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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 30, 1999
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) 434-4800
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 March 31, 1999:
Common Stock, $.01 par value: $51,061,000
On March 31, 1999 the Registrant had outstanding 12,575,565 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 24, 1999, which will be filed
pursuant to Regulation 14A, are incorporated by reference into
Part III of this Form 10-K.
INDEX
PART I
Page No.
Item 1. Business........................ 1
Item 2. Properties...................... 24
Item 3. Legal Proceedings............... 28
Item 4. Submission of Matters to a Vote of
Security Holders................ 28
PART II
Item 5. Market for Registrant's Common
Stock and Related Stockholder
Matters......................... 28
Item 6. Selected Financial Data......... 29
Item 7. Management's Discussion and Analysis
of Results of Operations and Financial
Condition....................... 33
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk... 50
Item 8. Financial Statements and
Supplementary Data.............. 50
Item 9. Changes in and Disagreements with
Accountants on Auditing and
Financial Disclosures........... 50
PART III
Item 10. Directors and Executive Officers
of the Registrant............... 51
Item 11. Executive Compensation.......... 53
Item 12. Security Ownership of Certain
Beneficial Owners and Management. 53
Item 13. Certain Relationships and
Related Transactions............ 53
PART IV
Item 14. Exhibits, Financial Statement
Schedule and Reports on Form 8-K. 53
Signatures................................. 90
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc. is a regional department and specialty store
chain based in Fresno, California. The Company currently operates forty full-
line department stores, including thirty Gottschalks' stores located
throughout California, and in Oregon, Washington and Nevada, and ten
"Harris/Gottschalks" stores located in the Southern California area. The
Company also operates twenty-two "Gottschalks" and "Village East" specialty
stores which carry a limited selection of merchandise. On August 20, 1998,
the Company acquired nine of the stores now operated under the
"Harris/Gottschalks" nameplate (closing one of the acquired stores on
January 31, 1999, as planned) from The Harris Company ("Harris") of San
Bernardino, California. In fiscal 1998, the Company's sales, which include
sales applicable to the Harris/Gottschalks locations after August 20, 1998,
exceeded a half-a-billion dollars for the first time in the Company's
history. Fiscal 1998 sales totaled $517.1 million, a 15.4% increase from
fiscal 1997 sales of $448.2 million. Total department store sales comprised
96.5%, and specialty store sales comprised 3.5%, of fiscal 1998 sales.
Gottschalks and Harris/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, shoes, fine jewelry and accessories; home furnishings including
china, housewares, domestics, electronics (in ten locations) and small
electric appliances; and other consumer goods. The Company's stores also
carry private-label merchandise and a mix of higher and budget priced
merchandise. The Company's department stores are generally anchor tenants of
regional shopping malls. Village East specialty stores, which offer apparel
for larger women, are located in the same mall in which a Company department
store is located, or as a separate department within some of the Company's
larger 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.
The Company has operated continuously for over 94 years since it
was founded by Emil Gottschalk in 1904. The Company did its initial public
offering of stock in 1986, and most of its growth has occurred since then.
Gottschalks Inc. includes the accounts of its wholly-owned
subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"). GCRC is a
qualified special purpose entity which was formed in 1994 in connection with
a receivables securitization program. (See Note 3 to the Consolidated
Financial Statements and Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".)
BUSINESS ACQUISITION
On August 20, 1998, the Company acquired substantially all the
assets and business of Harris, a wholly-owned subsidiary of El Corte Ingles
("ECI") of Spain. Harris operated nine full-line department stores located
in the Southern California area. The assets acquired consisted primarily of
merchandise inventories, customer credit card receivables, fixtures and
equipment and certain intangibles. The Company also assumed certain
liabilities relating to the business, including vendor payables, store
leases and certain other contracts. The purchase price for the assets was
2,095,900 shares of common stock of the Company and a $22.2 million 8%
Subordinated Note due August 20, 2003. As planned, the Company closed one of
the acquired stores on January 31, 1999.
Management believes the primary benefits of the acquisition are:
(1) the addition of approximately $90.0 million of annual sales volume to
further leverage Gottschalks' overhead; (2) the elimination of certain
duplicative corporate and distribution functions of Harris; (3) increased
purchasing power in areas such as merchandising, advertising, supplies and
insurance; (4) the acquisition of a profitable shoe division operated by
Harris; (5) the potential to more fully develop Harris' home divisions,
which management believes are under-penetrated in the Company's market
areas; and (6) the addition of more than 100,000 active proprietary credit
card customers.
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, and to
complement the branded merchandise with a mixture of private-label and other
higher and budget priced merchandise. Brand-name apparel, shoe, cosmetic and
accessory lines carried by the Company include Estee Lauder, Lancome,
Clinique, Dooney & Bourke, Nine West, 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
for the home includes Sony, Mitsubuishi, Lenox, Krups, Calphalon, Royal
Velvet, KitchenAid and Samsonite. Certain of the Company's stores also carry
apparel lines desired by the Company's more affluent customers, including
St. John Knits, Dana Buchman, Ellen Tracy and Ralph Lauren (Polo). In the
Company's stores, brand-name merchandise is prominently displayed, in many
cases with vendor supplied fixtures and signage. The Company's merchandising
activities are conducted centrally from its corporate offices in Fresno,
California.
The Company's merchandising strategy also continues to focus on
reallocating selling floor space to higher profit margin items, such as
shoes, and shifting its merchandise mix to a higher proportion of better
brands. For example, during fiscal 1998, the Company reduced the number of
stores that carry electronics, traditionally a lower gross margin line of
business, and intends to discontinue carrying electronics in its stores by
the end of fiscal 1999. In fiscal 1999, the Company will assume the
operation of its shoe division, which is currently operated by an outside
company as a leased department (in Gottschalks locations). In fiscal 1999,
the Company also plans to expand and remodel the shoe departments in certain
of its stores. The Company's merchandising strategy also continues to focus
on serving particular market segments experiencing increasing growth in its
market areas, including the "55 Plus" age group and the Hispanic population.
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:
1998 1997 1996 1995 1994
Softlines:
Cosmetics & Accessories... 18.2% 17.8% 17.5% 17.2% 16.6%
Women's Clothing.......... 16.8 16.8 15.9 15.5 16.1
Men's Clothing............ 14.0 14.0 14.4 14.3 13.9
Women's Dresses, Coats
& Lingerie.............. 7.7 7.9 7.9 7.8 7.9
Shoes, Fine Jewelry & Other
Leased Departments (1).. 7.7 7.8 7.8 7.4 7.1
Junior's Clothing......... 4.6 5.2 5.5 6.0 6.3
Children's Clothing....... 5.5 5.3 5.3 4.9 4.9
Village East.............. 2.5 2.5 2.5 2.6 2.6
Shoes (2)................. 0.8
---- ---- ---- ---- ----
Total Softlines........ 77.8 77.3 76.8 75.7 75.4
Hardlines:
Housewares................ 10.7 10.6 10.4 11.0 10.9
Domestics & Luggage....... 7.8 8.1 7.9 8.1 8.1
Electronics & Furniture... 3.7 4.0 4.9 5.2 5.6
---- ---- ---- ---- ----
Total Hardlines........ 22.2 22.7 23.2 24.3 24.6
---- ---- ---- ---- ----
Total Sales (3)........... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- ---------------------
(1) The Company currently leases the fine jewelry, shoe (in
thirty-one of its stores as of January 30, 1999) and maternity
wear departments, custom drapery, restaurants and the beauty
salons in its department stores. The shoe department lease has
been terminated effective mid-fiscal 1999.
(2) The Company currently operates the shoe departments in
the Harris/Gottschalks locations. Upon terminating the shoe
department lease in mid-fiscal 1999, the Company will operate the
shoe department in all of its locations.
(3) Fiscal 1998 amounts include sales applicable to the
Harris/Gottschalks stores starting August 20, 1998. Fiscal 1997
and prior amounts presented reflect Gottschalks sales only and do
not reflect amounts applicable to Harris.
The Company is a member of Frederick Atkins, Inc. ("Frederick
Atkins"), a national association of major retailers which provides its
members with group purchasing opportunities. 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 other members of the
organization. Substantially all of the Company's private-label merchandise
is currently purchased through Frederick Atkins. The Company also purchases
merchandise from numerous other suppliers, none of which accounted for more
than 5% of the Company's net purchases in fiscal 1998.
Store Location and Expansion Strategy. The Company's stores are
located primarily in diverse, growing, non-major metropolitan areas in the
western United States. 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 where there is a strong
demand and fewer competitors offering such merchandise. The Company has
historically avoided expansion into major metropolitan areas which are well
served by the Company's larger competitors. Some of the Company's stores are
located in agricultural areas and cater to mature customers with above
average levels of disposable income. The Company's department stores are
generally anchor tenants of regional shopping malls, with the majority of
its stores ranging in size from 50,000 to 150,000 gross square feet. Other
anchor tenants in the malls generally complement the Company's goods with a
mixture of competing and non-competing merchandise, and serve to increase
customer foot traffic within the mall.
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 expansion strategy,
the Company may also pursue selective strategic acquisitions. The Company
has continued to invest in the renovation and refixturing of its existing
store locations in an attempt to maintain and improve market share in those
market areas. Store renovation projects can range from updating decor and
improving in-store lighting, fixturing, wall merchandising and signage, to
more extensive remodeling and expansion projects. The Company sometimes
receives reimbursement 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. Such contributions have enhanced the
Company's ability to enter into attractive market areas that are consistent
with the Company's long-term expansion plans.
The following table presents selected data related to the
Company's stores for the fiscal years indicated:
Stores open at
year-end: 1998 1997 1996 1995 1994
Department stores 40 (1) 34 32 31 26
Specialty stores 22 (2) 25 27 29 27
-- -- -- -- --
TOTAL 62 59 59 60 53
== == == == ==
Gross store square
footage (in thousands):
Department
stores 4,301 3,391 3,175 2,878 2,327
Specialty stores 83 94 101 106 98
== == === === ==
TOTAL 4,384 3,485 3,276 2,984 2,425
===== ===== ===== ===== =====
- ---------------------------
(1) The Company acquired nine stores from Harris in August 1998,
closing one of the stores acquired on January 31, 1999. Two of the
stores acquired are located in malls with pre-existing Gottschalks
locations. The Company combines separate locations within the same
mall for the purpose of determining the total number of stores
being operated, resulting in a net addition of six department
stores in fiscal 1998.
(2) The Company has continued to close certain free-
standing Village East stores as their leases expire and
incorporate those stores into nearby larger Company department
stores as separate departments. Sales generated by these
departments are combined with total specialty store sales for
reporting purposes.
As of the end of fiscal 1999, the Company operated thirty-six
department stores in California, two in Nevada and one each in Oregon and
Washington. The Company's stores range in size from 25,000 to over 200,000
gross square feet. Management believes the Company has a competitive
advantage in being able to accommodate diverse locations into its operation
that may not be desired by its larger competitors that adopt a more
standardized approach to expansion. Following is a summary of the Company's
department store locations, by store size:
# of
stores
open
Larger than 200,000 gross square feet 3
150,000 - 199,000 gross square feet 7
100,000 - 149,999 gross square feet 8
50,000 - 99,000 gross square feet 19
25,000 - 49,000 gross square feet 3
--
TOTAL 40
==
See Part I, Item 2, "Properties--Store Leases and Locations" for additional
information related to the Company's store locations.
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'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 as a means to improve 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
customers. 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 fiscal 1998, the Company
completed the installation of a new targeted marketing system through which
the Company is now able to analyze the purchasing patterns of third party
bank card users and, for the first time, direct targeted marketing
activities at those customers. (See Part I, Item I, "Business--Private-Label
Credit Card")
In addition to targeted advertising efforts, the Company also uses
a variety of other marketing formats in its sales promotion strategy. One of
the Company's most significant recent marketing efforts is the inception of
"Emil's Market", named after the Company's founder, Emil Gottschalk. Emil's
Market, introduced in the Company's stores in fiscal 1998, is a complete
marketing strategy for the Company's housewares division, intended to
present houseware products in a specialty store format within the main
department store using a consistent theme with visual presentation,
advertising and packaging. A portion of the initial funding for the project
and certain annual recurring costs are paid by participating vendors. In
fiscal 1998, the Company also launched its new "KidZone" program for the
children's division and the new "Get It" program for the junior's and young
men's divisions, through which members receive additional discounts and
special services. The primary objectives of these programs are to improve
customer loyalty and increase sales in these divisions.
The Company offers selected merchandise, a complete Bridal
Registry service, and other general corporate information on the World Wide
Web at http://www.gottschalks.com. The Company also sells merchandise
through its mail order department. 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 "Gottschalks Rewards"
program. (See Part I, Item I, "Business--Private-Label Credit Card.")
Customer Service. Management believes one way the Company can
differentiate itself from its competitors is to provide a consistently high
level of customer service. The Company has a "Four Star" customer service
program, designed to continually emphasize and reward high standards of
customer service in the Company's stores. Sales associates are encouraged to
keep notebooks of customers' names, clothing sizes, birthdays, and major
purchases, to telephone customers about promotional sales and send thank-you
notes and other greetings to their customers during their normal working
hours. The "Four Star" customer service program also emphasizes sales
associate and store management training. Product seminars and other training
programs are frequently conducted in the Company's stores and its corporate
headquarters to ensure that sales associates will be able to provide useful
product information to customers. The Company also offers opportunities for
management training and leadership classes for those associates identified
for promotion within the Company. Various financial incentives are offered
to the Company's sales associates to reward reaching sales performance
goals.
In addition to providing a high level of personal sales
assistance, management believes that well-stocked stores, a liberal return
and exchange policy, frequent sales promotions and a conveniently located
and attractive shopping environment enhance the customer's shopping
experience and increase customer loyalty. Management also believes that
maintaining appropriate staffing levels in its stores, particularly at peak
selling periods, is essential for providing a high level of customer
service. In fiscal 1999, the Company expects to implement a new labor
scheduling system, through which management believes it will be able to more
efficiently match staffing levels to projected sales, thereby improving
customer service and maximizing the return on its store payroll
expenditures.
Distribution of Merchandise. The Company's 420,000 square foot
distribution center is centrally located in Madera, California and serves
all of the Company's store locations, including its store locations outside
California. Completed in 1989, the distribution center presently has the
capacity to process merchandise for up to seventy-five department store
locations, and the capacity may be expanded beyond that amount. The Company
receives substantially all of its merchandise at the distribution center and
makes daily distributions to the stores.
The Company has continued to focus on the adoption of new
technology and operational best practices at its distribution center with
the goals of receiving, processing and distributing merchandise to stores at
a faster rate and at a lower cost per unit. In fiscal 1998, the Company
completed the implementation of a new logistical system at its distribution
center, which is the same system that many of the Company's larger
competitors have also put into place. The new system enables the Company to
minimize the manual handling of a large percentage of incoming merchandise
and provides for the processing of such merchandise through the distribution
center and to the stores in minutes and hours as compared to several days in
the past. Currently, approximately 50% of merchandise is purchased from
vendors which 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. These vendors
also ship only "floor-ready" merchandise which arrives on approved hangers
pre-tagged with universal product code ("UPC") tickets, a bar coded price
label containing retail prices that can be electronically translated into
the Company's inventory systems.
The Company also has formal guidelines for vendors with respect to
shipping, receiving and invoicing for merchandise under its "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 instance of non-compliance. Such fees are
intended to offset higher costs associated with the processing of such
merchandise. Vendors can obtain the Company's shipping guidelines through
the Company's Web site.
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. 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 its customer credit card
receivables on an ongoing basis in connection with a receivables
securitization program. The Company has continued to service and administer
the receivables under the program.
The following represents a summary of information related to the
Company's credit card receivable portfolio for the fiscal years indicated:
1998 1997 1996 1995 1994
(In thousands of dollars, except selected data)
Average credit
card receivables
serviced (1) $69,143 $64,612 $64,162 $62,492 $57,613
Service charge
income 13,431 11,618 10,493 10,937 8,904
Credit sales as a
% of total
sales (2) 43.1% 43.7% 43.1% 43.6% 42.2%
# of days credit
sales in
receivables (3) 115.6 119.3 123.7 127.5 146.2
_______________________
(1) Includes receivables sold, the retained
interest in receivables sold, and other
receivables, which are all serviced
by the Company.
(2) The decrease in credit sales as a percentage of total sales
in fiscal 1998 is primarily due to the new Harris/Gottschalks
locations, which generally have a lower credit sales
volume than that of the rest of the Company.
(3) Excludes receivables acquired from Harris on August 20, 1998.
The Company has a variety of credit-related programs which
management believes have improved customer service and have increased
service charge revenues. Such programs include:
- an "Instant Credit" program, through which successful credit
applicants receive a discount ranging from 10% to 50%
(depending on the results of the Instant Credit scratch-off
card) on the first 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;
- "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;
- 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; and
- Ongoing credit card reactivation programs designed to
recapture credit cardholders who have not utilized their
credit card for a specified period of time.
The Company had approximately 589,000 active credit card holders
as of February 28, 1999 as compared to 460,000 as of February 28, 1998. This
increase is primarily due to the acquisition of approximately 100,000 credit
card accounts from Harris in August 1998. 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 processes, and enhances the Company's ability to provide
customer service. 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 credit management and advanced call management
systems for direct marketing and 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. 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%, and
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 increase the profitability of the Company. The
Company's information systems include IBM mainframe technology, supplemented
by applications on client servers, mid-range and personal computers
connected through a local area network. All of the Company's transaction
processing and reporting activities are computerized, including its sales,
inventory, credit, accounts payable, payroll and financial reporting
systems. 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 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 gross margin improvement 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 decreasing from approximately 1.4% in fiscal 1994 and 1.3% in
fiscal 1995 to approximately 1.1% of net sales in fiscal 1996, 1997 and
1998.
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 system, upgraded in fiscal
1998, has enhanced the Company's ability to allocate merchandise to stores
more efficiently and make prompt reordering and pricing decisions. The
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 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 entry and electronic
invoicing. Such systems have automated certain processes associated with the
purchasing and payment for merchandise.
Management is also focused on improving systems as a means to
reduce operating costs and improve efficiencies throughout the Company.
Recent system implementations include the previously described logistical
system installed at the Company's distribution center, which has resulted in
lower distribution center payroll and other overhead costs. A workflow and
imaging system was also recently installed, which has created a "paperless"
environment in the Company's accounts payables department and has automated
certain tasks that were previously manual. Efficiencies gained through this
system have enabled the department to process a significantly higher volume
of invoices and payments without increasing staffing levels. 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 and
human resources departments. In fiscal 1999, the Company expects to complete
a strategic review of its information systems and formulate a long-term
strategy for further system improvements.
The Company's Year 2000 readiness is described more fully in Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
Competition. The Company operates in a highly competitive
environment, competing with national, regional, and local chain department
and specialty stores, some of which are considerably larger and have
substantially greater financial and other resources than the Company.
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.
Increased use and acceptance of the internet and other home shopping
formats, and the trend towards consolidation of competitors within the
retail industry, have also created additional competition for the Company.
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 94 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. The Company encourages its store management and associates to
actively participate in local charitable activities.
Seasonality. 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 Easter and Back-to-School 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").
Employees. As of January 30, 1999, the Company had 6,600
employees, including 1,780 employees working part-time (less than 20 hours
per 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 competitive cost to the
employee and eligible beneficiaries and dependents. The Company has
performance-based incentive pay programs for its officers and certain of its
key employees and has stock option plans that provide for the grant of stock
options to officers and key employees of the Company. The Company's
stockholders have also approved a stock purchase plan, which is expected to
be implemented in fiscal 1999. The Company also offers management training
and leadership classes for those associates identified for promotion within
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.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain "forward-looking statements"
regarding activities, developments and conditions that the Company
anticipates may occur or exist in the future relating to things such as:
revenues and earnings;
savings or synergies from acquisitions;
future capital expenditures;
its expansion strategy (including store and department
openings);
the impact of sales promotions and customer service programs
on consumer spending;
the utilization of consumer credit programs;
its Year 2000 readiness.
Such forward-looking statements can be identified by words such as:
"believes", "anticipates", "expects", "intends", "seeks", "may", "will" and
"estimates". The Company bases its forward-looking statements on its
current views and assumptions. As a result, those statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those predicted. Some of the factors that could cause the Company's
results to differ from those predicted include the following:
RISK FACTORS
General Economic and Market Conditions. The Company's stores are
located primarily in non-major metropolitan and agricultural areas in the
western United States. A substantial portion of the stores are located in
California. The Company's success depends upon consumer spending, which may
be materially and adversely affected by any of the following events or
conditions:
a downturn in the national economy or in the California
economy;
a downturn in the local economies where the stores are
located;
a decline in consumer confidence;
an increase in interest rates;
inflation or deflation;
consumer credit availability;
consumer debt levels;
tax rates and policy; and
unemployment trends.
Seasonality and Weather. Seasonal influences affect the Company's
sales and profits. The Company experiences its highest levels of sales and
profits during the Christmas selling months of November and December, and to
a lesser extent, during the Easter holiday and Back-to-School seasons. The
Company also has increased working capital needs prior to the Christmas
season to carry significantly higher inventory levels to meet anticipated
demands. Any substantial decrease in sales during its traditional peak
selling periods could materially adversely impact the Company's business,
financial condition and results of operations. Factors that could cause
results to vary include:
the timing and level of sales promotions;
the weather;
fashion trends;
local unemployment levels; and
the overall health of the national and local economies.
The Company depends on normal weather patterns across its markets.
Historically, unusual weather patterns have significantly impacted its
business.
Consumer Trends. The Company's success partially depends on its
ability to anticipate and respond to changing consumer preferences and
fashion trends in a timely manner. However, it is difficult to predict what
merchandise consumers will demand, particularly merchandise that is trend
driven. Failure to accurately predict constantly changing consumer tastes,
preferences and spending patterns could adversely affect short and long term
results.
Expansion Strategy - Future Growth and Recent Acquisitions. The
Company's expansion strategy involves remodeling and expanding existing
stores and acquiring or opening new stores. Achieving such expansion plans
(including any potential acquisitions) depends upon many factors, including
the ability of the Company to:
- identify, negotiate, finance, obtain, construct, lease or
refurbish suitable store sites;
- hire, train and retain qualified personnel; and
- integrate new stores into existing information systems and
operations.
The Company also expects to achieve synergies from its recent
acquisition of the Harris stores. Achieving such synergies depends upon
many factors, including the ability of the Company to:
- leverage the additional sales volume of the Harris stores
over existing overhead;
- increase the Company's purchasing power;
- increase usage of the Company's credit card by the new
Harris customers; and
- successfully assume the operation of its shoe business.
The Company cannot guarantee that it will achieve its targets for
remodeling or expanding existing stores or for opening new stores, or that
such stores will operate profitably when opened or acquired, or that it will
achieve the expected synergies from the Harris acquisition. If the Company
fails to effectively implement its expansion strategy, it could materially
and adversely affect the Company's business, financial condition and results
of operations.
Competition. The retail business is highly competitive. The
Company's primary competitors include: national, regional and local chain
department and specialty stores, general merchandise stores, discount and
off-price retailers and outlet malls. Increased use and acceptance of the
internet and other home shopping formats also creates increased competition.
Some of these competitors offer similar or better branded merchandise and
are larger and have greater financial resources to purchase larger
quantities of merchandise at lower prices. The Company's success in
counteracting these competitive pressures depends on its ability to:
- offer merchandise which reflects the different regional
and local needs of its customers;
- differentiate and market itself as a home-town, locally-
oriented store (as opposed to its more nationally focused
competitors);
- continue to shift its merchandise mix to a higher
proportion of better branded merchandise.
- increase its buying power as a member of Fredrick Atkins; and
- accept smaller or odd-sized orders of merchandise.
Existing or new competitors, however, may begin to carry such
brand-name merchandise or increase their offering of better quality
merchandise which may negatively impact the Company's business, financial
condition and results of operations.
Vendor Relations. The Company believes its close relationship
with its key vendors enhances its ability to purchase brand-name merchandise
at competitive prices. If the Company loses key vendor support, is unable
to participate in group purchasing activities or its vendors withdraw brand-
name merchandise, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company cannot
guarantee that it will be able to acquire brand-name merchandise at
competitive prices or on competitive terms in the future.
Leverage and Restrictive Covenants. Due to the level of the
Company's indebtedness, any material adverse development affecting the
Company could significantly limit its ability to withstand competitive
pressures and adverse economic conditions, take advantage of expansion
opportunities or to meet its obligations as they become due. The Company's
existing debt imposes operating and financial restrictions that limit
the Company's ability to make dividend payments and grant liens.
Interest Rate Risk. The Company's borrowings under its revolving
line of credit facility bear a variable interest rate. If interest rates
increase, the Company's financial results could be materially adversely
affected. See Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk."
Consumer Credit Risks. The Company's private-label credit card
facilitates sales and generates additional revenue from credit card fees.
Changes in credit card use, default rates or in the laws regulating the
granting or servicing of credit (including late fees and finance charges
applied to outstanding balances) could materially adversely affect the
Company's business, financial condition and results of operations. In
addition, the Company cannot guarantee that the credit card programs it has
implemented will increase or maintain customer spending.
Securitization of Accounts Receivable. The Company securitizes
the receivables generated under its private-label credit card. Under the
securitization program, the Company transfers such receivables to a special
purpose entity which issues interests in the receivables to investors. The
Company cannot guarantee that it will continue to generate receivables by
credit card holders at the same rate, or that it will establish new credit
card accounts at the rate it has in the past. Any material decline in the
generation of receivables or in the rate of cardholder payments on accounts
could have a material adverse effect on the Company's financial condition
and results of operations.
Year 2000 Readiness. If computer hardware, software or technology
improperly function using dates after December 31, 1999, then the Company
may be adversely affected. The Company estimated its costs and completion
dates for its Year 2000 readiness based on assumptions of future events
including:
- the continued availability of internal and external
resources, such as human resources and capital;
- the ability of third parties doing business with the
Company to timely modify their computer systems; and
- the Company's contingency plans.
The Company cannot guarantee that it or the third parties it does
do business with will successfully complete the Year 2000 conversion on a
timely basis. If either the Company or any third party with whom it does
substantial business fails to complete its Year 2000 conversion on a timely
basis, it may adversely affect the Company's business, financial condition
and results of operations.
Dependence on Key Personnel. The Company's success depends to a
large extent on its executive management team. The loss of the services of
any such executive could have a material adverse effect on the Company.
The Company cannot guarantee that it will be able to retain such key
personnel or attract additional qualified members to its management
team in the future.
Labor Conditions. The Company depends on attracting and retaining
a large number of qualified employees to maintain and increase sales and to
execute its customer service programs. Many of the employees are in entry
level or part-time positions with historically high levels of turnover. The
Company's ability to meet its employment needs is dependent on a number
of factors, including the following factors which affect the Company's
ability to hire or retain qualified employees:
- unemployment levels;
- minimum wage legislation; and
- changing demographics in the local economies where stores are
located.
The foregoing list of important factors is not exclusive and the
Company does not undertake to revise any forward-looking statement to
reflect events or circumstances that occur after the statement is made.
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% interest. 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,
with six consecutive five-year renewal options.
Store Leases and Locations. The Company owns six of its forty
department stores, and leases the remaining thirty-four department stores
and all of its twenty-two specialty stores. 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. Additional information
pertaining to the Company's store leases is included in Note 6 to the
Consolidated Financial Statements.
The following table contains specific information about each of
the Company's stores open as of the end of fiscal 1998:
Expiration
Gross(1) Date of
Square Date Current
Feet Opened Lease Owned or Leased(2)
DEPARTMENT STORES:
Northern Region (17 Gottschalks locations):
Antioch............. 80,000 1989 N/A (3) Own
Auburn.............. 40,000 1995 2005 Lease
Carson City, Nevada. 68,000 1995 2005 Lease
Chico............... 85,000 1988 2017 Lease
Eureka.............. 96,900 1989 N/A (3) Own
Klamath Falls,
Oregon............ 65,400 1992 2007 Lease
Modesto:
Vintage Faire.....161,500 1977 2007 Lease
Century Center.... 65,000 1984 2013 Lease
Reno, Nevada........138,000 1996 2016 Lease
Sacramento..........194,400 1994 2014 Lease
Santa Rosa..........131,300 1997 2017 Lease
Sonora.............. 59,800 1997 2017 Lease
Stockton............ 90,800 1987 2009 Lease
Tacoma, Washington..119,300 1992 2012 Lease
Tracy...............113,000 1995 2015 Lease
Woodland............ 57,300 1987 2017 Lease
Yuba City........... 80,000 1989 N/A(3) Own
Central Region (13 Gottschalks locations):
Bakersfield,
Valley Plaza...... 90,000 1987 2017 Lease
Capitola............105,000 1990 2015 Lease
Clovis..............101,400 1988 2018 Lease
Fresno:
Fashion Fair......163,000 1970 2016 Lease
Fig Garden........ 36,000 1983 2005 Lease
Manchester........175,600 1979 2009 Lease
Hanford............. 98,800 1993 N/A(3) Own
Merced.............. 60,000 1983 2013 Lease
Oakhurst............ 25,600 1994 2005 Lease
San Luis Obispo..... 99,300 1986 N/A(3) Own
Santa Maria.........114,000 1976 2006 Lease
Visalia.............150,000 1995 2014 Lease
Watsonville......... 75,000 1995 2006 Lease
Southern Region (10 Harris/Gottschalks locations) (4):
Bakersfield, East
Hills:
Women's, Shoes and
Accessories.....105,000 1998 2008(5) Lease
Men's, Children's
and Home........ 92,900 1988 2009 Lease
Hemet............... 51,000 1998 2005 Lease
Indio............... 60,000 1998 2005 Lease
Moreno Valley.......153,000 1998 2008(5) Lease
Palmdale:
Women's, Shoes and
Accessories.....114,000 1998 2008(5) Lease
Men's, Children's
and Home.........114,900 1990 N/A(3) Own
Palm Springs........ 82,000 1991 2015 Lease
Redlands............106,000 1998 2007 Lease
Riverside...........208,000 1998 2002 Lease
San Bernardino......204,000 1995 2017 Lease
Victorville......... 71,000 1998 2006 Lease
Total Department
Store Square
Footage........ 4,301,200
SPECIALTY STORES:
Gottschalks:
Aptos............... 11,200 1988 2004 Lease
Redding............. 7,800 1993 Automatically Lease
renews every
60 days
Scotts Valley....... 11,200 1988 2001 Lease
Village East:
Antioch............. 2,100 1989 1999(6) Lease
Capitola............ 2,360 1991 2009 Lease
Carson City, Nevada. 3,400 1995 2005 Lease
Chico............... 2,300 1988 2000 Lease
Clovis.............. 2,300 1988 2009 Lease
Eureka.............. 2,820 1989 2004 Lease
Fresno, Fig Garden.. 2,800 1986 30 days(7) Lease
Hanford............. 2,800 1993 2008 Lease
Modesto,
Century Center.... 2,730 1986 2005 Lease
Palmdale............ 2,716 1990 2000 Lease
Sacramento.......... 2,700 1994 2004 Lease
San Luis Obispo..... 2,500 1987 2011 Lease
Santa Maria......... 3,000 1976 2001 Lease
Stockton............ 1,799 1989 30 days(7) Lease
Tacoma.............. 4,000 1992 2012 Lease
Tracy............... 3,428 1995 2006 Lease
Visalia............. 3,400 1975 1999(6) Lease
Woodland............ 2,022 1987 1999(8) Lease
Yuba City........... 3,200 1990 2000 Lease
Total Specialty Store
Square Footage.... 82,575
Total Square
Footage.........4,383,775
__________________________
(1) Reflects total store square footage, including office space,
storage, service and other support space that is not dedicated to
direct merchandise sales.
(2) Most of the Company's department store leases contain renewal
options. Leases for specialty store locations generally do not
contain renewal options.
(3) These stores are Company owned and have been pledged as security
for various debt obligations of the Company. (See Note 5 to the
Consolidated Financial Statements.)
(4) Locations opened in fiscal 1998 were acquired from
Harris. Locations open prior to that date were original
Gottschalks locations that are now operated under
Harris/Gottschalks nameplates.
(5) These leases are with ECI, an affiliate of the Company.
(6) The Company expects to renegotiate these leases prior to
their expiration.
(7) These leases are renewable on a month-to-month basis.
(8) The Company expects to close this location upon the expiration of
its lease and incorporate it into the nearby department store
location as a separate department.
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:
1998 1997
Fiscal Quarters High Low High Low
1st Quarter....... 9 1/4 6 13/16 6 1/2 5 1/8
2nd Quarter....... 8 7/8 7 3/4 9 5 1/2
3rd Quarter....... 8 3/4 6 9/16 9 7/8 7 11/16
4th Quarter....... 7 15/16 6 7/8 9 1/8 6 3/4
On March 31, 1999, the Company had 894 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 March 31, 1999 was $7 1/16 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.
On August 20, 1998, in connection with completing the acquisition
of substantially all of the assets and business of Harris, the Company
issued 2,095,900 shares of its common stock and the Subordinated Note to
Harris (see Note 2 to the Consolidated Financial Statements). The
transaction was a private placement involving one offeree and one purchaser
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
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 30, 1999,
January 31, 1998, February 1, 1997, February 3, 1996 and January 28, 1995
are referred to herein as fiscal 1998, 1997, 1996, 1995 and 1994,
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. The
Company completed the acquisition of nine stores from Harris on August 20,
1998, closing one of the acquired stores on January 31, 1999, as planned.
The acquisition has affected the comparability of the Company's financial
results.
RESULTS OF OPERATIONS:
1998 1997 1996 1995 1994
(In thousands, except share data)
Net sales........... $517,140 $448,192 $422,159 $401,041 $363,603
Net credit revenues.. 6,897 6,385 4,198 4,896 4,210
------- ------- ------- ------- -------
524,037 454,577 426,357 405,937 367,813
Costs and expenses:
Cost of sales...... 347,531 304,558 287,164 278,827 247,423
Selling, general and
administrative
expenses......... 150,719 130,922 123,860 120,637 101,516
Depreciation and
amortization(1)... 8,461 6,667 6,922 8,092 5,860
Acquisition related
expenses........... 859 673
Unusual items(2)..... 3,833
------- ------- ------- ------- -------
507,570 442,820 417,946 407,556 358,632
======= ======= ======= ======= =======
Operating income (loss) 16,467 11,757 8,411 (1,619) 9,181
Other (income) expense:
Interest expense...... 9,470 7,325 8,111 7,718 7,599
Miscellaneous income.. (2,032) (1,955) (2,792) (726) (755)
------- ------- ------- ------- -------
7,438 5,370 5,319 6,992 6,844
======= ======= ======= ======= =======
Income (loss) before
income tax expense
(benefit)........... 9,029 6,387 3,092 (8,611) 2,337
Income tax expense
(benefit)........... 3,747 2,657 1,258 (2,972) 821
------- ------- ------ ------ ------
Net income (loss)..... $ 5,282 $ 3,730 $ 1,834 $(5,639) $ 1,516
======= ======= ====== ====== ======
Net income (loss)
per common share -
basic and diluted.. $ 0.46 $ 0.36 $ 0.18 $ (0.54) $ 0.15
======= ======= ====== ====== ======
Weighted-average
number of common
shares outstanding
basic and diluted 11,418 10,474 10,461 10,416 10,413
SELECTED BALANCE SHEET DATA:
1998 1997 1996 1995 1994
(In thousands of dollars)
Retained interest in
receivables sold...$ 37,399 $ 15,813 $ 20,871 $ 25,892 $ 25,745
Receivables, net.... 16,136 3,085 1,818 1,575 1,566
Merchandise
inventories........ 123,118 99,294 89,472 87,507 80,678
Property and
equipment, net..... 113,645 99,057 87,370 89,250 93,809
Total assets........ 324,364 242,311 232,400 239,041 233,353
Working capital..... 96,231 67,579 70,231 42,904 37,900
Long-term obligations,
less current portion.74,114 62,420 60,241 34,872 33,672
Subordinated note
payable to affiliate.20,618 --- --- --- ---
Stockholders' equity.103,468 83,905 80,139 77,917 83,577
OTHER SELECTED DATA:
1998 1997 1996 1995 1994
(In thousands of dollars, except other selected data)
Sales growth:
Total store sales.... 15.4% 6.2% 5.3% 10.3% 6.2%
Comparable store
sales. 2.1% 3.3% 1.4% (3.1%) 3.3%
Comparable stores data:
Sales per selling
square foot $170 $160 $170 $181 $195
Selling square
footage 2,621 2,642 2,161 1,892 1,747
Gross margin percent:
Owned............. 34.3% 33.5% 33.4% 31.8% 33.3%
Leased............. 14.8% 14.6% 14.6% 14.4% 14.1%
EBITDA(3)...........$31,133 $24,631 $21,689 $10,777 $22,268
Capital
expenditures... $16,801 $14,976 $ 6,845 $12,773 $ 4,539
Current ratio..... 1.98:1 2.01:1 2.10:1 1.45:1 1.43:1
Inventory turnover
ratio............. 2.6 2.6 2.6 2.7 2.9
- -----------------------------------
(1) Includes the amortization of new store pre-opening costs of
$421,000, $589,000, $1.3 million, $2.5 million and $438,000
in fiscal 1998, 1997, 1996, 1995 and 1994, respectively.
This amount also includes the amortization of goodwill of
$291,000 in fiscal 1998 and $116,000 in each of fiscal
years 1997 through 1994.
(2) Represents legal fees and other
costs incurred to settle litigation against the Company.
(See the Company's 1997 Annual Report on Form 10-K for
additional information.)
(3) "EBITDA" is defined as earnings before
interest, income taxes, depreciation and amortization, and
other unusual items. EBITDA also excludes interest expense
on securitized receivables which is included in net credit
revenues. EBITDA is not intended to represent cash
flows from operations, to be an indicator of the Company's
operating performance or to be a measure of its liquidity.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant
factors which have affected the Company's financial position and its results
of operations for the periods presented in the accompanying Consolidated
Financial Statements. As described more fully in "Liquidity and Capital
Resources", the Company completed the acquisition of nine stores from Harris
on August 20, 1998, closing one of the acquired stores on January 31, 1999,
as planned. The acquisition has affected the comparability of the Company's
financial results.
Results of Operations
The following table sets forth for the periods indicated certain
items from the Company's Consolidated Income Statements, expressed as a
percent of net sales:
1998 1997 1996
Net sales........................ 100.0% 100.0% 100.0%
Net credit revenues.............. 1.3 1.4 1.0
----- ----- -----
101.3 101.4 101.0
Costs and expenses:
Cost of sales................. 67.2 68.0 68.0
Selling, general and
administrative expenses..... 29.1 29.2 29.3
Depreciation and amortization. 1.6 1.5 1.7
Acquisition related expenses.. 0.2 0.1
----- ----- -----
98.1 98.8 99.0
----- ----- -----
Operating income ................ 3.2 2.6 2.0
Other (income) expense:
Interest expense.............. 1.8 1.6 1.9
Miscellaneous income.......... (0.3) (0.4) (0.6)
----- ----- -----
1.5 1.2 1.3
----- ----- -----
Income before income tax expense. 1.7 1.4 0.7
Income tax expense...... 0.7 0.6 0.3
----- ----- -----
Net income ................. 1.0% 0.8% 0.4%
===== ===== =====
Fiscal 1998 Compared to Fiscal 1997
Net Sales
In fiscal 1998, net sales exceeded a half-a-billion dollars for
the first time in the Company's history. Net sales in fiscal 1998 increased
by $68.9 million to $517.1 million as compared to $448.2 million in fiscal
1997, a 15.4% increase. This increase is primarily due to additional sales
volume generated by the nine new Harris/Gottschalks locations, beginning
August 20, 1998, and by two new stores not open for the entire year in
fiscal 1997. As planned, the Company closed one of the stores acquired from
Harris on January 31, 1999. Comparable store sales, which increased by 2.1%
in fiscal 1998 as compared to the prior year, were negatively impacted by
unseasonably cold and wet weather conditions caused by the El Nino weather
system.
Net Credit Revenues
Net credit revenues related to the Company's credit card
receivables portfolio consist of the following:
(In thousands of dollars) 1998 1997
Service charge revenues $13,431 $11,618
Gain (loss) on sale of
receivables (45) 1,050
Interest expense on
securitized receivables (3,314) (3,579)
Charge-offs on receivables
sold and provision for
credit losses on
receivables ineligible
for sale (3,175) (2,704)
------ ------
$ 6,897 $ 6,385
====== ======
Net credit revenues associated with the Company's private label
credit card increased by $512,000, or 8.0%, in fiscal 1998 as compared to
fiscal 1997. As a percent of net sales, net credit revenues was 1.3% of net
sales in fiscal 1998 as compared to 1.4% in fiscal 1997. As described more
fully in Note 3 to the Consolidated Financial Statements, the gain on sale
of receivables in fiscal 1997 relates to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", and
includes a non-recurring credit of $898,000 related to a change in the
estimate for the allowance for doubtful accounts for receivables which were
ineligible for sale. SFAS No. 125 has not materially affected the Company's
operating results since its initial implementation in fiscal 1997.
Service charge revenues increased by approximately $1.8 million,
or 15.6%, in fiscal 1998 as compared to fiscal 1997. This increase is
primarily due to additional service charge revenues generated by customer
credit card receivables acquired from Harris, combined with an increase in
the volume of late charge fees collected on delinquent credit card balances.
This increase was partially offset by lower revenues resulting from a
decrease in credit sales as a percent of total sales (43.1% in fiscal 1998
as compared to 43.7% in fiscal 1997), partially due to lower credit sales
volume in the Harris/Gottschalks locations than in the Gottschalks
locations.
Interest expense on securitized receivables decreased by $265,000,
or 7.4%, in fiscal 1998 as compared to fiscal 1997. This decrease relates to
lower outstanding borrowings against securitized receivables during the
period. (See Note 3 to the Consolidated Financial Statements and "Liquidity
and Capital Resources".) Charge-offs on receivables sold and the provision
for credit losses on receivables ineligible for sale increased by $471,000,
or 17.4%, in fiscal 1998 as compared to 1997. As a percent of sales,
however, such amounts remained unchanged at 0.6% in fiscal 1998 and 1997.
Cost of Sales
Cost of sales, which includes costs associated with the buying,
handling and distribution of merchandise, increased by approximately $43.0
million to $347.5 million in fiscal 1998 as compared to $304.6 million in
fiscal 1997, an increase of 14.1%. The Company's gross margin percentage
increased to 32.8% in fiscal 1998 as compared to 32.0% in fiscal 1997,
primarily due to increased sales of higher gross margin merchandise
categories in certain of the Company's stores, combined with lower costs
associated with the processing of merchandise at the Company's distribution
center. Inventory shrinkage remained unchanged at 1.1% of net sales in
fiscal 1998 and 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
approximately $19.8 million to $150.7 million in fiscal 1998 as compared to
$130.9 million in fiscal 1997, an increase of 15.1%. As a percent of net
sales, selling, general and administrative expenses decreased to 29.1% in
fiscal 1998 as compared to 29.2% in fiscal 1997, primarily due to higher
sales volume gained through the acquisition of the Harris stores. This
decrease also reflects lower rental expense resulting from the modification
of certain store lease agreements and from the refinancing and conversion of
certain operating equipment leases into capital leases. This decrease was
partially offset by increased payroll and payroll related costs in the
Company's stores as a result of the mandatory minimum wage increase in
California (from $5.15 to $5.75 per hour, an 11.7% increase) effective March
1, 1998, and other competitive wage adjustments. The Company also increased
advertising and credit solicitation expenditures during the year in an
attempt to improve sluggish apparel sales during the first half of the year
and in connection with the integration of the Harris stores.
Depreciation and Amortization
Depreciation and amortization expense increased by approximately
$1.8 million to $8.5 million in fiscal 1998 as compared to $6.7 million in
fiscal 1997, an increase of 26.9%. As a percent of net sales, depreciation
and amortization increased to 1.6% in fiscal 1998 as compared to 1.5% in
fiscal 1997. These increases are primarily due to additional depreciation
related to capital expenditures for new stores and for the renovation of
existing stores, new capital lease obligations, and assets acquired from
Harris. These increases are also due to the amortization of goodwill
associated with the recent acquisition of the Harris stores.
Acquisition Related Expenses
Acquisition related expenses of $859,000 were incurred in fiscal
1998, consisting primarily of costs incurred prior to the elimination of
certain duplicative operations of Harris, including certain merchandising,
advertising, credit and distribution functions. As of the end of fiscal
1998, all duplicative operations of Harris have been eliminated.
The Company had previously entered into negotiations for the
acquisition of Harris in fiscal 1997. The parties were unable to agree on
the terms of the transaction, however, and negotiations were discontinued.
Fiscal 1997 results include $673,000 of costs related to the proposed
transaction, consisting primarily of legal, accounting and investment
banking fees.
Interest Expense
Interest expense, which includes the amortization of deferred
financing costs, increased by approximately $2.1 million to $9.5 million in
fiscal 1998 as compared to $7.3 million in fiscal 1997, an increase of
29.3%. As a percent of net sales, interest expense increased to 1.8% in
fiscal 1998 as compared to 1.6% in fiscal 1997. These increases are
primarily due to higher average outstanding borrowings under the Company's
working capital facilities, and additional interest associated with the
Subordinated Note issued to Harris (see Note 2 to the Consolidated Financial
Statements). These increases were partially offset by a decrease in the
weighted-average interest rate applicable to outstanding borrowings under
the Company's working capital facilities (7.88% in fiscal 1998 as compared
to 8.16% in fiscal 1997) resulting from interest rate reductions during the
year.
Interest expense related to securitized receivables is reflected
as a reduction to net credit revenues and is not included in interest
expense for financial reporting purposes.
Miscellaneous Income
Miscellaneous income, which includes the amortization of deferred
income and other miscellaneous income and expense amounts, remained
unchanged at approximately $2.0 million in fiscal 1998 and 1997.
Income Taxes
The Company's effective tax rate was 41.5% in fiscal 1998 as
compared to 41.6% in fiscal 1997. (See Note 7 to the Consolidated Financial
Statements.)
Net Income
As a result of the foregoing, the Company's net income increased
by $1.6 million to $5.3 million in fiscal 1998 as compared to $3.7 million
in fiscal 1997. On a per share basis (basic and diluted), net income per
share increased to $0.46 per share in fiscal 1998 as compared to $0.36 per
share in fiscal 1997.
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. The Company operated thirty-four
department stores as of the end of fiscal 1997 as compared to thirty-two as
of the end of fiscal 1996.
Net Credit Revenues
Net credit revenues consist of the following:
(In thousands of dollars) 1997 1996
Service charge revenues $11,618 $10,493
Gain on sale of receivables 1,050
Interest expense on
securitized receivables (3,579) (3,564)
Charge-offs on receivables
sold and provision for
credit losses on receivables
ineligible for sale (2,704) (2,731)
------ ------
$ 6,385 $ 4,198
====== ======
Net credit revenues increased by approximately $2.2 million, or
52.1%, in fiscal 1997 as compared to fiscal 1996. As a percent of net sales,
net credit revenues increased to 1.4% in fiscal 1997 as compared to 1.0% in
fiscal 1996. The gain on sale of receivables in fiscal 1997 includes a non-
recurring credit of $898,000 related to a change in the estimate for the
allowance for doubtful accounts for receivables which were ineligible for
sale. Because the provisions of SFAS No. 125 were not permitted to be
applied retroactively to prior periods presented, there was no gain or loss
on receivables sold in fiscal 1996. (See Note 3 to the Consolidated
Financial Statements.)
Service charge revenues increased by approximately $1.1 million,
or 10.7%, in fiscal 1997 as compared to fiscal 1996. This increase is
primarily due to an increase in credit sales as a percent of total sales
(43.7% in fiscal 1997 as compared to 43.1% in fiscal 1996), driven by the
success of the Company's "Gottschalks Rewards" customer loyalty program,
introduced in early fiscal 1997. This increase is also due to additional
income generated by modifications made to credit terms in selected states,
initiated in late fiscal 1996.
Interest expense on securitized receivables remained unchanged at $3.6
million in fiscal 1997 and 1996, and charge-offs on receivables sold and the
provision for credit losses on receivables ineligible for sale remained
unchanged at $2.7 million in fiscal 1997 and 1996.
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 and the Company's
gross margin percentage remained unchanged at 68.0% and 32.0% in fiscal 1997
and 1996, respectively. 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. Inventory
shrinkage remained unchanged at 1.1% of net sales in fiscal 1997 and 1996.
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 and ongoing Company-wide expense control measures, 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.
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 a $748,000 decrease
in the amortization of new store pre-opening costs as compared to the prior
year, 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
working capital facilities (8.16% in fiscal 1997 as compared to 8.62% in
fiscal 1996), resulting from interest rate reductions during the period, 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 1996-1 Series certificate and a $6.0 million mortgage loan. (See
"Liquidity and Capital Resources".)
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 from a deferred lease incentive resulting from the revision of
certain terms of the related lease. Other income in fiscal 1996 includes 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 6 to
Consolidated Financial Statements.)
Acquisition Related Expenses
Acquisition related expenses of $673,000 were incurred in fiscal
1997 in connection with a proposed acquisition of Harris. Such costs,
consisting primarily of legal, accounting and investment banking fees, were
recognized by the Company after the parties were unable to agree on the
terms of the transaction and discontinued negotiations. The companies
resumed negotiations and successfully completed the acquisition in fiscal
1998.
Income Taxes
The Company's effective tax rate was 41.6% in fiscal 1997 as
compared to 40.7% in fiscal 1996. (See Note 7 to the Consolidated Financial
Statements.)
Net Income
As a result of the foregoing, the Company's net income increased
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 increased by $0.18 per share to $0.36 per share in fiscal 1997 as
compared to $0.18 per share in fiscal 1996.
Liquidity and Capital Resources
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. Working capital increased by $28.6
million to $96.2 million in fiscal 1998 as compared to $67.6 million in
fiscal 1997. The Company's liquidity position and capital structure was
enhanced in fiscal 1998 by a business acquisition through which the Company
acquired net current assets that were readily convertible into cash,
including merchandise inventories and customer credit card receivables and
funded the acquisition of those assets through the issuance of long-term
unsecured subordinated debt and equity. The increase is also due to a $15.0
million increase ($40.0 million as of the end of fiscal 1998 as compared to
$25.0 million as of the end of fiscal 1997) in the amount of line of credit
borrowings that are classified as long-term for financial reporting
purposes. The Company's ratio of current assets to current liabilities
decreased slightly to 1.98:1 as of the end of fiscal 1998 as compared to
2.01:1 as of the end of fiscal 1997.
Business Acquisition. As described more fully in Note 2 to the
Consolidated Financial Statements, the Company completed the acquisition of
substantially all of the assets and business of Harris on August 20, 1998.
The assets acquired consisted primarily of merchandise inventories, customer
credit card receivables, fixtures and equipment and certain intangibles. The
Company also assumed certain liabilities relating to the business, including
vendor payables, store leases and certain other contracts. The purchase
price for the assets was the issuance to Harris of 2,095,900 shares of
common stock of the Company and the issuance of a $22.2 million 8%
Subordinated Note due August 20, 2003. Interest on the Subordinated Note is
payable semi-annually beginning in February 1999, with the principal portion
due and payable upon its maturity date, unless such payment would result in
the default on any of the Company's other credit facilities, in which case
the maturity of the note would be extended by three years to August 2006.
The Company also incurred additional costs related to the transaction,
including professional fees and transaction costs, severance pay, costs
related to the consolidation of duplicative distribution and administrative
functions, and costs associated with the closure of the former Harris store
located in San Bernardino on January 31, 1999.
Revolving Line of Credit. The Company has a $110.0 million
revolving line of credit facility with Congress through March 30, 2001.
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 (except for fiscal 1998, which was extended to February 28, 1999) to
fund increased seasonal inventory requirements. Interest under the facility
is charged at a rate of approximately LIBOR plus 2.25% (reduced to LIBOR
plus 2.00% on March 1, 1999), with no interest charged on the unused portion
of the line of credit. The maximum amount available for borrowings under the
line of credit with Congress was $79.9 million as of January 30, 1999, of
which $60.3 million was outstanding as of that date. As described below,
such outstanding borrowings were reduced by $25.3 million on March 1, 1999
by proceeds from the issuance of a new certificate under the Company's
receivables securitization program.
Receivables Securitization Program. The Company's receivables
securitization program provides the Company with an additional source of
working capital and long-term financing that is generally more cost-
effective than traditional debt financing.
As of January 30, 1999, the Company had three outstanding series
of certificates issued through private placements under the program,
including $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit
Card Certificates (the 1994-1 Series), a $6.0 million principal amount
6.79% Fixed Base Certificate (the "1996-1 Series") and a Variable Base
Certificate in the principal amount of up to $15.0 million (the "Variable
Series"). As described more fully in Note 3 to the Consolidated Financial
Statements, the Company commenced the repayment of the outstanding principal
balances of the 1994-1 and 1996-1 Series certificates on October 15, 1998,
making total principal reductions of $15.8 million through January 30, 1999.
The Company also reduced amounts outstanding against the Variable Series
certificate to $700,000 from $7.7 million as of January 31, 1998. The
outstanding principal balances of the certificates, totaling $30.9 million
and $53.7 million as of January 30, 1999 and January 31, 1998, respectively,
are off-balance sheet for financial reporting purposes.
On March 1, 1999, the Company issued a $53.0 million principal
amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1
Series") to a single investor through a private placement. Proceeds from the
issuance of the 1999-1 Series were used to repay the outstanding balances of
the 1994-1, 1996-1 and Variable Series certificates, totaling $26.9 million
as of that date, reduce outstanding borrowings under the Company's revolving
line of credit by $25.3 million and pay certain costs associated with the
transaction. Interest on the 1999-1 Series will be earned by the certificate
holder on a monthly basis at a fixed interest rate of 7.66%, and the
outstanding principal balance of the certificate will be repaid in twelve
equal monthly installments commencing September 2003 and continuing through
August 2004. Monthly cash flows generated by the Company's credit card
portfolio, consisting of principal and interest collections, are first used
to pay certain costs of the program, which include interest payable to the
investor, and are then available to fund the working capital requirements of
the Company. Subject to certain conditions, the Company may expand the
securitization program to meet future receivables growth.
Other Financings. As described more fully in Note 5 to the
Consolidated Financial Statements, the Company has other long-term
obligations with total outstanding balances of $30.2 million at January 30,
1999 ($32.7 million as of January 31, 1998). The loans mature at dates
ranging from 2001 to 2010, bear interest at fixed rates ranging from 9.23%
to 10.45%, and are collateralized by various properties and equipment of the
Company. The scheduled annual principal maturities on the Company's various
long-term obligations are $2.7 million, $2.8 million, $2.5 million, $1.4
million and $1.4 million for fiscal 1999 through fiscal 2003, with $19.4
million due thereafter.
The Company's revolving line of credit agreement, and certain of
its long-term debt and lease arrangements contain various restrictive
covenants. The Company was in compliance with all such restrictive covenants
as of January 30, 1999.
The Company has entered into an agreement to open one new
department store in the second half of fiscal 1999 and is in the process of
remodeling certain existing store locations. The estimated cost of such
projects, totaling $6.4 million, is expected to be provided for from
existing financial resources. Such projects are expected to be fully
complete in fiscal 1999. 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.
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 1999. 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 they are
deemed to be advantageous.
Year 2000 Readiness
The year 2000 problem is pervasive, with almost every business,
large and small, affected. The year 2000 problem impacts both information
technology ("IT"), including hardware (mainframes, client/server systems and
personal computers) and software (packaged software and custom designed),
and impacts non-information technology ("non-IT"), including building
security, climate control and telephone systems. The Company also exchanges
data with certain trade suppliers and other third parties. Like many other
companies, the year 2000 computer issue creates risks and uncertainties for
the Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be a material adverse impact
on the Company's operations. To address year 2000 issues, the Company
established a task force in fiscal 1997 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. Plans and progress against plans are
reviewed by the year 2000 task force and are reported to the Company's
senior executive officers and the Board of Directors on a regular basis. It
is expected that activities related to the year 2000 issues will be continue
through mid-fiscal 1999 with the goal of appropriately resolving all
material internal systems and third party issues.
The Company's State of Readiness.
As of January 30, 1999, the Company's efforts towards becoming
year 2000 compliant with respect to its IT systems are progressing on
schedule with a projected completion date of mid-fiscal 1999. Based on
testing to date, management believes its mainframe operating system
environment and point-of-sale systems are already year 2000 compliant.
Modifications to the Company's proprietary, or custom designed software,
have been substantially completed and tested. Upgrades have been scheduled
for certain purchased software packages and are expected to be complete by
mid-fiscal 1999. The Company's operating system contains a testing
environment specifically designed to test year 2000 compliance. IT systems
acquired from Harris are limited to point-of-sale equipment, which has
already been converted to Gottschalks technology and is year 2000 compliant.
The Company has also completed the identification and evaluation
of all of its non-IT systems, which include, among other things, store alarm
and security systems, air conditioners and lighting, fire control, elevators
and escalators. The Company has already communicated with its suppliers,
dealers, financial institutions and other third parties with which it does
business to determine that the supplier's operations and the products or
services they provide are year 2000 compliant or to monitor their progress
toward year 2000 compliance. Some providers are not yet year 2000 compliant
and the Company is monitoring their progress on a continual basis.
Costs Associated with Year 2000 Issues.
The costs incurred to date related to the IT year 2000 conversion
are approximately $316,000. The Company currently expects that the total
remaining cost of these efforts, including both incremental spending and re-
deployed resources, will be approximately $330,000. Such costs, which
represent approximately 10.9% of the Company's fiscal 1999 IT budget,
consist primarily of internal personnel costs, external consulting fees and
costs in excess of normal hardware and software upgrades and replacements
and do not include potential costs related to the cost of internal software
and hardware replaced in the normal course of business. Management expects
such costs will be funded with working capital. Purchased hardware and
software are being capitalized in accordance with normal policy. Personnel
and all other costs related to the year 2000 project are being expensed as
incurred. In some instances, the installation schedule of new software and
hardware in the normal course of business has been accelerated, or deferred,
in order to resolve year 2000 compatibility issues. The acceleration, or
delay of such projects, however, will not have a materiel adverse effect on
the Company's financial position or results of operations.
The cost of the project and the estimated completion dates for the year
2000 conversion are based on the Company's best estimates, which have been
derived based on a number of assumptions of future events including the
continued availability of internal and external resources, the timely
completion of third party modifications and other factors. The ultimate cost
of the project is subject to change as the project progresses. Actual
results may differ from original estimates. The Company has not yet
completed its assessment of costs that may be associated with non-IT year
2000 issues, as such determination will be dependant upon the results of
communications with the related suppliers.
Contingency Plans.
Management believes its efforts towards year 2000 compliance will
be completed on schedule in mid-fiscal 1999. In the event the Company is not
able to progress according to schedule, however, the Company has developed
contingency plans. The Company's year 2000 conversion schedule contains
"trigger" dates to implement the contingency plan specifically designed for
each system in the event the conversion has not progressed accordingly to
schedule. If necessary, the Company has the ability to divert additional
internal IT staff onto the year 2000 project. The Company also has
additional sources of contract programming specialists who are familiar with
the Company's operating environment. The Company also believes that it has
alternate sources of suppliers for substantially all of its non-IT systems
to replace suppliers that are unable to become year 2000 compliant within an
appropriate time frame.
Based on currently available information, management does not
believe that the year 2000 matters discussed above related to internal
systems will have a material adverse impact on the Company's financial
condition or its results of operations; however, it is uncertain to what
extent the Company may be affected by such matters and no assurance can be
given. In addition, there can be no assurance that the failure to ensure
year 2000 capability by a supplier or another third party would not have a
material adverse effect on the Company.
Inflation
Although inflation has not been a material factor to the Company's
operations during the past several years, the Company does experience
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 on 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 1998 and 1997 (in thousands, except per share data).
(See Note 11 to the Consolidated Financial Statements.)
1998
Quarter Ended May 2 August 1 October 31 January 30
Net sales $95,468 $104,131 $123,118 $194,423
Gross profit 29,941 32,601 43,188 63,879
Income (loss) before
income tax expense
(benefit) (3,408) (2,310) 604 14,143
Net income (loss) (1,994) (1,352) 345 8,283
Net income (loss)
per common share
-basic and
diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
Weighted-average
number of common
shares outstanding(1) 10,479 10,479 12,138 12,575
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 $ (0.09) $ (0.02) $ (0.14) $ 0.62
Weighted-average
number of common
shares outstanding 10,473 10,473 10,473 10,477
- ------------------------------
(1) The increase in the weighted-average number of
common shares outstanding during fiscal 1998 is due to the
issuance of 2,095,900 shares of common stock to Harris on August
20, 1998 in connection with a business acquisition (see Note 2 to
the Consolidated Financial Statements.)
Recently Issued Accounting Standards
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities" was recently issued and is effective for fiscal 1999.
This statement requires start-up costs, such as new store pre-opening costs,
to be expensed as incurred. SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" was also issued and is
effective for fiscal 1999. SOP 98-1 requires certain internal and external
software development costs to be capitalized upon meeting certain criteria.
The Company does not expect the adoption of these new accounting standards
will have a material effect on its financial position or the results of its
operations.
_________________________________
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks in the normal course of
business, due to changes in interest rates on short-term
borrowings under its revolving line of credit. As of January 30, 1999, line
of credit borrowings subject to a variable interest rate represented 46.5%
of the Company's total outstanding borrowings (both on and off-balance
sheet). The Company does not engage in financial transactions for
speculative or trading purposes, nor does the Company purchase or hold any
derivative financial instruments.
The interest payable on the Company's revolving line of credit is
based on a variable interest rate and is therefore affected by changes in
market interest rates. An increase of 51 basis points on existing line of
credit borrowings (a 10% change from the Company's weighted-average interest
rate as of January 30, 1999, less a scheduled interest rate reduction of 25
basis points on March 1, 1999) would reduce the Company's pre-tax net income
and cash flow by approximately $375,000. This 51 basis point increase in
interest rates would not materially affect the fair value of the Company's
fixed rate financial instruments. (See Note 1 to the Consolidated Financial
Statements.)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under Part IV, Item 14,
included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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 24, 1999, to be filed pursuant to Regulation
14A (the "1999 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 67 Chairman and Chief
Executive Officer
James R. Famalette 46 President and Chief
Operating Officer
Gary L. Gladding 59 Executive Vice
President/
General Merchandise
Manager
Michael S. Geele 48 Senior Vice President
and Chief Financial Officer
Michael J. Schmidt 57 Senior Vice
President/
Director of Stores
- ---------------------------------
(1) As of March 31, 1999
Joe W. Levy became Chairman and Chief Executive Officer of the
Company's predecessor and former subsidiary, E. Gottschalk & Co., Inc. ("E.
Gottschalk") in 1982 and of the Company in 1986. Mr. Levy was Executive Vice
President from 1972 to 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. Mr. Levy has also served on
numerous other state and local commissions and public service agencies.
James R. Famalette became 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 1993 through 1997, and
served in a variety of other positions with Liberty House from 1987 through
1993, including Vice President, Stores and Vice President, General
Merchandise Manager. From 1982 through 1987, he served as Vice President,
General Merchandise Manager and later as President of Village Fashions/Cameo
Stores in Philadelphia, Pennsylvania, and from 1975 to 1982 served as a
Divisional Merchandise Manager for Colonies, a specialty store chain, based
in Allentown, Pennsylvania. Mr. Famalette serves on the Board of Directors
of the National Retail Federation and Frederick Atkins.
Gary L. Gladding has been Executive Vice President of the Company
since 1987, and joined E. Gottschalk as Vice President/General Merchandise
Manager in 1983. From 1980 to 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.
Michael S. Geele became Senior Vice President and Chief Financial
Officer of the Company on January 21, 1999. Prior to joining the Company,
Mr. Geele was Chief Financial Officer of Southwest Supermarkets in Phoenix,
Arizona from 1995 to 1998. From 1991 to 1995, Mr. Geele served as Vice
President of Finance for Smitty's Super Valu in Phoenix, Arizona, and from
1981 to 1991 served in various financial positions with Smitty's, including
Senior Director and Corporate Controller. Mr. Geele is a Certified Public
Accountant.
Michael J. Schmidt became Senior Vice President/Director of Stores
of E. Gottschalk in 1985 and of the Company in 1986. From 1983 through 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
1981 to 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 1999 Proxy under the headings
"Executive Compensation" and "Director Compensation For Fiscal Year 1998."
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 1999 Proxy under the heading "Security
Ownership of Certain Beneficial Owners and Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the portion of the Company's 1999 Proxy under the heading "Certain
Relationships and Related Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Gottschalks
Inc. and Subsidiary as required by Item 8 are included in Part IV,
Item 14 of this report:
Consolidated balance sheets -- January 30, 1999 and January 31,
1998
Consolidated income statements -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997
Consolidated statements of stockholders' equity -- Fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997
Consolidated statements of cash flows -- Fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997
Notes to consolidated financial statements -- Three years ended
January 30, 1999
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):
Incorporated by
Reference From
the
Exhibit Following
No. Description Document
3.1 Certificate of Incorporation Registration
of the Registrant, as amended Statement on Form
S-1 (File No. 33-3949)
3.2 By-Laws of the Registrant, Annual Report on
as amended Form 10-K for the
year ended January
28, 1995 (File No.
1-09100)
10.1 Agreement of Limited Partnership Annual Report on
dated March 16, 1990, by and Form 10-K for the
between River Park Properties I year ended February
and Gottschalks Inc. relating to 2, 1991 (File No.
the Company's corporate 1-09100)
headquarters
10.2 Gottschalks Inc. Retirement Registration
Savings Plan(*) Statement on Form
S-1 (File No.
33-3949)
10.3 Participation Agreement dated Annual Report on
as of December 1, 1988 among Form 10-K for the
Gottschalks Inc., General Foods year ended January
Credit Investors No. 2 Corporation 29, 1994 (File No.
and Manufacturers Hanover Trust 1-09100)
Company of California relating to
the sale-leaseback of the Stockton
and Bakersfield department stores
and the Madera distribution facility
10.4 Lease Agreement dated December 1, Annual Report on
1988 by and between Manufacturers Form 10-K for the
Hanover Trust Company of California year ended January
and Gottschalks Inc. relating to 29, 1994 (File No.
the sale-leaseback of department 1-09100)
stores in Stockton and Bakersfield,
California and the Madera
distribution facility
10.5 Ground Lease dated December 1, Annual Report on
1988 by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback 1-09100)
of the Bakersfield department store
10.6 Memorandum of Lease and Lease Annual Report on
Supplement dated July 1, 1989 by Form 10-K for the
and between Manufacturers Hanover year ended January
Trust Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Stockton
department store
10.7 Ground Lease dated August 17, Annual Report on 1989
by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback of 1-09100)
the Madera distribution facility
10.8 Lease Supplement dated as of Annual Report on
August 17, 1989 by and between Form 10-K for the
Manufacturers Hanover Trust year ended January
Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Madera
distribution facility
10.9 Tax Indemnification Agreement Annual Report on
dated as of August 1, 1989 by Form 10-K for the
and between Gottschalks Inc. year ended January
and General Foods Credit 29, 1994 (File No.
Investors No. 2 Corporation 1-09100)
relating to the sale-leaseback
of the Stockton and Bakersfield
department stores and the
Madera distribution facility
10.10 Lease Agreement dated as of Annual Report on
March 16, 1990 by and between Form 10-K for the
Gottschalks Inc. and River year ended January
Park Properties I relating to the 29, 1994 (File No.
Company's corporate headquarters 1-09100)
10.11 Consulting Agreement dated Quarterly Report on
June 1, 1994 by and between Form 10-Q for the
Gottschalks Inc. and Gerald quarter ended April
H. Blum(*) 30, 1994 (File No.
1-09100)
10.12 Form of Severance Agreement Annual Report on
dated March 31, 1995 by and Form 10-K for the
between Gottschalks Inc. and year ended January
the following senior executives 28, 1995 (File No.
of the Company: Joseph W. Levy, 1-09100)
Gary L. Gladding and Michael
J. Schmidt(*)
10.13 1994 Key Employee Incentive Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54783)
10.14 1994 Director Nonqualified Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54789)
10.15 Promissory Note and Security Annual Report on
Agreement dated December 16, Form 10-K for the
1994 by and between year ended January
Gottschalks Inc. and 28, 1995 (File No.
Heller Financial, Inc. 1-09100)
10.16 Agreement of Sale dated June 27, Quarterly Report on
1995, by and between Gottschalks Form 10-Q for the
Inc. and Jack Baskin relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.17 Lease and Agreement dated June 27, Quarterly Report on
1995, by and between Jack Baskin Form 10-Q for the
and Gottschalks Inc. relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.18 Promissory Notes and Security Quarterly Report on
Agreements dated October 4, 1995 Form 10-Q for the
and October 10, 1995 by and quarter ended
between Gottschalks Inc. and October 28, 1995
Midland Commercial Funding (File No. 1-09100)
10.19 Promissory Note and Security Annual Report on
Agreement dated October 2, Form 10-K for the
1996, by and between Gottschalks year ended February
Inc. and Heller Financial, Inc. 3, 1996 (File No.
1-09100)
10.20 Loan and Security Agreement dated Annual Report on
December 29, 1996, by and between Form 10-K for the
Gottschalks Inc. and Congress year ended February
Financial Corporation 1, 1997 (File No.
1-09100)
10.21 Promissory Notes dated March 28, Annual Report on
1996 and September 11, 1996, Form 10-K for the
by and between Gottschalks year ended February
Inc. and Broadway Stores, 1, 1997 (File No.
Inc., a wholly-owned division 1-09100)
of Federated Department Stores, Inc.
10.22 Employment Agreement dated Annual Report on
March 14, 1997 by and between Form 10-K for the
Gottschalks Inc. and year ended February
James R. Famalette(*) 1, 1997 (File No.
1-09100)
10.23 Gottschalks Inc. 1998 Stock Registration
Option Plan(*) Statement on Form
S-8 (File #33-
61471)
10.24 Gottschalks Inc. 1998 Registration
Employee Stock Purchase Statement on Form
Plan(*) S-8 (File #33-
61473)
10.25 Asset Purchase Agreement dated Current Report on
as of July 21, 1998 among Form 8-K dated July
Gottschalks Inc., The Harris 21, 1998 (File No.
Company and El Corte Ingles, 1-09100)
S. A. together with all
Exhibits thereto
10.26 Non-Negotiable, Extendable, Current Report on
Subordinated Note due Form 8-K dated
August 20, 2003 issued to August 20, 1998
The Harris Company (File No. 1-09100)
10.27 Registration Rights Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.28 Employee Lease Agreement between Current Report on
The Harris Company and Gottschalks Form 8-K dated
Inc. dated August 20, 1998 August 20, 1998
(File No. 1-09100)
10.29 Tradename License Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.30 Stockholders' Agreement among Current Report on
El Corte Ingles, S. A., Gottschalks Form 8-K dated
Inc., Joseph Levy and Bret Levy August 20, 1998
dated August 20, 1998 (File No. 1-09100)
10.31 Standstill Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.32 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: East Hills (File No. 1-09100)
Mall, Bakersfield, California
10.33 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Moreno (File No. 1-09100)
Valley Mall at Towngate,
Moreno Valley, California
10.34 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Antelope (File No. 1-09100)
Valley Mall at Palmdale, California
10.35 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Carousel (File No. 1-09100)
Mall at San Bernardino, California
10.36 Waiver Agreement dated Quarterly Report on
December 15, 1998 by and between Form 10-Q for the
Gottschalks Inc. and Congress quarter ended
Financial Corporation October 31, 1998
(File No. 1-09100)
10.37 Form of Severance Agreement Filed electronically
dated January 21, 1999 by herewith
and between Gottschalks Inc.
and Michael S. Geele (*)
10.38 Receivables Purchase Filed electronically
Agreement dated March 1, 1999 herewith
By and between Gottschalks
Credit Receivables Corporation
and Gottschalks Inc.
10.39 Pooling and Servicing Filed electronically
Agreement dated as of March 1, herewith
1999 by and among Gottschalks
Credit Receivables Corporation,
Gottschalks Inc. and Bankers
Trust Company
10.40 Series 1999-1 Supplement to Filed electronically
Pooling and Servicing herewith
Agreement dated March 1, 1999
by and among Gottschalks Credit
Receivables Corporation,
Gottschalks Inc. and Bankers
Trust Company
21. Subsidiary of the Registrant Annual Report on
Form 10-K for the
year ended January
28, 1995 (File No.
1-09100)
23. Independent Auditors' Consent Filed electronically
herewith
27. Financial Data Schedule Filed electronically
herewith
(*) Management contract, compensatory plan or arrangement.
- ---------------------------------
(b) Reports on Form 8-K -- The Company filed the following Report
on Form 8-K during the fourth quarter of fiscal 1998:
-- Current Report on Form 8-K/A dated November 2, 1998,
amending the Form 8-K which was filed on September 2,
1998, (for an event dated August 20, 1998) to provide
the required financial information pursuant to Item 2,
Acquisition or Disposition of Assets, for the
acquisition of substantially all of the assets and
business of The Harris Company.
(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 JANUARY 30, 1999
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 30, 1999 and January 31, 1998, and the
related consolidated income statements, stockholders' equity and cash flows
for each of the three years in the period ended January 30, 1999. 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 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended January 30, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information
set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fresno, California
February 23, 1999 (March 1, 1999 as to Note 3)
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
January 30, January 31,
ASSETS 1999 1998
CURRENT ASSETS:
Cash $ 1,693 $ 1,601
Retained interest in
receivables sold (Note 3) 37,399 15,813
Receivables:
Credit card receivables, less
allowances of $1,195 in 1998
and $437 in 1997 (Note 3) 16,136 3,085
Vendor claims, less allowances of
$121 in 1998 and $80 in 1997 2,849 3,475
------- -------
18,985 6,560
Merchandise inventories 123,118 99,294
Other 12,836 11,444
------- -------
Total current assets 194,031 134,712
PROPERTY AND EQUIPMENT (Note 6):
Land and land improvements 15,102 15,101
Buildings and leasehold improvements 62,561 52,339
Furniture, fixtures and equipment 77,060 64,993
Buildings and equipment under capital
leases 12,148 10,875
Construction in progress 909 1,858
------- -------
167,780 145,166
Less accumulated depreciation and
amortization 54,135 46,109
------- -------
113,645 99,057
OTHER ASSETS:
Goodwill, less accumulated amortization
of $1,554 in 1998 and $1,263 in 1997
(Note 2) 9,244 1,136
Other 7,444 7,406
------- -------
16,688 8,542
------- -------
$324,364 $242,311
======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
January 30, January 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Trade accounts payable
and accrued expenses (Note 4) $ 68,623 $ 53,633
Revolving line of credit (Note 5) 20,273 5,767
Current portion of long-term debt (Note 5) 2,710 2,641
Current portion of capitalized lease
obligations (Note 6) 1,724 1,309
Deferred income taxes (Note 7) 4,470 3,783
------- -------
Total current liabilities 97,800 67,133
LONG-TERM OBLIGATIONS, less current portion
(Notes 5 and 6):
Line of credit 40,000 25,000
Notes and mortgage loans payable 27,506 30,083
Capitalized lease obligations 6,608 7,337
------- -------
74,114 62,420
DEFERRED INCOME AND OTHER (Note 6) 24,111 25,061
DEFERRED INCOME TAXES (Note 7) 4,253 3,792
SUBORDINATED NOTE PAYABLE TO AFFILIATE,
net of discount of $1,561 (Note 2) 20,618
COMMITMENTS AND CONTINGENCIES (Notes 3, 6 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;
12,575,565 and 10,478,415 issued
Common stock 126 105
Additional paid-in capital 70,626 56,366
Retained earnings 32,716 27,434
------- -------
103,468 83,905
------- -------
$324,364 $242,311
======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands of dollars, except per share data)
1998 1997 1996
Net sales $517,140 $448,192 $422,159
Net credit revenues (Note 3) 6,897 6,385 4,198
------- ------- -------
524,037 454,577 426,357
Costs and expenses:
Cost of sales 347,531 304,558 287,164
Selling, general and
administrative expenses 150,719 130,922 123,860
Depreciation and amortization 8,461 6,667 6,922
Acquisition related expenses (Note 2) 859 673
------- ------- -------
507,570 442,820 417,946
======= ======= =======
Operating income 16,467 11,757 8,411
Other (income) expense:
Interest expense 9,470 7,325 8,111
Miscellaneous income (2,032) (1,955) (2,792)
------- ------- -------
7,438 5,370 5,319
------- ------- -------
Income before income tax expense 9,029 6,387 3,092
Income tax expense (Note 7) 3,747 2,657 1,258
------- ------- -------
Net income $ 5,282 $ 3,730 $ 1,834
======= ======= =======
Net income per common share -
basic and diluted $ 0.46 $ 0.36 $ 0.18
======= ======= =======
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
Shares Amount Capital Earnings Total
BALANCE,
FEBRUARY 4, 1996 10,416,520 $104 $55,943 $21,870 $ 77,917
Net income 1,834 1,834
Shares issued to
Retirement
Savings Plan 56,395 1 387 388
---------- --- ------ ------ ------
BALANCE,
FEBRUARY 1, 1997 10,472,915 105 56,330 23,704 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 56,366 27,434 83,905
Net income 5,282 5,282
Shares issued for
business acquisition
(Note 2) 2,095,900 21 14,252 14,273
Shares issued under
stock option plan 1,250 8 8
---------- --- ------ ------ -------
BALANCE,
JANUARY 30, 1999 12,575,565 $126 $70,626 $32,716 $103,468
========== === ====== ====== =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 5,282 $ 3,730 $ 1,834
Adjustments:
Depreciation and amortization 8,461 6,667 6,922
Deferred income taxes 633 2,557 419
Amortization of deferred items (950) (888) (300)
Provision for credit losses 992 470 2,724
Net loss (gain) from sale of assets 26 (72)
Other non-cash items, net (106) (1,170) (1,457)
Decrease (increase) in assets, excluding
effect of business acquisition (Note 2):
Receivables (1,312) (1,346) (9)
Retained interest in receivables sold (979)
Merchandise inventories (4,524) (9,227) (1,370)
Other current and long-term assets 2,958 2,594 (6,518)
Increase (decrease) in liabilities,
excluding effect of business acquisition
(Note 2):
Trade accounts payable and accrued
expenses (2,571) 1,873 2,570
Other current and long-term
liabilities 2,605 (1,546) 6,421
------- ------- -------
Net cash provided by operating
activities 11,494 3,642 10,257
INVESTING ACTIVITIES:
Available-for-sale securities (Note 3):
Maturities (262,357) (230,433)
Purchases 256,571 235,491
Acquisition of business (Note 2) (1,369)
Purchases of property and equipment (16,801) (14,976) (6,845)
Proceeds from property and equipment sales 680 365 2,026
Distributions from limited partnership 198 229 112
------- ------- ------
Net cash used in investing
activities (23,078) (9,324) (4,707)
FINANCING ACTIVITIES:
Net proceeds (repayments) under revolving
line of credit 29,506 (8,137) (6,260)
Proceeds from long-term obligations 3,214 3,878
Principal payments on long-term obligations (4,065) (3,054) (4,850)
Proceeds from issuance of 1996-1 Series
certificate (Note 3) 6,000
Principal payments on outstanding Series
certificates (Note 3) (15,800)
Changes in cash management liability
and other 2,035 13,764 (4,304)
------- ------- -------
Net cash provided by (used in)
financing activities 11,676 5,787 (5,536)
------- ------- -------
INCREASE IN CASH 92 105 14
CASH AT BEGINNING OF YEAR 1,601 1,496 1,482
------- ------- -------
CASH AT END OF YEAR $ 1,693 $ 1,601 $ 1,496
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY:
OPERATING ACTIVITY:
Issuance of common stock to Retirement
Savings Plan $ 388
INVESTING ACTIVITIES:
Consideration for acquisition of business (Note 2):
Issuance of 2,095,900 shares of
common stock $ 14,273
Issuance of 8% Subordinated Note 20,467
-------
$ 34,740
=======
FINANCING ACTIVITIES:
Acquisition of equipment under capital
leases $ 1,273 $ 3,562
Acquisition of fixtures under long-term
debt obligation $ 2,650
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 forty full-line department
stores, including thirty "Gottschalks" and ten "Harris/Gottschalks"
department stores, and twenty-two specialty stores which carry a limited
selection of merchandise. The Company's department stores are located
primarily in non-major metropolitan cities throughout California and in
Oregon, Washington and Nevada, and 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. The Company operates in one
reportable operating segment.
Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Such estimates and
assumptions are subject to inherent uncertainties which may cause actual
results to differ from reported amounts.
Principles of Consolidation - The accompanying financial statements include
the accounts of Gottschalks Inc., and its wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC"), (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on the Saturday nearest January
31. Fiscal years 1998, 1997 and 1996, which ended on January 30, 1999,
January 31, 1998 and February 1, 1997, respectively, each consist of 52
weeks.
Transfers and Servicing of Financial Assets - The Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in fiscal 1997. SFAS No. 125 requires the
Company to recognize gains and losses on transfers of financial assets
(securitizations) that qualify as sales and to recognize as assets certain
financial components that are retained as a result of such sales. Such
assets consist primarily of the retained interest in receivables sold, 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.
Retained Interest in Receivables Sold - The retained interest in receivables
sold consists of securities backed by receivables sold pursuant to the
Company's receivables securitization program and the retained right to
future income resulting from such sales which are recorded pursuant to the
provisions of SFAS No. 125. The retained right to future interest income
($237,000 at January 30, 1999 and $211,000 at January 31, 1998) is carried
at fair value. As of January 30, 1999 and January 31, 1998, the estimated
cost to service the assets is equal to the contractually specified servicing
fee, resulting in no servicing asset or liability.
The certificated portion of the retained interest is considered readily
marketable and is classified as available-for-sale in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Due to the short-term revolving nature of the credit card portfolio, the
carrying value of the Company's retained interest approximates its fair
value, resulting in no unrealized gains or losses.
Receivables - Receivables consist primarily of customer credit card
receivables that do not meet certain eligibility requirements of the
Company's receivables securitization program, and as of January 30, 1999,
also includes $12,708,000 of recently acquired receivables which were
incorporated into the securitization program in early fiscal 1999. (See Note
2). Such receivables are not certificated and include revolving charge
accounts with terms which, in some cases, provide for payments with terms in
excess of one year. In accordance with usual industry practice such
receivables are included in current assets.
The Company maintains a reserve for possible credit losses on such
receivables which is based on the expected collectibility of those
receivables.
Concentrations of Credit Risk - The Company extends credit to individual
customers based on their credit worthiness and generally requires no
collateral from such customers. Concentrations of credit risk with respect
to the Company's credit card receivables are limited due to the large number
of customers comprising the Company's customer base.
Merchandise Inventories - Inventories, which consist of merchandise held for
resale, are valued by the retail method and are stated at last-in, first-out
(LIFO) cost, which is not in excess of market. Current cost, which
approximates replacement cost, under the first-in, first-out (FIFO) method
is equal to the LIFO value of inventories at January 30, 1999 and January
31, 1998.
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 a new store that are deferred
and amortized generally on a straight-line basis not to exceed a twelve
month period commencing with the store opening. All new store pre-opening
costs were fully amortized as of January 30, 1999. Store pre-opening costs,
net of accumulated amortization, of $421,000 at January 31, 1998 is included
in other current assets. The amortization of new store pre-opening costs,
totaling $421,000, $589,000 and $1,337,000 in 1998, 1997 and 1996,
respectively, is included in depreciation and amortization in the
accompanying income statements.
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
the criteria used to classify the lease, and such amortization is combined
with depreciation in the accompanying income statements.
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 30, 1999 and January 31, 1998,
the investment is $2,632,000 and $2,679,000, respectively, and prepaid rent,
net of accumulated amortization, is $675,000 and $793,000, respectively.
Such amounts are included in other long-term assets. The Company's equity in
the income of the partnership, totaling $140,000 in 1998, $141,000 in 1997
and $133,000 in 1996, 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 store and enter into a lease
arrangement. Land contributed to the Company is included in land and
recorded at appraised fair market values. Donated income is amortized to
income over the average depreciable life of the related fixed assets built
on the land for locations that are owned by the Company, and over the
minimum lease periods of the related building leases with respect to
locations that are leased by the Company, ranging from 10 to 32 years.
Deferred income, net of accumulated amortization, is $16,347,000 as of
January 30, 1999 and $17,574,000 as of January 31, 1998.
Leased Department Sales - Net sales include leased department sales of
$40,216,000, $35,179,000 and $32,781,000 in 1998, 1997 and 1996,
respectively. Cost of sales include related costs of $34,271,000,
$30,044,000 and $28,006,000 in 1998, 1997 and 1996, respectively.
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 Per Common Share - Basic earnings per common share is computed
based on the weighted average number of common shares outstanding which were
11,417,744, 10,473,682 and 10,461,424 in 1998, 1997 and 1996, respectively.
Diluted earnings per share includes the effect of stock options and other
potentially dilutive securities, if any. In 1998, 1997 and 1996, diluted
earnings per common share is equal to basic earnings per common share
because the effect of potentially dilutive securities under the stock option
plans were antidilutive and therefore not included.
Fair Value of Financial Instruments - The carrying value of the Company's
cash and cash management liability, receivables, notes receivable, trade
payables and other accrued expenses, revolving line of credit and stand-by
letters of credit approximate their estimated fair values because of the
short maturities or variable interest rates underlying those instruments.
The retained interest in receivables sold and the Subordinated Note are
carried at their estimated fair values. 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. Borrowings with aggregate
carrying values of $30,216,000 and $32,724,000 at January 30, 1999 and
January 31, 1998, had estimated fair values of $27,809,000 and
$31,207,000 at January 30, 1999 and January 31, 1998, respectively.
Off-Balance Sheet Financial Instruments - The Company's off-balance
sheet financial instruments consist primarily of certificates issued
under the securitization program. (See Note 3.) The aggregate estimated
fair values of the 1994-1 and 1996-1 Series certificates, based on
similar issues of certificates at current rates for the same remaining
maturities, with aggregate face values of $30,667,000 at January 30,
1999 and $46,000,000 at January 31, 1998 are $30,154,000 and
$44,408,000, respectively. The estimated fair value of the Variable
Series 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". Accordingly, no compensation
expense has been recognized in the 1998, 1997 or 1996 financial statements
for employee stock arrangements. Pro-forma information regarding net income
and earnings per share, as calculated under the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", is disclosed in Note 8.
Long-Lived Assets - The Company periodically evaluates the carrying value of
long-lived assets to be held and used, including goodwill and other
intangible assets, when events and circumstances warrant such a review. When
the anticipated undiscounted cash flow from a long-lived asset is less than
its carrying value, a loss is recognized based on the amount by which its
carrying value exceeds its fair market value. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risks involved. Based on such a review, the Company
recognized no impairment loss in 1998, 1997 or 1996.
Recently Issued Accounting Standards - AICPA Statement of Position (SOP) 98-
5, "Reporting on the Costs of Start-Up Activities" was recently issued and
is effective for fiscal 1999. This statement requires start-up costs, such
as new store pre-opening costs, to be expensed as incurred. SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" was also issued and is effective for fiscal 1999. SOP 98-1
requires certain internal and external software development costs to be
capitalized upon meeting certain criteria. The Company does not expect the
adoption of these new accounting standards will have a material effect on
its financial position or the results of its operations.
Reclassifications - Certain amounts in the accompanying 1997 and 1996
consolidated financial statements have been reclassified to conform with the
1998 presentation.
2. BUSINESS ACQUISITION
On August 20, 1998, the Company completed the acquisition of substantially
all of the assets and business of The Harris Company ("Harris"), pursuant to
an Asset Purchase Agreement entered into with Harris and El Corte Ingles, S.
A. ("ECI") of Spain, the parent company of Harris. Harris operated nine full-
line department stores located throughout southern California. The assets
acquired consisted primarily of merchandise inventories, customer credit
card receivables, fixtures and equipment and certain intangibles. The
Company also assumed certain liabilities relating to the business, including
vendor payables, store leases and certain other contracts. The purchase
price for the assets consisted of the issuance to Harris of 2,095,900 shares
of common stock of the Company and the issuance of an 8% Non-Negotiable,
Extendable, Subordinated Note (the "Subordinated Note") due August 20, 2003
in the principal amount of $22,179,000. Interest on the Subordinated Note
is payable semi-annually beginning in February 1999, with the principal
portion due and payable upon its maturity date, unless such payment would
result in the default on any of the Company's other credit facilities,
whereby the maturity date of the Subordinated Note would be extended by
three years to August 2006. Additional purchase liabilities recorded include
costs related to the transaction, severance and related costs and costs
associated with the closure of the former Harris store located in San
Bernardino. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired
stores are included in the Company's financial statements from the
acquisition date of August 20, 1998.
The purchase price has been allocated to the acquired assets and assumed
liabilities on the basis of their estimated fair values as of the date of
the acquisition. The financial statements reflect the preliminary allocation
of the purchase price, as estimates of certain direct costs and certain
store closure costs have not yet been finalized. The fair value of the
assets acquired and liabilities assumed, based on the preliminary allocation
of the purchase price, is summarized as follows (in thousands of dollars):
Fair value of common stock issued to Harris $14,273
Fair value of Subordinated Note 20,467
Total estimated direct fees and expenses 1,369
------
Total purchase price $36,109
======
Customer credit card and other receivables $11,827
Merchandise inventories 18,570
Other current and long-term assets 3,809
Leaseholds, fixtures and other equipment 5,731
Trade accounts payable and other current
liabilities (11,713)
Deferred income taxes (515)
Excess of purchase price over
the estimated fair value of
identifiable net assets acquired
to be amortized over 20 years 8,400
------
Total purchase price $36,109
======
Unaudited Pro Forma Financial Information.
The following unaudited pro forma financial information for the Company
gives effect to the acquisition as if it had occurred at the beginning of
fiscal 1998 and 1997, and includes certain adjustments, including the
amortization of goodwill, interest expense associated with acquisition debt,
adjustments to rental expense to reflect new store leases, adjustments to
depreciation expense to reflect the fair value of assets acquired and the
related income tax effects. These pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of what would
have occurred if the acquisition had been completed as of those dates. In
addition, pro forma information is not intended to be a projection of future
results and does not reflect expected cost savings or synergies expected to
result from the integration of the Harris stores into the Company's
business.
(In thousands, except share data) 1998 1997
Net sales $565,745 $545,595
Net income (loss) $ 870 $ (2,771)
Net income (loss) per
common share -
basic and diluted $ 0.07 $ (0.22)
Weighted-average number of
common shares outstanding -
basic and diluted 12,575 12,569
Acquisition Related Expenses.
Acquisition related expenses of $859,000 were incurred in fiscal 1998
consisting primarily of costs incurred prior to the elimination of certain
duplicative operations of Harris, including certain merchandising,
advertising, credit and distribution functions. As of the end of fiscal
1998, all duplicative operations of Harris have been eliminated.
The Company had previously entered into negotiations for the acquisition of
the stores from Harris in fiscal 1997. The parties were unable to agree on
the terms of the transaction, however, and negotiations were discontinued
during that year. Fiscal 1997 results include $673,000 of costs related to
the proposed acquisition, consisting primarily of legal, accounting and
investment banking fees.
3. CREDIT CARD RECEIVABLES
Securitization Program.
The Company's receivables securitization program provides the Company with a
source of long-term 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, servicing retained, to a wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC"), and those receivables
are subsequently conveyed to Gottschalks Credit Card Master Trust ("GCC
Trust"), to be used as collateral for securities issued to investors. GCC
Trust is a qualified special purpose entity under SFAS No. 125. Accordingly,
all transfers of receivables to GCC Trust are accounted for as sales for
financial reporting purposes and such transferred receivables are removed
from the Company's balance sheet. The Company retains an ownership interest
in certain of the receivables sold under the program, represented by
Exchangeable and Subordinated Certificates, and also retains an
uncertificated ownership interest in receivables that do not meet certain
eligibility requirements of the program. As of January 30, 1999, the
uncertificated receivables also include $12,708,000 of receivables acquired
from Harris which were incorporated into the securitization program in
connection with the fiscal 1999 refinancing of the program.
As of January 30, 1999, the Company had three outstanding series of
certificates issued through private placements under the program, including
$40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates (the "1994-1 Series"), a $6,000,000 principal amount 6.79%
Fixed Base Class A-1 Credit Card Certificate (the "1996-1 Series"), and a
Variable Base Certificate in the principal amount of up to $15.0 million
(the "Variable Series"). Interest on the certificates is earned on a monthly
basis and the principal portion of the certificates is payable in twelve
equal monthly installments which commenced on October 15, 1998. As of
January 30, 1999, the Company had repaid a total of $15,800,000 of the
outstanding balances of the 1994-1 and 1996-1 Series certificates, and had
reduced amounts outstanding against the Variable Series certificate to
$700,000 from $7.7 million as of January 31, 1998. The outstanding principal
balances of the certificates, totaling $30,900,000 and $53,700,000 as of
January 30, 1999 and January 31, 1998, respectively, are off-balance sheet
for financial reporting purposes.
On March 1, 1999, the Company issued a $53.0 million principal amount 7.66%
Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") to a
single investor through a private placement. Proceeds from the issuance of
the 1999-1 Series were used to repay the outstanding balances of the 1994-1,
1996-1 and Variable Series certificates, totaling $26,950,000 as of that
date, reduce outstanding borrowings under the Company's revolving line of
credit (Note 5) and pay certain costs associated with the transaction.
Interest on the 1999-1 Series certificate is to be earned by the certificate
holder on a monthly basis at a fixed interest rate of 7.66%, and the
outstanding principal balance of the certificate is to be repaid in twelve
equal monthly installments commencing September 2003 and continuing through
August 2004. The Company is required, among other things, to maintain
certain portfolio performance standards under the program. Subject to
certain conditions, the master trust permits further expansion of the
program to meet future receivables growth.
Net Credit Revenues.
Net credit revenues associated with the Company's credit card receivable
portfolio, including securitized receivables, consists of the following:
(In thousands of dollars) 1998 1997 1996
Service charge revenues $13,431 $11,618 $10,493
Gain (loss) on sale of
receivables (45) 1,050
Interest expense on
securitized receivables (3,314) (3,579) (3,564)
Charge-offs on receivables
sold and provision for
credit losses on
receivables ineligible
for sale (3,175) (2,704) (2,731)
------ ------ ------
$ 6,897 $ 6,385 $ 4,198
====== ====== ======
The Company adopted the provisions of SFAS No. 125 in fiscal 1997. The
provisions of the statement were not permitted to be applied retroactively
to prior periods presented. Accordingly, the Company had no gain or loss on
the sale of receivables in fiscal 1996. The gain on sale of receivables of
$1,050,000 in 1997 includes a credit of $898,000 related to a change in
estimate for the allowance for doubtful accounts for receivables which were
ineligible for sale.
4. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Trade accounts payable and accrued expenses consist of the following:
January 30, January 31,
(In thousands of dollars) 1999 1998
Trade accounts payable $23,178 $20,950
Cash management liability 12,176 10,141
Taxes, other than income taxes 11,078 8,723
Accrued expenses 10,597 5,861
Accrued payroll and
related liabilities 6,416 5,734
Federal and state
income taxes payable 5,178 2,224
------ ------
$68,623 $53,633
====== ======
5. DEBT OBLIGATIONS
Revolving Line of Credit.
The Company has a revolving line of credit arrangement with Congress
Financial Corporation ("Congress") which provides the Company with a
$110,000,000 working capital facility through March 30, 2001. 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 (except in 1998, which was extended to February 28, 1999) to fund
increased seasonal inventory requirements. Interest on outstanding
borrowings under the facility is charged at a rate of approximately LIBOR
plus 2.25% (7.39% at January 30, 1999), with no interest charged on the
unused portion of the line of credit. On March 1, 1999, the interest rate
applicable to the line of credit was reduced by 1/4% to approximately LIBOR
plus 2.00%. The maximum amount available for borrowings under the line of
credit was $79,871,000 as of January 30, 1999, of which $60,273,000 was
outstanding as of that date. Of that amount, $40,000,000 has been classified
as long-term in the accompanying financial statements as of January 30, 1999
($25,000,000 as of January 31, 1998) 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 30, 1999.
Long-Term Obligations.
Notes and mortgage loans payable consist of the following:
January 30, January 31,
(In thousands of dollars) 1999 1998
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 $19,242 $19,501
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 2,850 3,800
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 4,429 5,286
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 1,384 1,892
Other 2,311 2,245
------ ------
30,216 32,724
Less current portion 2,710 2,641
------ ------
$27,506 $30,083
====== ======
The scheduled annual principal maturities on notes payable and mortgage
loans are $2,710,000, $2,842,000, $2,472,000, $1,362,000 and $1,412,000 for
1999 through 2003, with $19,418,000 payable thereafter.
Deferred debt issuance costs related to the Company's various financing
arrangements are included in other current and long-term assets and are
charged to income as additional interest expense on a straight-line basis
over the life of the related indebtedness. Such costs, net of accumulated
amortization, totaled $1,263,000 at January 30, 1999 and $1,734,000 at
January 31, 1998.
Interest paid, net of amounts capitalized, was $12,063,000 in 1998,
$10,302,000 in 1997 and $11,059,000 in 1996. Capitalized interest expense
was $134,000 in 1998, $114,000 in 1997 and $37,000 in 1996. The weighted-
average interest rate charged on the Company's various revolving line of
credit arrangements was 7.88% in 1998, 8.16% in 1997 and 8.62% in 1996.
Certain of the Company's long-term financing arrangements include various
restrictive covenants. The Company was in compliance with all such covenants
as of January 30, 1999.
6. LEASES
The Company leases certain retail department stores, furniture and equipment
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. During 1998, the Company entered
into leases with ECI, an affiliate of the Company, for three of the
department stores acquired from Harris. (See Note 2.) Management believes
the terms of the leases with ECI reflect current market rates. Rent paid to
ECI totaled $457,000 in fiscal 1998.
Certain of the Company's department store 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
income and amounts payable under the leases as deferred lease payments.
Deferred lease payments totaled $6,850,000 at January 30, 1999 and
$6,463,000 at January 31, 1998.
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 30, 1999:
Capital Operating
(In thousands of dollars) Leases Leases
1999 $ 2,475 $ 19,217
2000 2,095 17,232
2001 918 16,504
2002 902 16,181
2003 889 15,940
Thereafter 6,142 127,539
------ -------
Total minimum
lease payments 13,421 $212,613
====== =======
Amount representing
interest (5,089)
------
Present value of
minimum lease payments 8,332
Less current portion (1,724)
------
$ 6,608
======
Rental expense consists of the following:
(In thousands of dollars) 1998 1997 1996
Operating leases:
Buildings:
Minimum rentals $14,395 $13,099 $11,897
Contingent rentals 2,173 1,911 2,213
Fixtures and equipment 3,275 4,358 5,439
------ ------ ------
$19,843 $19,368 $19,549
====== ====== ======
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 30, 1999.
The Company terminated two capital leases in fiscal 1996 in connection with
the relocation of two of its department stores to new locations. The Company
recognized a pre-tax gain of $1,344,000 upon the termination of the leases,
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 in fiscal 1996. The new leases
have been accounted for as operating leases for financial reporting
purposes.
7. INCOME TAXES
The components of income tax expense are as follows:
(In thousands of dollars) 1998 1997 1996
Current:
Federal $2,737 $ 92 $ 375
State 377 8 464
3,114 100 839
Deferred:
Federal 210 1,976 704
State 423 581 (285)
----- ----- -----
633 2,557 419
----- ----- -----
$3,747 $2,657 $1,258
===== ===== =====
The principal components of deferred tax assets and liabilities
are as follows (in thousands of dollars):
January 30, January 31,
1999 1998
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
Current:
Vacation accrual and
employee vacation
benefits $ 762 $ 689
Credit losses 658 572
Accrued employee benefits 257 353
State income taxes 125 332
LIFO inventory reserve $ (3,636) $(2,942)
Workers' compensation
insurance premiums (760) (574)
Supplies inventory (1,340) (1,429)
Gain from adoption
of SFAS No. 125 (65) (450)
Other items, net 322 (793) 803 (1,137)
----- ------ ------ ------
2,124 (6,594) 2,749 (6,532)
Long-Term:
Net operating loss
carryforwards 2,500 4,541
General business credits 2,242 2,034
Alternative minimum tax
credits 3,243 777
State income taxes 504
Depreciation expense (9,221) (8,503)
Accounting for leases 945 (3,364) 913 (3,408)
Deferred income 1,495 (2,313) 1,699 (1,958)
Other items, net 724 (1,008) 567 (454)
------ ------- ------ -------
11,653 (15,906) 10,531 (14,323)
$13,777 $(22,500) $13,280 $(20,855)
====== ======= ====== =======
Income tax expense varies from the amount computed by applying the statutory
federal income tax rate to the income before income taxes. The reasons for
this difference are as follows:
1998 1997 1996
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 5.8 5.9 5.7
Amortization of goodwill .4 .6 1.3
General business credit (1.7) (1.2)
Other items, net 2.0 1.3 (1.3)
---- ---- ----
Effective rate 41.5% 41.6% 40.7%
==== ==== ====
The Company paid income taxes, net of refunds, of $138,000 in 1998. The
Company received income tax refunds, net of payments, of $195,000 in 1997.
At January 30, 1999, the Company has, for federal tax purposes, net
operating loss carryforwards of approximately $7,300,000 which expire in the
years 2008 through 2011, general business credits of approximately
$1,146,000 which expire in the years 2007 through 2018, and alternative
minimum tax credits of approximately $2,864,000 which may be used for an
indefinite period. At January 30, 1999, the Company has, for state tax
purposes, enterprise zone credits of approximately $1,096,000 and
alternative minimum tax credits of approximately $378,000 which may be used
for an indefinite period. These carryforwards are available to offset future
taxable income and are expected to be fully utilized.
8. STOCK OPTION PLANS
The Company has stock option plans for directors, officers and key employees
which provide for the grant of non-qualified and incentive stock options.
Under the plans, the option exercise price may not be lower than 100% of the
fair market value of such shares at the date of the grant. Options granted
generally vest on a cumulative basis over five years and expire ten years
from the date of the grant. At January 30, 1999, options for 794,500 shares
were available for future grants under the plans.
Option activity under the plans is as follows:
Weighted-
Average
Number of Exercise
Shares Price
Outstanding, February 4, 1996
(138,000 exercisable at a weighted-
average price of $9.92) 500,000 $9.74
Granted (weighted-average fair value
of $3.54) 45,000 5.75
Canceled (36,000) 9.88
------- -----
Outstanding, February 1, 1997
(221,000 exercisable at a weighted-
average price of $9.83) 509,000 9.36
Granted (weighted-average fair value
of $4.26) 74,000 5.87
Exercised (5,500) 6.55
Canceled (77,000) 9.46
======= ====
Outstanding, January 31, 1998
(298,500 exercisable at a weighted-
average price of $9.72) 500,500 9.05
Granted (weighted-average fair value
of $4.38) 336,000 7.73
Exercised (1,250) 5.75
Canceled (57,250) 9.46
------- ----
Outstanding, January 30, 1999
(366,000 exercisable at a weighted-
average price of $9.50) 778,000 $8.45
======= ====
Additional information regarding options outstanding as of
January 30, 1999 is as follows:
Options Outstanding Options Exercisable
Weighted-Avg. -------------------
Remaining
Range of Number Contractual Weighted-Avg. Number Exercise
Exercise Outstanding Life (yrs.) Exercise Price Exercisable Price
Prices
$5.38
to $10.87 778,000 7.4 yrs. $8.45 366,000 $9.50
Additional Stock Plan Information.
SFAS No. 123 requires the disclosure of pro-forma net income and earnings
per share had the Company adopted the fair value method as of the beginning
of fiscal 1996. 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, 51.08% in 1998, 51.09% in 1997 and 49.74% in 1996;
risk-free interest rates, 4.6% in 1998, 5.41% in 1997 and 6.30% in 1996; 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. Had the computed fair values of the 1998, 1997 and 1996 awards
been amortized to expense over the vesting period of the awards, pro-forma
net income and earnings per share would have been $5,282,000, or $0.46 per
share in 1998, $3,693,000, or $0.35 per share in 1997 and $1,816,000, or
$0.17 per share in 1996.
9. 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 and may elect to have up to 20% of their annual eligible
compensation, subject to certain limitations, deferred and deposited with a
qualified trustee. Participants in the Plan may receive an employer matching
contribution of up to 4% of the participants' eligible compensation,
depending on the Company's quarterly and annual financial performance. The
Company recognized $424,000, $875,000 and $197,000 in expense related to the
Plan in 1998, 1997 and 1996, respectively.
The Company has also established a Voluntary Employee Beneficiary
Association ("VEBA") trust for the purpose of funding employee vacation
benefits.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to legal proceedings and claims which have arisen
during the ordinary course of business. In the opinion of management, the
ultimate outcome of such litigation and claims is not expected to have a
material adverse effect on the Company's financial position or results of
its operations.
The Company arranges for the issuance of letters of credit in the ordinary
course of business. As of January 30, 1999, the Company had outstanding
letters of credit amounting to $2,868,000. Management believes the
likelihood of non-performance under such contracts is remote.
The Company is in process of remodeling certain existing store locations.
The estimated cost of such projects as of January 30, 1999 is $6,418,000,
and such costs are expected to be funded through working capital.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1998 and 1997 (in thousands, except per share data):
1998
-------------------------------------------
Quarter Ended May 2 August 1 October 31 January 30
Net sales $95,468 $104,131 $123,118 $194,423
Gross profit 29,941 32,601 43,188 63,879
Income (loss) before
income tax expense
(benefit) (3,408) (2,310) 604 14,143
Net income (loss) (1,994) (1,352) 345 8,283
Net income (loss)
per common share
-basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
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 $ (0.09) $ (0.02) $ (0.14) $ 0.62
Net income for the three month period ended January 31, 1998 includes
a pre-tax adjustment to the inventory shrinkage reserve resulting in
a $637,000 increase in the gross margin, and also includes an $898,000
credit related to a change in estimate for the allowance for doubtful
accounts. (See Note 3.)
**********
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 30, 1999:
Allowance for
doubtful
accounts. $ 437,179 $ 991,523 (1) $ 541,759(2) $(775,296)(3)$1,195,165
========= ========= ========== ========== =========
Allowance
for vendor
claims
receivable $ 80,000 $ 40,700(4) $ 120,700
========= ========= ========== ========== =========
Allowance for
notes
receivable $ -0- $ $ -0-
========= ========= ========== ========== =========
Year ended
January 31, 1998:
Allowance for
doubtful
accounts..$1,322,107 $ 469,935 (1) $( 898,000)(5) $(456,863)(3)$ 437,179
========= ========= ========== ========== =========
Allowance
for vendor
claims
receivable.$ 80,000 $ 80,000
========= ========= ========== ========== =========
Allowance
for notes
receivable.$ -0- $ -0-
========= ========= ========== ========== =========
Year ended
February 1, 1997:
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)(6) $ 80,000
========= ========= ========== ========== =========
Allowance
for notes
receivable.. $ 282,767 $ (282,767)(7) $ -0-
========= ========= ========== ========== =========
Notes:
(1) Represents the provision for credit losses on receivables
ineligible for sale.
(2) Represents the allowance for doubtful accounts
applicable to the receivables acquired from Harris
(see Note 2 to the Consolidated Financial Statements).
(3) Represents uncollectible accounts written off,
net of recoveries, pertaining to receivables
ineligible for sale.
(4) Represents the allowance for vendor claims
receivable applicable to the outstanding vendor
claims acquired from Harris (see Note 2
to the Consolidated Financial Statements.)
(5) Represents a change in estimate for the allowance
for doubtful accounts related to receivables
which were ineligible for sale. (See Note 3 to
the Consolidated Financial Statements.) This amount
is included in net credit revenues in the fiscal
1997 consolidated income statement.
(6) Reduction in provision for uncollectible vendor claims
receivable.
(7) 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: April 30, 1999 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) April 30, 1999
Joseph W. Levy
President, Chief
Operating Officer April 30, 1999
_/s/ James R. Famalett e and Director
James R. Famalette
Senior Vice President
and Chief Financial
Officer (principal April 30, 1999
financial and
_/s/ Michael S. Geele accounting officer)
Michael S. Geele
/s/ O. James Woodward III Director April 30, 1999
O. James Woodward III
/s/ Bret W. Levy Director April 30, 1999
Bret W. Levy
/s/ Sharon Levy Director April 30, 1999
Sharon Levy
/s/ Joseph J. Penbera Director April 30, 1999
Joseph J. Penbera
/s/ Fred Ruiz Director April 30, 1999
Fred Ruiz
/s/ Max Gutmann Director April 30, 1999
Max Gutmann
/s/ Isidoro Alvarez Director April 30, 1999
Isidoro Alvarez
/s/ Jorge Pont Director April 30, 1999
Jorge Pont