tax rate was 40.7% in
fiscal 1996 as compared to an effective tax benefit of
(34.5%) in fiscal 1995. (See Note 6 to the Consolidated
Financial Statements.)
Net Income (Loss)
As a result of the foregoing, the Company's net
income increased by $7.5 million to net income of $1.8
million in fiscal 1996 as compared to a net loss of
($5.6) million in fiscal 1995. On a per share basis
(basic and diluted), net income increased by $.72 per
share to net income of $.18 per share in fiscal 1996 as
compared to a net loss of ($.54) per share in fiscal
1995. Net income in fiscal 1996 includes a non-recurring
pre-tax gain of $1.3 million resulting from
the termination of two capital leases. Excluding this
amount, net income in fiscal 1996 was $1.1 million, or
$.11 per share.
Liquidity and Capital Resources
Sources of Liquidity. As described more fully
below, the Company's working capital requirements are
currently met through a combination of cash provided by
operations, short-term trade credit, and by borrowings
under its revolving line of credit and its receivables
securitization program.
Revolving Line of Credit and Working Capital
Facility. The Company has a revolving line of credit
arrangement with Congress which provides the Company
with an $80.0 million working capital facility through
March 30, 2000. Borrowings under the arrangement are
limited to a restrictive borrowing base equal to 65% of
eligible merchandise inventories, increasing to 70% of
such inventories during the period of September 1
through December 20 of each year to fund increased
seasonal inventory requirements. Interest under the
facility is charged at a rate of approximately LIBOR
plus 2.5% (8.34% at January 31, 1998), with no interest
charged on the unused portion of the line of credit.
For fiscal 1998, the interest rate applicable to the
line of credit has been reduced by 1/4% to
approximately LIBOR plus 2.25%. The maximum amount
available for borrowings under the line of credit with
Congress was $56.9 million as of January 31, 1998, of
which $30.8 million was outstanding as of that date. Of
that amount, $25.0 million has been classified as long-term
in the accompanying financial statements as the
Company does not anticipate repaying that amount prior
to one year from the balance sheet date. The agreement
contains one financial covenant, pertaining to the
maintenance of a minimum tangible net worth, with which
the Company was in compliance as of January 31, 1998.
In addition to the Congress facility, the
Company also has up to $15.0 million of additional
working capital financing available under the Variable
Base Certificate, issued to Bank Hapoalim. The Company
can borrow against the Variable Base Certificate on a
revolving basis, similar to a line of credit
arrangement. Borrowings against the Variable Base
Certificate are limited to a percentage of the
outstanding balance of receivables underlying the
certificate, and therefore, the Company's borrowing
capacity under the facility is subject to seasonal
variations that may affect the outstanding balance of
such receivables. Interest on outstanding borrowings on
the facility is charged at a rate of approximately
LIBOR plus 1.0% (6.56% at January 31, 1998). At January
31, 1998, $7.7 million was outstanding under the line
of credit with Bank Hapoalim, which was the maximum
amount available for borrowings as of that date. Under
the provisions of SFAS No. 125, effective fiscal 1997,
borrowings against the Variable Base Certificate are
treated as "off-balance sheet" borrowings for financial
reporting purposes and are excluded from amounts
reported in the accompanying fiscal 1997 financial
statements. Prior to the adoption of SFAS No. 125 in
fiscal 1997, transfers of receivables underlying the
Variable Base Certificate were accounted for as secured
borrowings for financial statement purposes.
Accordingly, outstanding borrowings against the
Variable Base Certificate as of February 1, 1997,
totaling $7,600,000, are included in amounts reported
in the Company's fiscal 1996 financial statements. As
described more fully in the "Cash Flows from
Securitization Program" portion of this section, the
issuance of an additional $6.0 million Fixed Base
Certificate in fiscal 1996 reduced the level of
receivables allocable to the Variable Base Certificate,
and thus has reduced the Company's borrowing capacity
under the facility.
Other Financings. As described more fully in
Note 4 to the Consolidated Financial Statements, the
Company has four fifteen-year mortgage loans with
Midland Commercial Funding ("Midland") with outstanding
balances totaling $19.5 million at January 31, 1998.
The Midland loans, due 2010, bear interest at rates
ranging from 9.23% to 9.39%. The Company also has the
following other long-term loan facilities as of January
31, 1998: (i) a 10.45% mortgage loan payable with
Heller Financial, Inc. ("Heller") due 2002, with an
outstanding loan balance of $3.8 million; an additional
9.97% mortgage loan payable with Heller, due March
2004, with an outstanding loan balance of $5.3 million;
(iii) two 10.0% notes payable to Federated Department
Stores, Inc., due 2001, with outstanding balances
totaling $1.9 million; and (iv) other long-term
obligations with outstanding balances totaling $2.2
million.
Certain of the Company's long-term debt and
lease arrangements contain various restrictive
covenants. The Company was in compliance with all such
restrictive covenants as of January 31, 1998.
Cash Flows From Securitization Program. The
Company's receivables securitization program provides
the Company with an additional source of working
capital financing that is generally more cost-effective
than traditional debt financing. Accordingly, the
Company continually seeks to divert as large a
percentage of total borrowings as possible to its
securitization program.
Since 1994, the Company has issued $40.0 million
principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates (the "1994 Fixed Base Certificates") and a
$6.0 million principal amount 6.79% Fixed Base
Certificate (the "1996 Fixed Base Certificate") under
the program. Proceeds from the issuances of the 1994
and 1996 Fixed Base Certificates (collectively, the
"Fixed Base Certificates") were used to reduce or repay
previously outstanding higher interest bearing debt
obligations of the Company and pay certain costs
associated with the transaction. Interest is earned by
the certificateholders on a monthly basis and is paid
through finance charges collected under the program.
The outstanding principal balance of the certificates
are to be repaid in equal monthly installments
commencing September 1998 through September 1999,
through the application of credit card receivable
principal collections during that period. Management
currently intends to refinance the Fixed Base
Certificates as they mature with newly issued
certificates under the program. The issuances of the
Fixed Base Certificates were accounted for as sales for
financial reporting purposes. Accordingly, the $46.0
million of receivables underlying those certificates
and the corresponding debt obligations have been
excluded from the accompanying financial statements.
The Company also issued a Variable Base Class A-2
Credit Card Certificate ("Variable Base Certificate")
in 1994 in the principal amount of up to $15.0 million
to Bank Hapoalim. The Company can borrow against the
Variable Base Certificate on a revolving basis, similar
to a revolving line of credit arrangement. Management
also intends to refinance the Variable Base Certificate
upon its maturity in September 1998.
In addition to the Fixed and Variable Base
Certificates, additional series of certificates may be
issued as a source of additional working capital
financing to the Company. However, other than
refinancing the previously issued certificates upon
their maturity, management does not currently
anticipate any additional certificate issuances in
fiscal 1998.
Management believes the previously described
sources of liquidity are adequate to meet the Company's
working capital, capital expenditure and debt service
requirements for fiscal 1998. Management also believes
it has sufficient sources of liquidity for its long-term
growth plans at moderate levels. The Company may
engage in other financing activities if it is deemed to
be advantageous.
Additional Cash Flow and Working Capital
Analysis.
Working capital decreased by $2.6 million to
$67.6 million in fiscal 1997 as compared to $70.2
million in fiscal 1996. The Company's ratio of current
assets to current liabilities decreased to 2.01:1 as of
the end of fiscal 1997 as compared to 2.11:1 as of the
end of fiscal 1996. This decrease is primarily due to
an increase in the current portion of long-term
obligations related to new financing arrangements
entered into or finalized in fiscal 1997, in addition
to an increase in trade payables and the related cash
management liability resulting from the timing of the
payment for, and the clearing of, certain payables at
year end.
Cash flows from operating activities consist
primarily of net income (loss) adjusted for certain
non-cash income and expense items, including, but not
limited to, depreciation and amortization, the
provision for uncollectible accounts and changes in
deferred taxes. Net cash provided by operating
activities decreased by $6.7 million to $3.6 million in
fiscal 1997 as compared to $10.3 million in fiscal
1996. This decrease is primarily due to the additional
investment in merchandise inventories required for new
stores, partially offset by cash received from the
return of certain previously outstanding deposits and
an increase in amounts due from GCC Trust, resulting
from the adoption of SFAS No. 125 in fiscal 1997 (see
Note 1 to the Consolidated Financial Statements). The
decrease is also due to additional cash flows received
in fiscal 1996 resulting from the payment of
approximately $7.6 million of operating expenses
related to fiscal 1996 during the 53rd week of fiscal
1995 as a result of the fiscal 1995 calendar shift, and
from the receipt of $3.4 million in connection with the
filing of certain amended income tax returns.
Net cash used in investing activities increased
by $4.6 million to ($9.3) million in fiscal 1997 as
compared to ($4.7) million in fiscal 1996. The Company
spent $9.8 million more on capital expenditures, net of
reimbursements received, in fiscal 1997 as compared to
fiscal 1996. The cash used in fiscal 1997 for capital
expenditures was partially offset by cash provided
under the securitization program of $5.1 million in
fiscal 1997. The Company's 1997 expansion program
included the completion and opening of one new
department store in Sonora, California in August 1997
and one new department store in Santa Rosa, California
in September 1997. The Company also completed the first
phase of the 23,000 square foot expansion and remodel
of its existing store located in the Valley Plaza Mall
in Bakersfield, California and certain other store
remodel projects. These projects were funded primarily
with cash generated by operations, proceeds from
previously described long-term financing arrangements
entered into in late fiscal 1996 and with borrowings
under the Company's working capital facilities. The
Company also continued to invest in the enhancement of
various management information systems in fiscal 1997.
The Company also opened two new department stores in
fiscal 1996. Cash required to open a particular new
store, however, may vary significantly depending upon
various factors, including whether the store was fully
constructed, the size, age and condition of an existing
store location if assumed from another party, and the
extent of construction allowances to be received.
Capital expenditures in fiscal 1997 and 1996 were
partially offset by reimbursements received from
certain of the mall owners, in addition to proceeds
from various sale and sale/leaseback arrangements
entered into during those periods. The Company adopted
the provisions of SFAS No. 125 in fiscal 1997, which
requires the presentation of purchases and maturities
of securities under the Company's securitization
program to be presented as investing activities in the
statement of cash flows.
Net cash provided by financing activities
increased by $11.3 million to $5.8 million in fiscal
1997 as compared to net cash used in financing
activities of ($5.5) million in fiscal 1996. This
increase is primarily due to an increase in the cash
management liability, which resulted from the timing of
the payment for, and the clearing of, certain payables
at year end, in addition to an increase in cash
provided by GCC Trust, resulting from the adoption of
SFAS No. 125 in fiscal 1997. Cash held by GCC Trust in
fiscal 1996 and 1995, classified as financing
activities for statement of cash flow purposes, were
reflected as a receivable from GCC Trust pursuant to
SFAS No. 125 in fiscal 1997 and classified as an
operating activity in the fiscal 1997 statement of cash
flows. (See Notes 1 and 2 to the Consolidated Financial
Statements.) This increase was partially offset by a
reduction in net borrowings under the Company's
revolving line of credit and the Variable Base
Certificate in fiscal 1997 as compared to fiscal 1996,
primarily due to the application of the final $3.0
million proceeds received from the previously described
mortgage loan with Heller. Net cash used in financing
activities in fiscal 1996 include proceeds from the
$6.0 1996 Fixed Base Certificate and $3.0 million
received from the previously described Heller loan.
Such proceeds, however, were more than fully offset by
principal payments made on various short-term and long-term
obligations during the year.
The Company has entered into an agreement to
open one new department store in the second half of
fiscal 1998 and is in process of remodeling certain
existing store locations. The estimated cost of such
projects is $15.5 million. Such costs are expected
to be provided for from existing financial resources
and from additional long-term financing. Such projects
are expected to be fully complete in fiscal 1998, however,
there can be no assurance that the completion of such projects
will not be delayed subject to a variety of conditions
precedent or other factors.
Proposed Acquisition of The Harris
Company. On July 3, 1997, the Company entered into a
non-binding letter of intent with El Corte Ingles
("ECI"), of Spain, and The Harris Company ("Harris").
The letter of intent contemplated the purchase of all
of the common stock of Harris, a wholly-owned
subsidiary of ECI, which currently operates nine
department stores located throughout Southern
California. The two parties were unable to agree on the
terms of the transaction and terminated negotiations in
October 1997. The Company incurred non-recurring costs
totaling $673,000 in connection with the proposed
acquisition, consisting primarily of investment
banking, legal and accounting fees.
Year 2000 Conversion
The Company has established a task force to
coordinate the identification, evaluation and
implementation of changes to computer systems and
applications necessary to achieve a year 2000 date
conversion with no disruption to business operations.
These actions are necessary to ensure that the systems
and applications will recognize and process the year
2000 and beyond. Major areas of potential business
impact have been identified and are being dimensioned,
and initial conversion efforts are underway. The
Company is also communicating with suppliers, dealers,
financial institutions and others with which it does
business to coordinate the year 2000 conversion. The
total cost of the conversion is currently estimated to
be $350,000 and is not expected to materially affect
the Company's results of operations during the fiscal
1998-1999 conversion period. Such costs are expected to
consist primarily of external consulting fees and costs
in excess of normal software upgrades and replacements
and will be incurred throughout fiscal 1999. The year
2000 issue affects virtually all companies and
organizations.
Inflation
Although inflation has not been a material
factor to the Company's operations during the past
several years, the Company does experience some
increases in the cost of certain of its merchandise,
salaries, employee benefits and other general and
administrative 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 using the department store price
indexes 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 in reported
income due to increasing costs.
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 1997 and
1996 (in thousands, except per share data). (See Note
11 to the Consolidated Financial Statements.)
1997
Quarter Ended May 3 August 2 November 1 January 31
Net sales $90,506 $99,997 $101,466 $156,223
Gross profit 28,510 32,279 32,871 49,974
Income (loss) before
income tax expense
(benefit) (1,673) ( 422) (2,516) 10,998
Net income (loss) ( 987) ( 248) (1,485) 6,450
Net income (loss)
per common share (.09) (.02) (.14) .62
1996
Quarter Ended May 4 August 3 November 2 February 1
Net sales $85,560 $95,675 $95,675 $145,249
Gross profit 26,830 30,392 30,719 47,054
Income (loss) before
income tax expense
(benefit) (2,099) (1,245) (2,430) 8,866
Net income (loss) (1,322) ( 785) (1,530) 5,471
Net income (loss)
per common share (.13) (.07) (.15) .52
Recently Issued Accounting Standards
Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" was
recently issued and establishes standards for reporting
and displaying comprehensive income and its components
in a full set of general-purpose financial statements.
The new rules are effective for fiscal years beginning
after December 15, 1997 (fiscal 1998), with earlier
application permitted. SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information",
changes the manner in which operating segments are
defined and reported externally to be consistent with
the basis on which they are defined and reported on
internally. The new rules are also effective for
periods beginning after December 15, 1997, with earlier
application permitted. The application of SFAS No. 130
and 131 will not impact the Company's financial
position, results of operations or cash flows, and any
effect will be limited to the form and content of its
disclosures. The Company does not anticipate adoption
of these standards prior to their effective dates.
Safe Harbor Statement
The preceding sections including Part I, Item I,
"Business" and Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of
Operations" contain certain forward-looking statements
within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe
harbors created thereby. These forward-looking
statements include the plans and objectives of
management for future operations and the future
economic performance of the Company, and such forward-looking
statements can be identified by words
including, but not limited to: "believes",
"anticipates", "expects", "intends", "seeks", "may", "will
and "estimates".
The forward-looking statements are qualified by
important factors that could cause actual results to
differ materially from those identified in such
forward-looking statements, including, without
limitation, the following: (i) the ability of the
Company to gauge fashion trends and preferences of its
customers; (ii) the level of demand for the merchandise
offered by the Company; (iii) the ability of the
Company to locate and obtain favorable store sites,
negotiate acceptable lease terms, and hire and train
employees; (iv) the ability of management to manage the
planned expansion; (v) the continued ability to obtain
adequate credit from factors and vendors and the timely
availability of branded and other merchandise; (vi) the
effect of economic conditions, both nationally and in
the Company's specific market areas; (vii) the effect
of severe weather or natural disasters; and (viii) the
effect of competitive pressures from other retailers.
Results actually achieved thus may differ materially
from expected results in these statements as a result
of the foregoing factors or other factors affecting the
Company.
_________________________________
Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Disclosures under Item 305 of Regulation S-K are
effective for annual financial statements for fiscal
years ending after June 15, 1998 and will be required
to be included in the Company's 1998 Annual Report on
Form 10-K.
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 those portions of the Company's
definitive proxy statement with respect to the Annual
Stockholders' Meeting scheduled to be held on June 25,
1998, to be filed pursuant to Regulation 14A (the "1998 Proxy")
under the headings "Nominees for Election as Director" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
The following table lists the executive officers
of the Company:
Name Age(1) Position
Joe W. Levy 66 Chairman and
Chief
Executive Officer
James R. Famalette 45 President and
Chief Operating Officer
Gary L. Gladding 58 Executive Vice
President/
General
Merchandise
Manager
Alan A. Weinstein 53 Senior Vice
President and
Chief Financial
Officer
Michael J. Schmidt 56 Senior Vice
President/
Director of
Stores
__________________________
(1) As of February 28, 1998
Joe W. Levy became Chairman 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. Mr.
Levy was Executive Vice President from 1972 to April
1982 and first joined E. Gottschalk in 1956. He serves
on the Board of Directors of the National Retail
Federation and the Executive Committee of Frederick
Atkins. He was formerly Chairman of the California
Transportation Commission and served on the Board of
Directors of Community Hospitals of Central California
and of Air 21, a regional airline based in Fresno,
California, which was liquidated under federal
bankruptcy laws in fiscal 1997. Mr. Levy has also
served on numerous other state and local commissions
and public service agencies.
James R. Famalette became the President and
Chief Operating Officer of the Company on 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 March 1993 through April 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 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 and
Frederick Atkins.
Gary L. Gladding has been Executive Vice
President of the Company 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 1989 he was
Vice President and Chief Financial Officer of Wildlife
Enterprises, Inc. Aside from his position with The Wet
Seal, he has served general and specialty retailers in
California, New York and Texas for over twenty-five
years. Mr. Weinstein serves on the Board of Directors
of the American Heart Association of Fresno and
Combined Health Appeal and is a member of the Fig
Garden Rotary in Fresno and of the Community Relations
Action Committee of the Central California Blood
Center.
Michael J. Schmidt became Senior Vice
President/Director of Stores of E. Gottschalk in
February 1985. From October 1983 through February 1985,
he was Manager of the Gottschalks Fashion Fair store.
Prior to joining the Company, he was General Manager of
the Liberty House store in Fresno from January 1981 to
October 1983, and before 1981, 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 those portions
of the Company's 1998 Proxy under the headings
"Executive Compensation" and "Director Compensation
For Fiscal Year 1997."
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 1998 Proxy under the headings "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 1998 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 are included
in Item 8:
Consolidated balance sheets -- January 31, 1998
and February 1, 1997
Consolidated statements of operations -- Fiscal
years ended January 31, 1998, February 1, 1997
and February 3, 1996
Consolidated statements of stockholders' equity
-- Fiscal years ended January 31, 1998, February
1, 1997 and February 3, 1996
Consolidated statements of cash flows -- Fiscal
years ended January 31, 1998, February 1, 1997
and February 3, 1996
Notes to consolidated financial statements --
Three years ended January 31, 1998
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 the Regulation S-K and Item 14(c):
Exhibit
No. Description
3.1 Certificate of Incorporation of the Registrant,
as amended.(1)
3.2 By-Laws of the Registrant, as amended.(10)
10.1 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.(2)
10.2 1986 Employee Nonqualified Stock Option Plan
with form of stock option agreement
thereunder.(3)(4)
10.3 Gottschalks Inc. Retirement Savings Plan.(3)(16)
10.4 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.(1)
10.5 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.(1)
10.6 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.(1)
10.7 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.(1)
10.8 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.(1)
10.9 Lease Supplement 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.(1)
10.10 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.(1)
10.11 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.(5)
10.12 Receivables Purchase Agreement dated as of March
30, 1994 by and between Gottschalks Credit
Receivables Corporation and Gottschalks Inc.(6)
10.13 Pooling and Servicing Agreement dated as of
March 30, 1994 by and among Gottschalks Credit
Receivables Corporation, Gottschalks Inc. and
Bankers Trust Company. (6)
10.14 Amendment No. 1 to Pooling and Servicing
Agreement dated as of September 16, 1994 by and
among Gottschalks Credit Receivables
Corporation, Gottschalks Inc. and Bankers Trust
Company.(7)
10.15 Amended and Restated Series 1994-1 Supplement to
Pooling and Servicing Agreement dated as of
September 16, 1994, by and among Gottschalks
Credit Receivables Corporation, Gottschalks Inc.
and Bankers Trust Company.(7)
10.16 Waiver Agreement dated November 23, 1994, by and
among Gottschalks Credit Receivables
Corporation, Gottschalks Inc. and Bankers Trust
Company.(7)
10.17 Consulting Agreement dated June 1, 1994 by and
between Gottschalks Inc. and Gerald H.
Blum.(4)(8)
10.18 Form of Severance Agreement dated March 31, 1995
by and between Gottschalks Inc. and the
following senior executives of the Company:
Joseph W. Levy, Gary L. Gladding, Michael J.
Schmidt and Alan A. Weinstein.(4)(10)
10.19 1994 Key Employee Incentive Stock Option
Plan.(4)(9)
10.20 1994 Director Nonqualified Stock Option
Plan.(4)(9)
10.21 1994 Executive Bonus Plan.(4)(10)
10.22 Promissory Note and Security Agreement dated
December 16, 1994 by and between Gottschalks
Inc. and Heller Financial, Inc.(10)
10.23 Agreement of Sale dated June 27, 1995, by and
between Gottschalks Inc. and Jack Baskin
relating to the sale and leaseback of the
Capitola, California property.(11)
10.24 Lease and Agreement dated June 27, 1995, by and
between Jack Baskin and Gottschalks Inc.
relating to the sale and leaseback of the
Capitola, California property.(11)
10.25 Promissory Notes and Security Agreements dated
October 4, 1995 and October 10, 1995 by and
between Gottschalks Inc. and Midland Commercial
Funding.(12)
10.26 Waiver Agreement dated April 22, 1996 by and
between Gottschalks Inc. and Heller Financial,
Inc.(13)
10.27 Amended and Restated Series 1994-1 Supplement to
Pooling and Servicing Agreement, dated October
31, 1996, by and among Gottschalks Credit
Receivables Corporation, Gottschalks Inc. and
Bankers Trust Company.(14)
10.28 Series 1996-1 Supplement to Pooling and
Servicing Agreement dated as of November 1,
1996, by and among Gottschalks Credit
Receivables Corporation, Gottschalks Inc. and
Bankers Trust Company.(14)
10.29 Promissory Note and Security Agreement dated
October 2, 1996, by and between Gottschalks
Inc. and Heller Financial, Inc.(14)
10.30 Promissory Notes dated March 28, 1996 and
September 11, 1996, by and between Gottschalks
Inc. and Broadway Stores, Inc., a wholly-owned
division of Federated Department Stores,
Inc.(15)
10.31 Loan and Security Agreement dated December 29,
1996, by and between Gottschalks Inc. and
Congress Financial Corporation. (16)
10.32 Employment Agreement dated March 14, 1997 by and
between Gottschalks Inc. and James R.
Famalette.(4)(15)
21. Subsidiaries of the Registrant.(10)
23. Independent Auditors' Consent.
27. Financial Data Schedule.
_______________________
(1) Filed as an exhibit to the Annual Report on Form
10-K for the year ended January 29, 1994 (File
No. 1-09100), and incorporated herein by
reference.
(2) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 2, 1991 (File
No. 1-09100), and incorporated herein by
reference.
(3) Filed as an exhibit to Registration Statement on
Form S-1, (File No. 33-3949), and incorporated
herein by reference.
(4) Management contract, compensatory plan or
arrangement.
(5) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 1, 1992 (File
No. 1-09100), and incorporated herein by
reference.
(6) Filed as an exhibit to the Current Report on
Form 8-K dated March 30, 1994 (File No. 1-09100),
and incorporated herein by reference.
(7) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended October 29, 1994
(File No. 1-09100), and incorporated herein by
reference.
(8) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended April 30, 1994
(File No. 1-09100), and incorporated herein by
reference.
(9) Filed as exhibits to Registration Statements on
Form S-8, (Files #33-54783 and #33-54789), and
incorporated herein by reference.
(10) Filed as an exhibit to the Annual Report on Form
10-K for the year ended January 28, 1995 (File
No. 1-09100), and incorporated herein by
reference.
(11) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended July 29, 1995
(File No. 1-09100), and incorporated herein by
reference.
(12) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended October 28, 1995
(File No. 1-09100), and incorporated herein by
reference.
(13) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 3, 1996 (File
No. 1-09100), and incorporated herein by
reference.
(14) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended November 2, 1997
(File No. 1-09100), and incorporated herein by
reference.
(15) Filed as an exhibit to the Registration
Statement on Form S-8 (File #33-00061), and
incorporated herein by reference.
(16) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 1, 1997 (File
No. 1-09100), and incorporated by 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 fiscal
1997.
(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 JANUARY 31, 1998
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 as of January
31, 1998 and February 1, 1997, and the related
consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in
the period ended January 31, 1998. Our audits also
included the financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of
the Company's management. Our responsibility is to
express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. 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 as of
January 31, 1998 and February 1, 1997, and the results
of their operations and their cash flows for each of
the three years in the period ended January 31, 1998,
in conformity with generally accepted accounting
principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the
basic consolidated financial statements taken as a
whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the financial statements, the
Company changed its method of accounting for
securitized receivables in fiscal 1997 to conform with
Statement of Financial Accounting Standard No. 125.
DELOITTE & TOUCHE LLP
/s/Deloitte & Touche LLP
Fresno, California
February 24, 1998
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
January 31, February 1,
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 1,601 $ 1,496
Cash held by GCC Trust 5,163
Retained interest in
receivables sold (Notes 2 and 3) 15,813 20,871
Receivables:
Receivables, less allowances of $437
in 1997 and $1,322 in 1996
(Notes 2 and 3) 3,085 1,818
Vendor claims, less allowances of $80
in 1997 and 1996 3,475 2,818
6,560 4,636
Merchandise inventories 99,294 89,472
Other 11,444 11,800
Total current assets 134,712 133,438
PROPERTY AND EQUIPMENT (Note 5):
Land and land improvements 15,101 15,074
Buildings and leasehold improvements 52,339 46,925
Furniture, fixtures and equipment 64,993 57,648
Buildings and equipment under capital leases 10,875 7,302
Construction in progress 1,858 309
145,166 127,258
Less accumulated depreciation and
amortization 46,109 39,888
99,057 87,370
OTHER ASSETS:
Goodwill, less accumulated amortization
of $1,263 in 1997 and $1,146 in 1996 1,136 1,252
Other 7,406 10,340
8,542 11,592
$242,311 $232,400
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
January 31, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
Revolving lines of credit (Note 4) $ 5,767 $ 13,904
Cash management liability 10,141 1,540
Trade accounts payable 20,950 19,077
Accrued expenses 8,110 10,714
Taxes, other than income taxes 8,698 8,202
Accrued payroll and related liabilities 5,734 5,208
Current portion of
long-term obligations (Notes 4 and 5) 3,950 2,408
Deferred income taxes (Note 6) 3,783 2,154
Total current liabilities 67,133 63,207
LONG-TERM OBLIGATIONS, less current portion
(Notes 4 and 5):
Line of credit 25,000 25,000
Notes and mortgage loans payable 30,083 29,861
Capitalized lease obligations 7,337 5,380
62,420 60,241
DEFERRED INCOME (Note 5) 18,408 19,580
DEFERRED LEASE PAYMENTS AND OTHER (Note 5) 6,653 6,369
DEFERRED INCOME TAXES (Note 6) 3,792 2,864
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 10)
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;
10,478,415 and 10,472,915 issued
Common stock 105 105
Additional paid-in capital 56,368 56,332
Retained earnings 27,434 23,704
83,907 80,141
Less common stock in treasury at cost, 338 shares (2) (2)
83,905 80,139
$242,311 $232,400
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
1997 1996 1995
Net sales $448,192 $422,159 $401,041
Net credit revenues 6,385 4,198 4,896
454,577 426,357 405,937
Costs and expenses:
Cost of sales 304,558 287,164 278,827
Selling, general and
administrative expenses 130,922 123,860 120,637
Depreciation and amortization 6,667 6,922 8,092
442,147 417,946 407,556
Operating income (loss) 12,430 8,411 (1,619)
Other (income) expense:
Interest expense 7,325 8,111 7,718
Miscellaneous income (1,955) (2,792) (726)
Acquisition related expenses 673
6,043 5,319 6,992
Income (loss) before
income tax expense(benefit) 6,387 3,092 (8,611)
Income tax expense(benefit) 2,657 1,258 (2,972)
Net income (loss) $ 3,730 $ 1,834 $ (5,639)
Net income (loss) per common share -
basic and diluted $ .36 $ .18 $ (.54)
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars, except share data)
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
BALANCE,
JANUARY 29, 1995 10,416,520 $104 $56,112 $27,509 $(148) $83,577
Net loss (5,639) (5,639)
Net compensation benefit
related to stock option plan (170) (170)
Purchase of 12,500 shares
of treasury stock (94) (94)
Contribution of 34,164
shares of treasury stock
to Retirement Savings Plan 3 240 243
BALANCE,
FEBRUARY 3, 1996 10,416,520 104 55,945 21,870 (2) 77,917
Net income 1,834 1,834
Issuance of 56,395
shares to
Retirement Savings
Plan 56,395 1 387 388
BALANCE,
FEBRUARY 1, 1997 10,472,915 105 56,332 23,704 (2) 80,139
Net income 3,730 3,730
Shares issued under stock
option plan 5,500 36 36
BALANCE,
JANUARY 31, 1998 10,478,415 $105 $56,368 $27,434 $ (2) $83,905
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1997 1996 1995
OPERATING ACTIVITIES:
Net income (loss) $ 3,730 $ 1,834 $ (5,639)
Adjustments:
Depreciation and amortization 6,667 6,922 8,096
Deferred income taxes 2,557 419 (1,296)
Deferred lease payments and other 284 467 870
Deferred income (1,172) (767) (609)
Net benefit related to stock option plan (170)
Provision for credit losses 470 2,724 2,754
Equity in the income of limited
partnership (120) (133) (64)
Net gain from sale of assets (72) (344)
Net gain from termination of
capital leases (Note 5) (1,344)
(Gain) loss on securitization and
sale of receivables (Note 2) (1,050) 20
Acquisition related expenses (Note 8) (673)
Litigation settlements (Note 9) (2,400) (3,000)
Lease incentive (Note 5) 4,000
Changes in operating assets and liabilities:
Receivables (1,346) (9) (5,114)
Retained interest in receivables sold (979) (147)
Merchandise inventories (9,227) (1,370) (6,215)
Trade accounts payable 1,873 2,570 (7,638)
Other current and long-term assets 3,267 (6,518) (3,394)
Other current and long-term
liabilities (1,546) 8,821 (2,572)
Net cash provided by (used in) operating
activities 3,642 10,257 (20,482)
INVESTING ACTIVITIES:
Purchases of held-to-maturity securities
(Note 3) (230,433)
Maturities of held-to-maturity securities
(Note 3) 235,491
Purchases of property and equipment,
net of reimbursements received (14,976) (6,845) (12,773)
Proceeds from sale/leaseback arrangements
and other property and equipment sales 365 2,026 11,606
Distribution from limited partnership 229 112 86
Net cash used in investing activities ( 9,324) (4,707) (1,081)
FINANCING ACTIVITIES:
Net proceeds (repayments) under revolving
line of credit and Variable Base
Certificate (8,137) (6,260) 27,320
Proceeds from short-term and long-term
obligations 3,214 3,878 23,993
Principal payments on short-term and
long-term obligations (3,054) (4,850) (24,710)
Proceeds from securitization and sale of
receivables (Note 3) 6,000
Changes in cash management liability 8,601 (3,556) (4,757)
Changes in cash held by GCC Trust 5,163 ( 748) 85
Payments to acquire treasury stock (94)
Net cash provided by (used in) financing
activities 5,787 (5,536) 21,837
INCREASE IN CASH 105 14 274
CASH AT BEGINNING OF YEAR 1,496 1,482 1,208
CASH AT END OF YEAR $ 1,601 $ 1,496 $ 1,482
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, currently consisting of thirty-seven
"Gottschalks" department stores and twenty-two
"Village East" specialty stores located
primarily in non-major metropolitan cities
throughout California and in Oregon, Washington
and Nevada. Gottschalks department stores
typically offer a wide range of moderate and
better brand-name and private-label merchandise,
including men's, women's, junior's and
children's apparel, cosmetics, shoes and
accessories, home furnishings and other consumer
goods. Village East specialty stores offer
apparel for larger women.
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 result
in actual results differing 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"). Prior to fiscal 1997, the Company's
consolidated financial statements also included
the accounts of GCC Trust, a qualified special purpose
entity which is no longer consolidated
as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of
Liabilities". (See Notes 2 and 3.) All of GCC
Trust's assets were transferred subsequent to
December 31, 1996, the effective adoption date of
SAS No. 125. 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
1997, 1996 and 1995 ended on January 31, 1998,
February 1, 1997 and February 3, 1996,
respectively. Fiscal years 1997 and 1996 each
contained 52 weeks; fiscal year 1995 contained
53 weeks. The Company's fiscal 1995 results of
operations were not materially affected by
results applicable to the 53rd week.
Cash Held by GCC Trust - Cash held by GCC Trust
of $5,163,000 at February 1, 1997 consists
primarily of customer credit card payments
collected through the Company's receivables
securitization program and held for the payment
of monthly interest to certificate holders and
amounts designated under the prepayment option
of the Variable Base Certificate. Cash held by
GCC Trust in excess of amounts required for
those purposes are remitted to the Company on a
daily basis to be used for operating purposes.
As previously described, effective fiscal 1997,
GCC Trust is no longer consolidated into the
Company's financial statements. Amounts due from
GCC Trust, totaling $4,922,000 as of January
31, 1998 are included in other current assets.
Retained Interest in Receivables Sold - The
Company adopted the provisions of SFAS No. 125
effective fiscal 1997. As described more fully
in Notes 2 and 3, the retained interest in
receivables sold as of January 31, 1998 consists
primarily of securities backed by receivables
sold pursuant to the Company's receivable
securitization program and various financial
components which are retained and recorded as
assets as a result of such sales. Such assets
include the right to service the receivables
sold, if any, which is based on a contractually
specified servicing fee, and the retained rights
to future interest income from the serviced
assets in excess of the contractually specified
servicing fee (interest-only strips). 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 interest based
on their relative fair values. The certificated
retained interest is subsequently valued in accordance
with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity
Securities". In accordance with SAS No. 115,
these investments are classified as held-to- maturity
and, accordingly, are carried at
amortized cost as the securities are not subject
to substantial prepayment risk and the Company
has the ability and intent to hold the securities to
maturity. The servicing assets, if
any, and the interest-only strips are amortized
to operations over the period of estimated net
servicing income. As of January 31, 1998, the
estimated cost to service the assets was equal
to the contractually specified servicing fee,
resulting in no servicing asset or liability.
The interest-only strip, net of accumulated
amortization, totaled $211,000 as of January 31,
1998. As of February 1, 1997, the retained
interest in receivables sold consisted only of
securities backed by receivables sold under the
Company's receivables securitization program.
Receivables - Receivables consist primarily of
customer credit card receivables that do not
meet certain eligibility requirements of the
Company's receivable securitization program.
Such receivables are not certificated and
include revolving charge accounts with terms
which, in some cases, provide for payments
exceeding one year. In accordance with usual
industry practice such receivables are included
in current assets.
The Company maintains a reserve for possible
credit losses on such receivables which is
based on the expected collectibility of those
receivables. Prior to the implementation of SFAS
No. 125 in fiscal 1997, the Company maintained
reserves for possible credit losses based on the
expected collectibility of all receivables,
including receivables sold or certificated. (See
Note 2.)
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 was equal to the
LIFO value of inventories at January 31, 1998
and February 1, 1997.
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.
Store Pre-Opening Costs - Store pre-opening
costs represent certain expenditures incurred
prior to the opening of new stores that are
deferred and amortized generally on a straight-line
basis not to exceed a twelve month period
commencing with the store opening. Store pre-opening
costs, net of accumulated amortization,
of $421,000 at January 31, 1998 and $136,000 at
February 1, 1997 are included in other current
assets. The amortization of new store pre-opening costs,
totaling $589,000, $1,337,000 and
$2,524,000 in 1997, 1996 and 1995, respectively,
is included in depreciation and amortization in
the accompanying statements of operations.
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 estimated useful lives of the
assets, which range from 20 to 40 years for
buildings, land improvements and leasehold
improvements and 3 to 15 years for furniture,
fixtures and equipment. Reimbursements received
for certain capital expenditures are reported as
reductions to the original cost of the related
assets. Amortization of buildings and equipment
under capital leases is generally computed by
the straight-line method over the term of the
lease or the estimated economic life of the
asset, depending on which criteria was used to
classify the lease, and such amortization is
combined with depreciation in the accompanying
statements of operations.
Investment in Limited Partnership - The Company
is the limited partner in a partnership that was
formed for the purpose of acquiring the land and
constructing and maintaining the building in
which the Company's corporate headquarters are
located. The Company made an initial capital
contribution of $5,000,000 to acquire a 36%
ownership interest in the partnership and
receives favorable rental terms for the space
occupied in the building. Of the initial
$5,000,000 capital contribution, $3,212,000 was
allocated to the investment in limited
partnership based on the estimated fair market
value of the land and building and the remaining
$1,788,000 was allocated to prepaid rent and is
being amortized to rent expense over the 20 year
lease term.
The Company accounts for its investment in the
limited partnership on the equity method of
accounting. As of January 31, 1998 and February
1, 1997, the investment was $2,679,000 and
$2,766,000, respectively, and prepaid rent, net
of accumulated amortization, was $793,000 and
$911,000, respectively. Such amounts are
included in other long-term assets. The
Company's equity in the income of the
partnership, totaling $141,000 in 1997, $133,000
in 1996 and $64,000 in 1995 is included in
miscellaneous income.
Goodwill - The excess of acquisition costs over
the fair value of the net assets acquired 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
or forecasted profitability of the related
acquired assets as compared to their carrying
values.
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 to the
Company.
Deferred Income - Deferred income consists
primarily of donated land and cash incentives
received to construct a new store and enter into
a new lease arrangement. Land contributed to the
Company is included in land and recorded at
appraised fair market values. Donated income is
amortized to operations over the average
depreciable life of the related fixed assets
built on the land with respect to 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 70 years.
Leased Department Sales - Net sales include
leased department sales of $35,179,000,
$32,781,000 and $29,766,000 in 1997, 1996 and
1995, respectively. Cost of sales include
related costs of $30,044,000, $28,006,000 and
$25,494,000 in 1997, 1996 and 1995,
respectively.
Net Credit Revenues - The Company adopted the
provisions of SFAS No. 125 in fiscal 1997, and
has changed the presentation of net credit
revenues related to the Company's customer credit
card receivables for financial statement
purposes. (See Note 2.) Net credit revenues in
fiscal 1997 consist primarily of the gain on the
sale of receivables during that period and the
amortization of the interest-only strip. The
amortization of the interest-only strip
approximates service charge revenues related to
receivables sold, net of interest expense
related to securitized receivables and charge-offs
related to receivables sold. Net credit
revenues also include service charges related to
the retained interest in receivables sold, net
of a related provision for credit losses related
to receivables which were ineligible for sale.
Net credit revenues in fiscal 1996 and 1995
consist of services charges related to all
customer credit card receivables, including
receivables sold, net of interest expense
related to securitized receivables and a
provision for credit losses on all receivables,
including receivables sold.
The gain on sale of receivables totaled
$1,050,000 in 1997, and includes a credit of
$898,000 related to a change in estimate for the
allowance for doubtful accounts related to receivables
which were ineligible for sale.
Service charge revenues related to the Company's
customer credit card receivables totaled
$11,618,000 in 1997, $10,493,000 in 1996 and
$10,937,000 in 1995. Interest expense related to
securitized receivables totaled $3,579,000,
$3,564,000 and $3,578,000 in 1997, 1996 and
1995. Charge-offs related to the receivables
sold totaled $2,234,000 and the provision for credit
losses related to receivables which were
ineligible for sale totaled $470,000 in 1997,
for a total of $2,704,000. The provision for
credit losses related to receivables, including
receivables sold, totaled $2,731,000 and
$2,463,000 in 1996 and 1995.
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.
Net Income (Loss) Per Common Share - The Company
adopted the provisions of SFAS No. 128,
"Earnings per Share", effective for interim
periods and fiscal years ended after December
15, 1997. This statement replaces the
presentation of primary and fully diluted
earnings per share with a presentation of
"basic" earnings per share, which is based on
the weighted-average number of common shares
outstanding during a period, and "diluted"
earnings per share, which includes the effect of
stock options and other potentially dilutive
securities. In accordance with the provisions of
the statement, all previously reported
earnings per share amounts have been restated to
reflect the provisions of the new standard. The
adoption of the standard had no impact on
previously reported earnings (loss) per share
amounts.
Basic earnings (loss) per common share is
computed based on the weighted average number of
common shares outstanding which were 10,473,682,
10,461,424 and 10,416,520 in 1997, 1996 and
1995, respectively. Diluted earnings (loss) per
common share is equal to basic earnings (loss)
per common share because the effect of
potentially dilutive securities under the stock
option plans were antidilutive, or insignificant,
in 1997, 1996 and 1995, and therefore not included.
Non-Cash Transactions - The Company acquired
certain equipment under a capital lease
obligation totaling $3,562,000 in 1997 and
acquired fixtures and equipment under long-term
debt obligations totaling $2,650,000 in 1996.
The Company issued or contributed common stock
to the Retirement Savings Plan with a value of
$388,000 and $243,000 in 1996 and 1995,
respectively.
Fair Value of Financial Instruments - The
carrying value of the Company's cash and cash
management liability, retained interest in
receivables sold, 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 following methods and assumptions were used
to estimate the fair value for each remaining
class of financial instruments:
Long-Term Obligations - The fair values of the
Company's notes and mortgage loans payable are
estimated using discounted cash flow analysis,
based on the Company's current incremental
borrowing rates for similar types of borrowing
arrangements. The aggregate estimated fair
values of such obligations with aggregate
carrying values of $32,724,000 and $31,933,000
at January 31, 1998 and February 1, 1997,
respectively, are $34,241,000 and $32,024,000,
respectively.
Off-Balance Sheet Financial Instruments -
The Company's off-balance sheet financial
instruments consist primarily of the Fixed
Base Certificates and, as of fiscal 1997,
the Variable Base Certificate, and related
borrowings associated with those
securities. (See Notes 2 and 3.) The
aggregate estimated fair values of the
Fixed Base Certificates, based on similar
issues of certificates at current rates
for the same remaining maturities, with
aggregate face values of $46,000,000 at
both January 31, 1998 and February 1, 1997
are $44,408,000 and $44,249,000,
respectively. The estimated fair value of
the Variable Base Certificate approximates
its reported value due to the short-term
revolving nature of the credit card
portfolio.
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".
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. The
carrying value of a long-lived asset is
considered impaired when the anticipated
undiscounted cash flow from such asset is
separately identified and is less than its
carrying value. In that event, a loss is
recognized based on the amount by which the
carrying value exceeds the fair market value of
the long-lived asset. Fair market value is
determined primarily using the anticipated cash
flows discounted at a rate commensurate with the
risks involved. Based on such a review, the
Company determined that no impairment loss need
be recognized for fiscal years 1997 or 1996.
Recently Issued Accounting Standards - SFAS No.
130, "Reporting Comprehensive Income" was
recently issued and establishes standards for
reporting and displaying comprehensive income
and its components in a full set of general-purpose
financial statements. The new rules are
effective for fiscal years beginning after
December 15, 1997 (fiscal 1998), with earlier
application permitted. SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information",
changes the manner in which operating segments are
defined and reported externally to be consistent with the
basis on which they are defined and reported on
internally. The new rules are also effective for
periods beginning after December 15, 1997, with
earlier application permitted. The application
of SFAS No. 130 and 131 will not impact the Company's
financial position, results of
operations or cash flows, and any effect will be
limited to the form and content of its
disclosures. The Company does not anticipate
adoption of these standards prior to their
effective dates.
Reclassifications - Certain amounts in the
accompanying 1996 and 1995 consolidated
financial statements have been reclassified to
conform with the 1997 presentation.
2. ACCOUNTING CHANGE
The Company adopted the provisions of SFAS No.
125 effective fiscal 1997. This statement
changed the accounting for securitized
receivables and provides consistent guidance for
distinguishing transfers of financial assets
(securitizations) that are sales from transfers
that are secured borrowings. SFAS No. 125
requires the Company to recognize gains and losses
on securitizations which qualify as sales
and to recognize as assets certain financial
components that are retained as a result of such
sales. Such assets consist primarily of the
retained interest in the receivables sold, the
right to service the receivables sold, which is
based on a contractually specified servicing
fee, and the retained rights to future interest
income from the serviced assets in excess of the
contractually specified servicing fee (interest-only
strips). The effect of this accounting
change was to increase pre-tax net income by
$1,050,000 for the year ended January 31, 1998.
Such amount, which includes a credit of $898,000
related to a change in estimate for the
allowance for doubtful accounts related to
receivables which were ineligible for sale, is
included in net credit revenues in the
accompanying fiscal 1997 statement of
operations.
The provisions of the statement are not
permitted to be applied retroactively to prior
periods presented. The Company has, however, made certain
reclassifications to amounts in the accompanying fiscal
1996 and 1995 statements of operations to more closely conform
with the financial statement presentation required by this
statement.
3. RECEIVABLES SECURITIZATION PROGRAM
The Company's receivables securitization program
provides the Company with a source of working
capital financing that is generally more cost-effective
than traditional debt financing. Under
the program, the Company automatically sells all
of its accounts receivable arising under its
private label customer credit cards to a
wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"), and those receivables are subsequently
conveyed to a trust, 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 SFAS No. 125. Accordingly, all
transfers of receivables to GCC Trust under the Company's
securitization program are accounted for as sales for financial
reporting purposes. The Company retains an ownership interest
in certain of the receivables sold under the program, represented
by Subordinated and Exchangeable Certificates issued to GCRC by
GCC Trust, and also retains an uncertificated ownership interest
in receivables that do not meet certain eligibility
requirements of the program. The Company services and administers
the receivables in return for a monthly servicing fee. As of
January 31, 1998, the following securities have been issued under
the securitization program:
Fixed Base Certificates.
In 1994, fractional undivided ownership
interests in certain of the receivables were
sold through the issuance of $40,000,000
principal amount 7.35% Fixed Base Class A-1
Credit Card Certificates (the "1994 Fixed Base
Certificates") to third-party investors. An
additional $6,000,000 principal amount 6.79%
Fixed Base Class A-1 Credit Card Certificate
(the "1996 Fixed Base Certificate") was issued
under the program in 1996. Proceeds from the
issuances of the 1994 and 1996 Fixed Base
Certificates (collectively, the "Fixed Base
Certificates") were used to reduce or repay
previously outstanding higher interest bearing
debt obligations of the Company and pay certain
costs associated with the transaction. Interest
on the Fixed Base Certificates is earned by the
certificate holders on a monthly basis and the
outstanding principal balances of such
certificates are to be repaid in equal monthly
installments commencing September 15, 1998
through September 15, 1999, through the
application of the principal portion of credit
card collections during that period. Management
currently intends to refinance the Fixed Base
Certificates as they mature with newly issued
certificates under the program. The issuances of
the Fixed Base Certificates were accounted for
as sales for financial reporting purposes.
Accordingly, the $46,000,000 of receivables
underlying the Fixed Base Certificates as of
January 31, 1998 and February 1, 1997 and the
corresponding debt obligations have been
excluded from amounts reported in the
accompanying financial statements.
Variable Base Certificate.
A Variable Base Class A-2 Credit Card
Certificate ("Variable Base Certificate") was
also issued in 1994 in the principal amount of
up to $15,000,000 to Bank Hapoalim. The Variable
Base Certificate represents a fractional
undivided ownership interest in certain
receivables held by GCC Trust and functions
similar to a revolving line of credit
arrangement.
Under the provisions of SFAS No. 125, effective
fiscal 1997, the transfer of receivables under
the Variable Base Certificate are treated as
sales for financial reporting purposes.
Accordingly, the retained interest in
receivables sold pertaining to the Variable Base
Certificate, totaling $7,700,000 as of January
31, 1998 and the corresponding outstanding
borrowings against the Variable Base Certificate
with Bank Hapoalim have been excluded from
amounts reported in the accompanying financial
statements. Prior to the adoption of SFAS No.
125 in fiscal 1997, transfers of receivables
underlying the Variable Base Certificate were
accounted for as secured borrowings in the
accompanying fiscal 1996 financial statements
and the outstanding balance of the Variable Base
Certificate, totaling $7,600,000 at February 1,
1997, and the corresponding outstanding
borrowings against the Variable Base Certificate
with Bank Hapoalim are included in amounts
reported in the accompanying fiscal 1996
financial statements.
Other Program Requirements.
Under the program, the Company is required,
among other things, to maintain certain
portfolio performance standards which include
the maintenance of a minimum portfolio yield,
maximum levels of delinquencies and write-offs
of customer credit card receivables and minimum
levels of credit card collection rates. The
Company was in compliance with all applicable
requirements of the program at January 31, 1998.
In addition to the Fixed and Variable Base
Certificates, GCRC may, upon the satisfaction of
certain conditions, offer additional series of
certificates to be issued by GCC Trust. While management
intends to refinance the previously described outstanding
certificates as they mature, management is not presently
contemplating the issuance of any additional certificates
in fiscal 1998.
4. DEBT OBLIGATIONS
Revolving Lines of Credit.
The Company has a revolving line of credit
arrangement with Congress Financial Corporation
("Congress") which provides the Company with an
$80,000,000 working capital facility through March 30, 2000.
Borrowings under the arrangement are limited to a
restrictive borrowing base equal to 65% of eligible merchandise
inventories, increasing to 70% of such inventories during
the period of September 1 through December 20 of each year to
fund increased seasonal inventory requirements. Interest on
outstanding borrowings under the facility is charged at a rate
of approximately LIBOR plus 2.5% (8.34% at January 31, 1998),
with no interest charged on the unused portion
of the line of credit. For fiscal 1998, the
interst rate applicable to the line of credit
has been reduced by 1/4% to approximately LIBOR
plus 2.25%. The maximum amount available for
borrowings under the line of credit was $56,920,000 as of
January 31, 1998, of which $30,767,000 was outstanding as of
that date. Of that amount, $25,000,000 has been classified as
long-term in the accompanying financial statements as the Company
does not anticipate repaying that amount prior to one year from the
balance sheet date. The agreement contains one financial covenant,
pertaining to the maintenance of a minimum tangible net worth,
with which the Company was in compliance as of
January 31, 1998.
The Company also has up to $15,000,000 of
additional working capital financing available
under the Variable Base Certificate, issued to
Bank Hapoalim (Note 3). Borrowings against the
Variable Base Certificate are limited to a
percentage of the outstanding principal balance
of receivables underlying the Variable Base Certificate and
therefore, the Company's borrowing capacity under the facility
is subject to seasonal variations that may affect the
outstanding principal balance of such
receivables. Interest on outstanding borrowings
on the facility is charged at a rate of approximately LIBOR
plus 1.0%, not to exceed a maximum of 12.0% (6.56% at
January 31, 1998).
At January 31, 1998, $7,700,000 was outstanding
under facility with Bank Hapoalim, which was the
maximum amount available for borrowings as of
that date. Under the provisions of SFAS No. 125,
effective fiscal 1997, borrowings against the
Variable Base Certificate with Bank Hapoalim are
treated as "off-balance sheet" borrowings for
financial reporting purposes and are excluded
from amounts reported in the accompanying
financial statements (see Notes 2 and 3).
Because the provisions of SFAS No. 125 are not
retroactively applied, outstanding borrowings
against the Variable Base Certificate as of
February 1, 1997, totaling $7,600,000, are
reported in the Company's fiscal 1996 financial
statements.
Long-Term Obligations.
Notes and mortgage loans payable consist of the
following:
January 31, February 1,
(In thousands of dollars) 1998 1997
Mortgage loans payable to financial
institution, payable in monthly
principal installments of $173
including interest at 9.23% and
9.39%, principal due and
payable October 1, 2010 and
November 1, 2010; collateralized
by certain real property, assets
and certain property and equipment $19,501 $19,738
Mortgage loan payable to financial
institution, payable in monthly
principal installments of $79 plus
interest at 10.45%, principal due
and payable January 1, 2002;
collateralized by certain real
property, assets and certain
property and equipment 3,800 4,750
Mortgage loan payable to financial
institution, payable in monthly
principal installments of $71 plus
interest at 9.97%, principal due
and payable April 1, 2004;
collateralized by certain real
property, assets and certain
property and equipment 5,286 3,000
Notes payable to Federated
Department Stores, Inc., payable in
quarterly principal installments of
$169 including interest at 10.0%,
principal due and payable
March and July 2001 1,892 2,351
Fixture loans and other 2,245 2,094
32,724 31,933
Less current portion 2,641 2,072
$30,083 $29,861
The mortgage loan payable to financial institution with
an outstanding balance of $5,286,000 at January 31,
1998 consists of amounts advanced to the Company under
a seven-year financing arrangement with Heller
Financial, Inc. ("Heller") entered into on October 2,
1996, providing for the mortgage of its department
store in San Luis Obispo, California. The Company
received $3,000,000 of the total $6,000,000 arrangement
in October 1996, and received the remaining $3,000,000
in March 1997.
Federated Department Stores, Inc. financed the
Company's acquisition of certain fixtures and
equipment located in the Broadway store
locations that were assumed by the Company
during fiscal 1996. (See Note 5).
The scheduled annual principal maturities on
notes payable and mortgage loans are $2,641,000,
$2,790,000, $2,883,000, $2,510,000 and
$1,395,000 for 1998 through 2002.
Debt issuance costs related to the Company's
various financing arrangements are included in
other current and long-term assets and are
deferred and charged to operations as additional
interest expense on a straight-line basis over
the life of the related indebtedness. Deferred
debt issuance costs, net of accumulated
amortization, amounted to $1,734,000 at January
31, 1998 and $2,260,000 at February 1, 1997.
Interest paid, net of amounts capitalized, was
$10,302,000, $11,059,000 and $10,927,000 in
1997, 1996 and 1995, respectively. Capitalized
interest expense was $114,000, $37,000 and
$278,000 in 1997, 1996 and 1995, respectively.
The weighted-average interest rate charged on
the Company's various revolving line of credit
arrangements was 8.16% in 1997, 8.62% in 1996
and 8.75% in 1995.
Certain of the Company's long-term financing
arrangements include various restrictive
covenants. The Company was in compliance with
such covenants as of January 31, 1998.
5. LEASES
The Company leases certain retail department
stores under capital leases that expire in
various years through 2020. The Company also
leases certain retail department stores,
specialty stores, land, furniture, fixtures and
equipment under 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 in excess of specified
minimum levels, 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.
Certain of the Company's operating leases also
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 expense charged
to operations and amounts payable under the
leases as deferred lease payments. Deferred
lease payments totaled $6,463,000 at January 31,
1998 and $6,157,000 at February 1, 1997.
Future minimum lease payments, by year and in
the aggregate, under capital leases and
noncancellable operating leases with initial or
remaining terms of one year or more consist of
the following at January 31, 1998:
Capital Operating
(In thousands of dollars) Leases Leases
1998 $ 2,070 $ 15,360
1999 2,070 16,567
2000 1,730 14,579
2001 752 14,023
2002 752 13,901
Thereafter 6,894 133,578
Total minimum
lease payments 14,268 $208,008
Amount representing
interest (5,622)
Present value of
minimum lease
payments 8,646
Less current portion (1,309)
$ 7,337
Rental expense consists of the following:
(In thousands of dollars) 1997 1996 1995
Operating leases:
Buildings:
Minimum rentals $13,099 $11,897 $ 9,796
Contingent rentals 1,911 2,213 2,315
Fixtures and equipment 4,358 5,439 4,679
$19,368 $19,549 $16,790
One of the Company's lease agreements contains a
restrictive covenant pertaining to the debt to
tangible net worth ratio with which the Company
was in compliance at January 31, 1998.
In 1996, the Company entered into agreements
with Broadway Stores, Inc. ("Broadway"), a
wholly-owned subsidiary of Federated Department
Stores, Inc., and the respective landlords,
whereby the Company vacated its original
location in the Modesto, California Vintage
Faire Mall and sub-leased the Broadway's former
store in that mall for the remaining twelve
years of the Broadway lease. The Company also
vacated its original location in the Fresno,
California Fashion Fair Mall and reopened a
store in that mall under a new 20-year lease in
the former Broadway store location. The Company
recognized a pre-tax gain of $1,344,000 upon the
termination of the original leases, which were
accounted for as capital leases by the Company,
representing the difference between the capital
lease obligations and the net book value of the
related assets recorded under the capital
leases, and such gain is included in
miscellaneous income for the year ended February
1, 1997. The new leases have been accounted for
as operating leases for financial reporting
purposes.
Lease Incentive.
The Company received $4,000,000 in 1995 as an
incentive to enter into a lease in connection
with one of the fiscal 1995 new store openings.
The $4,000,000 received was deferred for
financial reporting purposes and is being
amortized into operations over the ten-year
minimum lease period. The deferred lease
incentive, net of accumulated amortization,
amounted to $3,130,000 at January 31, 1998 and
$3,731,000 at February 1, 1997.
Sale and Leaseback Arrangement.
In 1995, the Company sold the land, building and
leasehold improvements comprising its department
store in Capitola, California and subsequently
leased the department store back under a twenty-year
lease with four five-year renewal options.
The lease has been accounted for as an operating
lease for financial reporting purposes. The $11,600,000
proceeds received from the sale were used to reduce
previously outstanding borrowings.
6. INCOME TAXES
The components of income tax expense (benefit)
are as follows:
(In thousands of dollars) 1997 1996 1995
Current:
Federal 92 $ 375 $(1,678)
State 8 464 2
100 839 (1,676)
Deferred:
Federal 1,976 704 (857)
State 581 (285) (439)
2,557 419 (1,296)
$2,657 $1,258 $(2,972)
The principal components of deferred tax assets and
liabilities (in thousands of dollars) are as follows:
January 31, February 1,
1998 1997
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
Current:
Vacation accrual and
employee vacation
benefits $ 689 $ 467
Credit losses 572 566
Accrued employee
benefits 353 257
State income taxes 332 124
LIFO inventory reserve $ (2,942) $ (2,841)
Accelerated tax deduction
for workers' compensation
insurance premiums (574) 17
Supplies inventory (1,429) (951)
Gain deferred for tax
related to adoption
Of SFAS No. 125 (450)
Other items, net 803 (1,137) 875 (668)
2,749 (6,532) 2,306 (4,460)
Long-Term:
Net operating loss
carryforwards 4,541 4,674
General business
credits 2,034 1,985
Alternative minimum
tax credits 777 510
Depreciation expense (8,503) (8,143)
Accounting for leases 913 (3,408) 915 (3,433)
Deferred income 1,699 (1,958) 1,988 (1,746)
Other items, net 567 (454) 697 (311)
10,531 (14,323) 10,769 (13,633)
$13,280 $(20,855) $13,075 $(18,093)
Income tax expense (benefit) varies from the amount
computed by applying the statutory federal income tax
rate to the income (loss) before income taxes. The
reasons for this difference are as follows:
1997 1996 1995
Statutory rate 35.0% 35.0% (35.0)%
State income taxes,
net of federal income
tax benefit 5.9 5.7 (2.7)
Amortization of goodwill .6 1.3 .5
General business credit (1.2)
Nondeductible penalties .3
Other items, net 1.3 (1.3) 2.4
Effective rate 41.6% 40.7% (34.5)%
The Company received income tax refunds, net of
payments, of $195,000 in 1997 and $3,399,000 in
1996. There were no income tax refunds
receivable at January 31, 1998 or February 1,
1997. At January 31, 1998, the Company has, for
federal tax purposes, net operating loss
carryforwards of $11,400,000 which expire in the
years 2009 through 2012, general business
credits of $1,018,000 which expire in the years
2008 through 2011, and alternative minimum tax
credits of $610,000 which may be used for an
indefinite period. At January 31, 1998, the
Company has, for state tax purposes, net
operating loss carryforwards of $7,400,000 which
expire in the years 1999 through 2002,
enterprise zone credits of $1,015,000 which
expire in the years 2005 through 2013, and
alternative minimum tax credits of $166,000
which may be used for an indefinite period.
These carryforwards are available to offset
future taxable income and are expected to be
fully utilized.
7. STOCK OPTION PLANS
The Company's stock option plans consist of the
following:
The 1986 Plans:
The 1986 Employee Incentive Stock Option Plan
(the "1986 ISO Plan") provided for the grant of
options to three key officers of the Company to
purchase up to 160,000 shares of the Company's
common stock at a price equal to 100% or 110% of
the market value of the common stock on the date
of grant. All options under the 1986 ISO Plan
were to have been exercised within five years of
the date of the grant. All unexercised options
under the 1986 ISO Plan expired as of the year
ended February 3, 1996.
The 1986 Employee Nonqualified Stock Option Plan
(the "1986 Nonqualified Plan") provided for the
grant of options to purchase up to 510,000
shares of the Company's common stock to certain
officers and key employees of the Company.
Options granted under this plan generally became
exercisable at a rate of 25% per year beginning
on or one year after the grant date. The options
were exercisable on a cumulative basis and
expired no later than four or five years from
the date of grant. Substantially all of the
options under this plan were granted at a price
below the fair market value of the stock on the
date of the grant, however, such options had
expired by the end of fiscal 1995. The Company
recognized compensation benefit related to this
plan of $170,000 in 1995. The benefit resulted
from the reversal of previously recognized
compensation expense upon the forfeiture or
expiration of unexercised options. No
compensation benefit or expense related to this
plan was recognized in 1997 or 1996.
No new grants may be make under either of the
1986 Plans.
The 1994 Plans:
The 1994 Key Employee Incentive Stock Option
Plan (the "1994 ISO Plan") provides for the
grant of options to purchase up to 500,000
shares of the Company's common stock to certain
officers and key employees of the Company.
Options granted under this plan may not be
granted at less than 100% of the fair market
value of such shares on the date the option is
granted and become exercisable at a rate of 25%
per year beginning one year after the date of
the grant. The options are exercisable on a
cumulative basis and expire no later than ten
years after the date of the grant.
The 1994 Director Nonqualified Stock Option Plan
(the "1994 Director Nonqualified Plan") provides
for the grant of options to purchase up to
50,000 shares of the Company's common stock to
certain directors of the Company. Options
granted under this plan shall be granted at the
fair market value of such shares on the date the
option is granted and become exercisable at a
rate of 25% per year beginning one year after
the date of the grant. The options are
exercisable on a cumulative basis and expire no
later than ten years after the date of the
grant.
Option activity under the plans is as follows:
Weighted-
Average
Number of Exercise
Shares Price
Outstanding, January 28, 1995
(179,746 exercisable at a weighted-
average price of $12.81) 643,746 $10.74
Granted (weighted-average fair value
of $4.08) 28,000 6.63
Canceled (191,746) 12.63
Outstanding, February 3, 1996
(133,000 exercisable at a weighted-
average price of $9.93) 480,000 9.74
Granted (weighted-average fair value
of $3.54) 45,000 5.75
Canceled (34,000) 9.88
Outstanding, February 1, 1997
(236,000 exercisable at a weighted-
average price of $9.84) 491,000 9.37
Granted (weighted-average fair value
of $4.26) 62,000 6.94
Exercised (5,500) 6.55
Canceled (78,500) 9.46
Outstanding, January 31, 1998
(283,500 exercisable at a weighted-
average price of $9.72) 469,000 $9.06
Additional information regarding options
outstanding as of January 31, 1998 is as follows:
Options Outstanding Options Exercisable
Weighted-Avg.
Remaining
Range of Number Contractual Weighted-Avg. Number Exercise
Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price
$5.38 to $10.87 469,000 6.8 yrs. $9.06 283,500 $9.72
At January 31, 1998, 45,500 and 30,000 shares were
available for future grants under the 1994 ISO Plan and
the 1994 Director Nonqualified Plan, respectively.
Additional Stock Plan Information.
As described in Note 1, the Company continues to
account for its stock-based awards using the
intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees", and its related
interpretations. Accordingly, with the exception
of the compensation benefit recognized in fiscal
1995 in connection with the Company's 1986 Plan,
no compensation expense has been recognized in
the financial statements for employee stock
arrangements.
SFAS No. 123 "Accounting for Stock-Based
Compensation", requires the disclosure of pro-forma
net income (loss) and earnings (loss) per
share had the Company adopted the fair value
method as of the beginning of fiscal 1995.
Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the
use of option pricing models, even though such
models were developed to estimate the fair value
of freely tradable, fully transferable options
without vesting restrictions, which
significantly differ from the Company's stock
option awards. These models also require
subjective assumptions, including future stock
price volatility and expected time to exercise,
which greatly affect the calculated values. The
Company's calculations were made using the
Black-Scholes option pricing model with the
following weighted-average assumptions:
expected life, 5 years; stock volatility, 51.09%
in 1997 and 49.74% in 1996 and 1995; risk-free
interest rates, 5.41% in 1997 and 6.30% in 1996
and 1995; and no dividends during the expected
term. The Company's calculations are based on a
multiple option valuation approach and
forfeitures are recognized as they occur. Pro-forma
net income (loss) and earnings (loss) per
share, had the computed fair values of the 1997,
1996 and 1995 awards been amortized to expense
over the vesting period of the awards, would
have been $3,693,000, or $.35 per share in 1997
and $1,816,000, or $.17 per share in 1996. There
would have been no impact in 1995. The impact of
outstanding non-vested stock options granted
prior to 1995 has been excluded from the pro-forma
calculation; accordingly, the 1997, 1996
and 1995 pro-forma adjustments are not
indicative of future period pro-forma
adjustments, when the calculation will apply to
all applicable stock options.
8. EMPLOYEE BENEFIT PLANS
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. Under the Plan,
employees currently may elect to have up to 15%
of their annual eligible compensation, subject
to certain limitations, deferred and deposited
with a qualified trustee. During fiscal 1997,
the Company revised its discretionary
contribution policy for the Plan such that
contributions are now made on a quarterly basis
of up to 3% of a participants' quarterly
eligible compensation, with the ability to
receive an additional contribution of up to 1%
of annual eligible compensation, depending on
the Company's quarterly and annual financial
performance during those periods. Prior to
fiscal 1997, the Company, at the discretion of
the Board of Directors, could elect to make an
annual discretionary contribution to the Plan of
up to 2% of each participant's annual eligible
compensation. Participants are immediately
vested in their voluntary contributions to the
Plan and are 100% vested (25% per year) in the
Company's matching contribution to the Plan
after four years of continuous service. The
Company recognized $749,000, $275,000 and
$500,000 in expense representing the Company's
annual contribution to the Plan in 1997, 1996
and 1995, respectively. The Company contributed
cash to the Plan in fiscal 1997, with which the
Plan subsequently purchased common stock of the
Company to distribute to the participants. The
Company contributed common stock of the Company
directly to the Plan in 1996 and 1995.
A Voluntary Employee Beneficiary Association
("VEBA") trust has been established by the
Company for the purpose of funding employee
vacation benefits.
9. ACQUISITION RELATED EXPENSES
On July 3, 1997, the Company entered into a non-binding
letter of intent with El Corte Ingles
("ECI"), of Spain, and The Harris Company
("Harris" ). The letter of intent contemplated the
purchase of all of the common stock of
Harris, a wholly-owned subsidiary of ECI, which
currently operates nine department stores
located throughout Southern California. The parties
were unable to agree on the terms of the
transaction and terminated negotiations in
October 1997. The Company incurred various non-recurring
costs in connection with the proposed
acquisition, consisting primarily of investment
banking, legal and accounting fees. Such costs,
totaling $673,000, are classified as acquisition
related expenses in the accompanying 1997
statement of operations.
10. COMMITMENTS AND CONTINGENCIES
The Company received $3,300,000 in 1996 in
connection with the filing of certain amended
income tax returns. The Internal Revenue Service
has preliminarily disallowed deductions taken on
these returns. The Company intends to pursue the
matter in court and contest the matter
vigorously. While it is currently impossible to
determine the final disposition of this matter,
management does not believe that its ultimate
resolution will have a material adverse effect
on the financial position or results of
operations of the Company.
In addition to the matter described above, the
Company is party to legal proceedings and
claims which arise during the ordinary course of
business. In the opinion of management, the ultimate
outcome of such litigation and claims
will not 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
pursuant to certain factor and vendor contracts.
As of January 31, 1998, the Company had outstanding
letters of credit amounting to
$2,877,000. Management believes the likelihood
of non-performance under such contracts is
remote.
The Company has entered into an agreement to
open one new department store in the second half
of fiscal 1998 and is in process of remodeling
certain existing store locations. The estimated
cost of such projects is $15,482,000. Such
projects are expected to be fully complete in
fiscal 1998, however, there can be no assurance
that the completion of such projects will not be
delayed subject to a variety of conditions
precedent or other factors.
11. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following is a summary of the unaudited
quarterly results of operations for 1997 and
1996 (in thousands, except per share data):
1997
Quarter Ended May 3 August 2 November 1 January 31
Net sales $90,506 $99,997 $101,466 $156,223
Gross profit 28,510 32,279 32,871 49,974
Income (loss) before
income tax expense
(benefit) (1,673) (422) (2,516) 10,998
Net income (loss) (987) (248) (1,485) 6,450
Net income (loss)
per common share -
basic and diluted (.09) (.02) (.14) .62
1996
Quarter Ended May 4 August 3 November 2 February 1
Net sales $85,560 $95,675 $95,675 $145,249
Gross profit 26,830 30,392 30,719 47,054
Income (loss) before
income tax expense
(benefit) (2,099) (1,245) (2,430) 8,866
Net income (loss) (1,322) ( 785) (1,530) 5,471
Net income (loss)
per common share -
basic and diluted (.13) (.07) (.15) .52
The Company's quarterly results of operations
for the three month period ended January 31,
1998 includes a credit of $898,000 related to a
change in estimate for the allowance for
doubtful accounts related to receivables which
were ineligible for sale. (See Note 2.) The
quarterly results of operations for the three
month periods ended January 31, 1998 and
February 1, 1997 also include adjustments to the
inventory shrinkage reserve resulting in an
increase to the gross margin of $637,000 and
$795,000, respectively.
**********
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC. AND SUBSIDIARY
_______________________________________________________________________________
COL. A COL. B COL. C 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 January 31, 1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts.. $1,322,107 $2,704,104(1) $( 898,000)(2) $(2,691,032)(3) $ 437,179
Allowance for
vendor claims
receivable $ 80,000 $ $ 80,000
Allowance for notes
receivable $ -0- $ $ -0-
Year ended February 1, 1997:
Deducted from asset
accounts:
Allowance for
doubtful
accounts. $1,261,983 $2,730,502 (1) $(2,670,378)(3) $1,322,107
Allowance for vendor
claims
receivable $ 90,000 $ (10,000)(5) $ 80,000
Allowance for notes
receivable.$ 282,767 $ (282,767)(6) $ -0-
Year ended February 3, 1996:
Deducted from asset
accounts:
Allowance for
doubtful
accounts.. $1,297,231 $2,462,504 (1) $(2,497,752)(3) $1,261,983
Allowance for vendor
claims
receivable $ 98,000 $ (8,000)(5) $ 90,000
Allowance for notes
receivable.$ 150,000 $ 132,767 (4) $ 282,767
Notes:
(1) Provision for loss on credit sales.
(2) Represents a change in estimate for the
allowance for doubtful accounts related to
receivables which were ineligible for sale. (See
Note 2 to the Consolidated Financial
Statements.) This amount is included in net
credit revenues in the fiscal 1997 statement of
operations.
(3) Uncollectible accounts written off, net of
recoveries.
(4) Provision for uncollectible portion of note
receivable.
(5) Reduction in provision for uncollectible vendor
claims receivable.
(6) Reversal of uncollectible portion of note
receivable recorded in connection with
transferring related asset to a held for sale
classification during the year ended
February 1, 1997.
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: March 20, 1998
GOTTSCHALKS INC.
By: \s\ Joseph W. Levy
Joseph W. Levy
Chairman 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
Chairman and Chief
Executive Officer
(principal executive
\s\ Joseph W. Levy officer) March 20, 1998
Joseph W. Levy
Vice Chairman of
\s\ Gerald H. Blum the Board March 20, 1998
Gerald H. Blum
President and Chief
\s\ James R. Famalette Operating Officer March 20, 1998
James R. Famalette
Senior Vice President
and Chief Financial
\s\ Alan A. Weinstein Officer (principal
Alan A. Weinstein finanical and
accounting officer) March 20, 1998
\s\ O. James Woodward III Director March 20, 1998
O. James Woodward III
\s\ Bret W. Levy Director March 20, 1998
Bret W. Levy
\s\ Sharon Levy Director March 20, 1998
Sharon Levy
\s\ Joseph J. Penbera Director March 20, 1998
Joseph J. Penbera
\s\ Fred Ruiz Director March 20, 1998
Fred Ruiz
\s\ Max Gutmann Director March 20, 1998
Max Gutmann