SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
X Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for Quarterly period ended April 30,
1994
OR
____ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly 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 (I.R.S. Employer
incorporation or organization) Identification no.)
7 River Park Place East, Fresno, California 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code (209) 434-8000
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 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
The number of shares of the Registrant's common stock outstanding
as of April 30, 1994 was 10,415,981.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
April 30, 1994 and January 29, 1994 3
Condensed consolidated statements of operations -
thirteen weeks ended April 30, 1994 and
May 1, 1993 4
Condensed consolidated statements of cash flows -
thirteen weeks ended April 30, 1994 and
May 1, 1993 5
Notes to condensed consolidated financial
statements - thirteen weeks ended April 30, 1994
and May 1, 1993 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II. OTHER INFORMATION
Item 6 Exhibits and Current Report on Form 8-K 17
SIGNATURES
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars) April 30, 1994 January 29, 1994
(Unaudited) ASSETS
CURRENT ASSETS:
Cash $ 2,513 $ 1,213
Restricted cash (Note 2) 5,614
Receivables held for securitization
and sale (Note 3) 40,000
Receivables - net 14,964 25,436
14,964 65,436
Merchandise inventories (Note 4) 71,579 60,465
Other 10,789 12,573
Total current assets 105,459 139,687
PROPERTY AND EQUIPMENT 129,213 128,835
Less accumulated depreciation
and amortization 33,936 32,439
95,277 96,396
OTHER LONG-TERM ASSETS 13,071 12,247
$213,807 $248,330
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 5) $ 25,101 $ 49,700
Trade accounts payable 24,794 18,851
Accrued expenses 13,671 21,708
Accrued payroll and related
liabilities 4,329 5,013
Current portion of long-term
obligations 7,538 12,268
Total current liabilities 75,433 107,540
LONG-TERM OBLIGATIONS
(less current portion):
Notes and bonds payable (Note 5) 21,318 21,508
Capitalized lease obligations 9,870 9,985
31,188 31,493
DEFERRED INCOME 16,730 16,859
DEFERRED LEASE PAYMENTS AND OTHER 10,662 10,320
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock 104 104
Additional paid-in capital 56,036 56,021
Retained earnings 23,654 25,993
79,794 82,118
$213,807 $248,330
See notes to condensed consolidated financial statements
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - NOTE 1)
(In thousands of dollars, except share data)
Thirteen Weeks
Ended
April 30, May 1,
1994 1993
Net sales $ 70,221 $65,833
Service charges
& other income 2,282 2,304
72,503 68,137
COSTS & EXPENSES:
Cost of sales 48,036 45,052
Selling, general
& administrative
expenses 23,961 24,807
Depreciation &
amortization 1,389 1,577
Interest expense 2,627 1,781
Provision for unusual
items (Note 6) 268 644
76,281 73,861
LOSS BEFORE INCOME TAX
BENEFIT (3,778) (5,724)
Income tax benefit (1,435) (2,118)
NET LOSS $ (2,343) $(3,606)
Net loss per common share $ (.22) $ (.35)
Weighted average number
of common shares
outstanding 10,413 10,410
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
Thirteen Weeks
Ended
April 30, May 1,
1994 1993
OPERATING ACTIVITIES:
Net loss $ (2,343) $ (3,606)
Net proceeds from securitization
and sale of receivables (Note 3) 50,501
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities (16,847) (169)
31,311 (3,775)
INVESTING ACTIVITIES:
Purchases of property and
equipment (379) (3,936)
(379) (3,936)
FINANCING ACTIVITIES:
Proceeds from revolving line
of credit 14,236 32,400
Principal payments on revolving line
of credit and long-term
obligations (43,870) (24,428)
Issuance of common stock pursuant
to stock option plan 77
Repurchase of common stock pursuant
to stock option plan (75)
(29,632) 7,972
INCREASE IN CASH 1,300 261
CASH AT BEGINNING OF YEAR 1,213 1,106
CASH AT END OF PERIOD $ 2,513 $ 1,367
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks Ended
April 30, 1994 and May 1, 1993
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the thirteen week
periods ended April 30, 1994 and May 1, 1993 are not necessarily
indicative of the results that may be expected for the year
ending January 28, 1995, because of the seasonal nature of the
Company's business. It is suggested that the financial
statements be read in conjunction with the financial statements
and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended January 29, 1994.
The condensed consolidated balance sheet at January 29, 1994 has
been derived from the audited financial statements at that date.
Certain reclassifications have been made to 1993 amounts to
conform with 1994 presentation.
2. RESTRICTED CASH
Restricted cash at April 30, 1994 consists of $4,742,000 on
deposit with a bank to collateralize certain letters of credit
issued in the ordinary course of business and $872,000 of
customer credit card payments to be remitted to GCC Trust (Note
3). The letters of credit expired in May 1994 at which time the
related collateralization requirements were removed.
3. SECURITIZATION AND SALE OF ACCOUNTS RECEIVABLE
As described more fully in the Annual Report on Form 10-K for the
year ended January 29, 1994, the Company entered into an asset-
backed securitization program on March 30, 1994. Under the
program, all accounts receivable arising under the Company's
private label customer credit cards are automatically sold,
without recourse, to a wholly-owned subsidiary, Gottschalks
Credit Receivables Corporation ("GCRC") and certain of those
receivables are subsequently conveyed to a trust, Gottschalks
Credit Card Master Trust ("GCC Trust").
On March 30, 1994, GCC Trust sold undivided ownership interests,
at par value, in the receivables through the issuance of $40.0
million principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates ("Fixed Base Certificates") to third-party
investors. GCC Trust has also been authorized to issue up to a
$15.0 million principal amount Variable Base Class A-2 Credit
Card Certificate ("Variable Base Certificate"). Management
believes the Variable Base Certificate will be issued in the near
term. The Company has deferred approximately $300,000 of
transaction costs related to the Variable Base Certificate as of
April 30, 1994, and such costs will be recognized over the life
of the Variable Base Certificate upon its issuance.
On March 30, 1994, GCC Trust also issued to GCRC a Subordinated
Certificate and an Exchangable Certificate, representing GCRC's
retained interest in the receivables sold. Net receivables
included in the accompanying condensed consolidated balance sheet
includes GCRC's retained interest in such receivables, and is net
of an allowance for doubtful accounts based upon the expected
collectibility of all trade accounts receivable, including
receivables sold.
The proceeds from initial securitization and sale of the
receivables on March 30, 1994, amounting to $40.0 million, were
used to repay all outstanding borrowings under a pre-existing
line of credit facility with Wells Fargo Bank, N.A., ("Wells
Fargo"), which was due to expire on June 30, 1994, the $11.0
million Senior Notes due June 1996, and to pay certain costs
related to the transaction. Subsequent to March 30, 1994 and
through April 30, 1994, the Company sold an additional $11.1
million of receivables under the program. After the initial
sale, receivables are generally sold at a discount of 1% under
the program. Aggregate proceeds from such sales of $10.5
million, along with the $40.0 million from the initial sale of
receivables, are reported as operating cash flows in the
accompanying statement of cash flows.
In connection with the initial securitization and sale of the
Company's receivables, the Company recognized a loss of $200,000
during the thirteen week period ended April 30, 1994,
representing transaction costs in excess of the estimated excess
servicing gain related to the Fixed Base Certificate. Excess
servicing fees related to the Fixed Base Certificate are
recognized over the life of the related transaction.
4. 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
under the first-in, first-out (FIFO) method exceeded the LIFO
values by $3,202,000 at April 30, 1994 and January 29, 1994. An
actual valuation of inventory under the LIFO method can be made
only at the end of each year based on the inventory levels and
costs at that time. Since these are subject to many factors
beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation.
5. LONG-TERM OBLIGATIONS AND REVOLVING LINE OF CREDIT
The Company has a revolving line of credit with Barclays Business
Credit, Inc., ("Barclays"), which provides for borrowings of up
to $35.0 million, as limited to a restrictive borrowing base
($34.0 at April 30, 1994). The arrangement requires the Company
to repay all outstanding borrowings on the line of credit for
thirty consecutive days during the period of December 1 through
January 31 of each year and provides for interest to be charged
on outstanding borrowings at a rate equal to LIBOR plus 3.0%
(6.9% at April 30, 1994). At April 30, 1994, $25.1 million was
outstanding under the line of credit arrangement.
The Company also has a short and long-term loan facility with
Wells Fargo. The short-term loan, due June 28, 1994, is a $6.0
million 90-day term loan bearing interest at 10%. The long-term
loan, due June 30, 1996, has a total outstanding loan balance of
$18.5 million at April 30, 1994 and bears interest at rate of
10.0% at April 30, 1994, increasing 1/4% per quarter thereafter
to a maximum of 12%.
In connection with the Barclays and Wells Fargo loan agreements,
the Company has agreed to enter into additional long-term
financing arrangements prior to June 30, 1994 and use the
proceeds of such arrangements to repay the $6.0 million term loan
with Wells Fargo and to reduce the Company's outstanding
indebtedness to Barclay's by $5.0 million. The Company has
signed a letter of commitment with a financial institution which
will provide the Company with a five-year term loan for $11.5
million. Interest under the proposed term loan will be charged
at a rate equal to the prime interest rate plus 2% (currently
9.25%), and such term loan will be collateralized by certain
fixtures and equipment of the Company. Pursuant to the
provisions of the Barclays and Wells Fargo loan agreements,
proceeds from the proposed loan will be used to repay the $6.0
million term loan to Wells Fargo and to reduce total outstanding
borrowings to Barclays by $5.0 million. The remainder of the
proceeds will be used to fund working capital requirements of the
Company. Management believes the proposed term loan will be
finalized in the near term.
In order to repay all outstanding borrowings under the line of
credit arrangement with Barclays for thirty consecutive days
during the period of December 1 through January 31 of each year,
find the constriction, remodeling and fixturing of new stores
expected to be opened in 1994 and 1995 and satisfy increased
working capital requirements for seasonal inventory purchases,
the Company is also currently evaluating several additional
alternative financing sources, including the issuance of the
Variable Base Certificate under the asset-backed securitization
program (Note 3) and the mortgage of certain property of the
Company. Management believes that such an arrangement will be
finalized in the near term.
6. CONTINGENCIES AND PROVISION FOR UNUSUAL ITEMS
The Company was the subject of a federal investigation relating
to an employee benefit plan deduction (the "VEBA deduction") of
$3,674,000 on its 1985 federal tax return and certain financial
reporting practices. On April 13, 1994 the Company reached an
agreement with the Commissioner of the Internal Revenue to settle
all pending civil matters related to the VEBA deduction. Pursuant
to the terms of the agreement, the VEBA deduction on the
Company's 1985 federal tax return was disallowed. Such deduction
was, however, allowed in subsequent years. In connection with the
agreement, the Company paid a tax deficiency, interest and
penalties amounting to $2,282,000. These amounts were previously
accrued and were included in the Company's condensed consolidated
balance sheet at January 29, 1994.
On April 22, 1993, F&N Acquisition Corporation ("F&N") obtained
a partial summary judgment against the Company for breach of
an agreement to purchase a former Frederick and Nelson store
location in Spokane, Washington. The partial summary judgment
was subsequently affirmed in September 1993 by the United
States District Court for the Western District of Washington.
Pursuant to the provisions of the judgment, the Company was
ordered to pay F&N damages of $3,038,000. Management's estimate
of amounts that may be ultimately payable under the judgement
and legal fees related to this matter are included in the
Company's condensed consolidated balance sheets at April 30, 1994
and January 29, 1994. The Company is continuing to pursue the
matter vigorously and an appeal of the court's judgment is
presently pending before the United States Court of Appeals for
the Ninth Circuit.
In May 1993, a derivative action was filed by a stockholder
against the former independent auditors for the Company, certain
present and former officers and consultants to the Company and
certain present and former directors of the Company. The
complaint seeks to recover from the defendants the money damages
alleged to have been suffered by the Company as a result of the
VEBA deduction as well as other amounts. Additionally, class
action complaints have been filed in state and federal courts
against the Company, the defendants named in the derivative
complaint and others. These class action complaints seek money
damages as a result of alleged misrepresentations made in the
Company's public reports. In the opinion of management, the
ultimate outcome of these lawsuits cannot presently be
determined. Accordingly, no provision for any loss that may
result upon resolution of these lawsuits has been made in the
accompanying financial statements.
The Company has recorded an aggregate of $268,000 and $644,000
during the thirteen week periods ended April 30, 1994 and May 1,
1993, respectively, representing legal and accounting fees
related to the above matters. Such amounts are included in the
provision for unusual items in the accompanying condensed
consolidated statements of operations.
GOTTSCHALKS INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant
factors which have affected the Company's financial position and
results of operations for the periods presented in the
accompanying condensed consolidated financial statements.
RESULTS OF OPERATIONS
Thirteen Weeks Ended April 30, 1994 Compared To Thirteen Weeks
Ended May 1, 1993
The Company recorded a net loss of $2,343,000 in the first
quarter of 1994 compared to a net loss of $3,606,000 in the first
quarter of 1993. The operating loss prior to income taxes and
unusual items was $3,510,000 in the first quarter of 1994 as
compared to $5,080,000 in the first quarter of 1993. The
decrease in operating losses is primarily the result of an
increase in sales volume resulting from strong retail activity
and improved economic conditions in certain of the Company's
market areas in the first quarter of 1994. In addition, the
Company initiated various cost containment programs throughout
the Company beginning in 1993 resulting in an overall reduction
in its selling, general and administrative expenses as a percent
of net sales.
As discussed more fully in Note 6 to the condensed consolidated
financial statements, the net loss in the first quarter of 1994
and 1993 includes unusual charges of $268,000 and $644,000,
respectively, representing legal and accounting fees incurred in
connection with (i) the government's investigation of an employee
benefit plan deduction (the "VEBA deduction") of $3,674,000 on
the Company's 1985 federal tax return and certain of the
Company's financial reporting practices, (ii) related stockholder
litigation, and (iii) pending litigation related to the Company's
proposed acquisition of a former Frederick & Nelson store
location in Spokane, Washington. In April 1994, the Company
settled and paid all tax, penalties and interest due to the
Internal Revenue Service in connection with the VEBA deduction.
The following table sets forth for the periods indicated certain items
from the Company's condensed consolidated statements of operations, expressed
as a percent of net sales:
First Quarter First Quarter
1994 1993
Net sales 100.0% 100.0%
Service charges and other income 3.2 3.5
103.2 103.5
Costs and Expenses:
Cost of sales 68.4 68.4
Selling, general and
administrative expenses 34.1 37.7
Depreciation and amortization 2.0 2.4
Interest expense 3.7 2.7
Provision for unusual items .4 1.0
108.6 112.2
LOSS BEFORE INCOME TAX BENEFIT (5.4) (8.7)
Income tax benefit (2.0) (3.2)
NET LOSS (3.4)% (5.5)%
Net sales increased to $70.2 million in the first quarter of 1994
as compared to $65.8 million in the first quarter of 1993, or
6.7%. Comparable store sales increased 6.7% over the prior
year's first quarter. The increase in net sales of $4.4 million
in the first quarter of 1994 is primarily attributable to strong
retail activity and improved economic conditions in certain of
the Company's market areas.
Service charges and other income remained unchanged at $2.3
million in the first quarter of 1994 and 1993. Service charges
and servicing fee income associated with the Company's customer
credit cards increased to $2.3 million in the first quarter of
1994 as compared to $2.2 million in the first quarter of 1993, or
6.5%. This increase relates to an increase in the Company's
credit card sales as a percent of net sales to 43.4% in the first
quarter of 1994 as compared to 39.7% in the first quarter of
1993, and occurred primarily as a result of a new Instant Credit
program initiated in October 1993. Other income includes a
$200,000 loss related to the receivables securitization program
recognized in the first quarter of 1994 (Note 3).
Cost of sales increased to $48.0 million in the first quarter of
1994 as compared to $45.1 million in the first quarter of 1993,
or 6.6%. The Company's gross margin percent remained unchanged
at 31.6% in the first quarter of 1994 and 1993 despite the
increase in sales volume as a result of an increase in
promotional markdowns necessitated by intense competition during
the quarter.
Selling, general and administrative expenses decreased
to $24.0 million in the first quarter of 1994 as compared to
$24.8 million in the first quarter of 1993, or 3.4%. Selling,
general and administrative expenses as a percent of net sales
decreased to 34.1% in the first quarter of 1994 as compared to
37.7% in the first quarter of 1993. This decrease as a percent of
net sales occurred as a result of an increase in sales volume and
a reduction in payroll and related costs through the
restructuring of the Company's sales, buying and support staff,
and the implementation of expense control measures throughout the
Company.
Depreciation and amortization expense decreased to $1.4 million
in the first quarter of 1994 as compared to $1.6 million in the
first quarter of 1993, or 11.9%. Depreciation and amortization
expense as a percent of net sales decreased to 2.0% in the first
quarter of 1994 as compared to 2.4% in the first quarter of 1993.
This decrease resulted primarily from an increase in sales volume
and a decrease in the amortization of pre-opening costs related
to the Company's new stores.
Interest expense increased to $2.6 million in the first quarter
of 1994 as compared to $1.8 million in the first quarter of 1993,
or 47.5%. Interest expense as a percent of net sales increased
to 3.7% in the first quarter of 1994 as compared to 2.7% in the
first quarter of 1993. This increase related to an increase in
the interest rate charged on outstanding borrowings under the
Company's line of credit facility from 6.125% in the first
quarter of 1993 to a weighted average interest rate of 6.85%
during the first quarter of 1994. The increase in the interest
rate was not fully offset by reduced borrowings on the line of
credit arrangement resulting from the application of proceeds
from the securitization and sale of the Company's receivables
during the first quarter of 1994. In addition, the increase
resulted from additional amortization of loan fees applicable to
certain of the Company's short and long-term credit facilities
that were refinanced in March 1994.
The Company accounts for income taxes in accordance with
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". The interim effective tax rate represents the
Company's best estimate of the annual effective tax rate for the
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable, excluding amounts held for securitization
and sale at January 29, 1994, decreased to $15.0 million at April
30, 1994 from $25.4 million at January 29, 1994. This decrease
of $10.4 million is primarily due to the seasonal nature of the
Company's business. Trade receivables are at their highest level
following the Christmas selling season and gradually decline
throughout the following months as customers repay outstanding
balances. Compared to the end of the first quarter of 1993,
accounts receivable decreased $36.8 million from $51.8 million.
As discussed more fully in Note 3 to the condensed consolidated
financial statements, this decrease resulted from the
securitization and sale of certain of the Company's customer
credit card receivables under an asset-backed securitization
program entered into during the first quarter of 1994.
Merchandise inventories increased to $71.6 million at April 30,
1994 from $60.5 million at January 29, 1994. This increase of
$11.1 million is also primarily attributable to seasonality in
that inventories are at their lowest level following the
Christmas selling season and steadily increase in the following
months. Compared to the end of the first quarter of 1993,
inventories increased $1.7 million from $69.9 million. A portion
of this increase is attributable to the new store in Redding,
California not open in the first quarter of the prior year.
Working capital decreased to $30.0 million at April 30, 1994 from
$32.1 million at January 29, 1994. The Company's current ratio
increased to 1.40:1 at April 30, 1994 from 1.30:1 at January 29,
1994. The decrease in working capital and increase in the
current ratio is primarily the result of a reduction in
receivables due to the securitization and sale of the Company's
customer credit card accounts receivable in the first quarter of
1994 (Note 3), in addition to reduced outstanding borrowings on
the Company's line of credit and other long-term borrowings
resulting from the application of proceeds from the
securitization and the refinancing of certain existing long-term
borrowing arrangements in the first quarter of 1994 (Note 5).
Additions to property and equipment were $379,000 in the first
quarter of 1994 as compared to $4.0 million for the first quarter
of 1993. The additions in the first quarter of 1994 related
primarily to the purchase of a new payroll software package and
the remodel of certain of the Company's existing store locations.
The $4.0 million of additions in the first quarter of 1993
consisted primarily of $3.5 million related to the construction
and fixturing of the new store opened in Hanford, California and
$400,000 related to the purchase of new computer communications
equipment in each of the Company's store locations.
As discussed more fully on Note 3 in the condensed consolidated
financial statements, the Company entered into an asset-backed
securitization program on March 30, 1994. Under the program,
accounts receivable arising under the Company's private label
customer credit card are automatically sold, without recourse, to
a wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC") and certain of those receivables are
subsequently conveyed to a trust, Gottschalks Credit Card Master
Trust ("GCC Trust"). The proceeds from initial securitization
and sale of the receivables on March 30, 1994, amounting to $40.0
million, were used to repay all outstanding borrowings under a
pre-existing line of credit facility with Wells Fargo Bank, N.A.,
("Wells Fargo"), which was due to expire on June 30, 1994, the
$11.0 million Senior Notes due June 1996, and to pay certain
costs related to the transaction. Subsequent to March 30, 1994
and through April 30, 1994, the Company sold an additional $11.1
million of receivables under the program. After the initial
sale, receivables are generally sold at a discount of 1% under
the program. Aggregate proceeds from such sales amounted to
$10.5 million and were used to fund working capital requirements
of the Company.
The Company has a revolving line of credit with Barclays Business
Credit, Inc., ("Barclays"), which provides for borrowings of up
to $35.0 million, as limited to a restrictive borrowing base
($34.0 at April 30, 1994). The arrangement requires the Company
to repay all outstanding borrowings on the line of credit for
thirty consecutive days during the period of December 1 through
January 31 of each year and provides for interest to be charged
on outstanding borrowings at a rate equal to LIBOR plus 3.0%
(6.9% at April 30, 1994). At April 30, 1994, $25.1 million was
outstanding under the line of credit arrangement.
The Company also has a short and long-term loan facility with
Wells Fargo Bank, N.A. ("Wells Fargo"). The short-term loan, due
June 28, 1994, is a $6.0 million 90-day term loan bearing
interest at 10%. The long-term loan, due June 30, 1996, has a
total outstanding loan balance of $18.5 million at April 30, 1994
and bears interest at rate of 10.0% at April 30, 1994, increasing
1/4% per quarter thereafter to a maximum of 12%.
The Company has signed a letter of commitment with a financial
institution which will provide the Company with a five-year term
loan for $11.5 million. Interest under the proposed term loan
will be charged at a rate equal to the prime interest rate plus
2% (currently 9.25%), and such term loan will be collateralized
by certain fixtures and equipment of the Company. Pursuant to
the provisions of the Barclays and Wells Fargo loan agreements,
proceeds from the proposed loan will be used to repay the $6.0
million term loan to Wells Fargo, reduce total outstanding
borrowings to Barclays by $5.0 million and fund working capital
requirements of the Company. Management believes the proposed
term loan will be finalized prior to June 30, 1994.
In order to repay all outstanding borrowings under the line of
credit arrangement with Barclays for thirty consecutive days
during the period of December 1 through January 31 of each year
and satisfy increased working capital requirements for seasonal
inventory purchases, the Company is continuing to evaluate
additional financing sources, including the issuance of the
Variable Base Certificate under the asset-backed securitization
program (Note 3) and the mortgage of certain property of the
Company. Management believes that such an arrangement will be
finalized in the near term and, together with the arrangements
previously described, believes the Company will have adequate
cash resources for its anticipated needs.
The Company announced its intention to open a new 190,000 square
foot store in Sacramento, California in November 1994 and a new
150,000 square foot store in Visalia, California in 1995. The
estimated cost to remodel and fixture the current 97,000 square
foot existing store location in Sacramento is $500,000, and such
costs are expected to be financed with proceeds from the proposed
$11.5 million term loan. The estimated cost to construct and
fixture a new store in Visalia, net of amounts to be received
from the developer of the project, are $1.0 million. Such costs
are expected to be financed through internally generated funds.
As discussed in Note 6 to the condensed consolidated financial
statements, class action lawsuits have been filed against the
Company. The ultimate outcome of these lawsuits cannot presently
be determined. Accordingly, no provision for any loss that may
result upon resolution of these lawsuits has been made in the
accompanying financial statements.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the
requirements of Item 601 of Regulations S-K:
Exhibit No. Description
10.7 Consulting agreement dated May 27, 1994
between Gottschalks Inc. and Mr. Gerald Blum.
10.80 Severance agreement dated June 17, 1993
between Gottschalks Inc. and Mr. Steven
Furst.
(b) The Company filed the following Current Report on Form 8-K
during the thirteen week period ended April 30, 1994:
-- Current Report on Form 8-K dated April 14, 1994,
describing pursuant to Item 2, Acquisition or
Disposition of Assets, the sale of certain of the
Company's accounts receivable arising under its private
label consumer revolving credit card accounts in
connection with an asset-backed securitization program
and the finalization of new loan agreements with Wells
Fargo Bank, National Association, and Barclays Business
Credit, Inc.
SIGNATURES
Pursuant to the requirements 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.
Gottschalks Inc.___________
(Registrant)
June 14, 1994
s/Joseph W. Levy
(Joseph W. Levy, Chairman
and Chief Executive Officer)
June 14, 1994
s/Alan A. Weinstein
(Alan A. Weinstein, Senior Vice
President and Chief Financial Officer)
CONSULTING AGREEMENT
PARTIES: (1)GOTTSCHALKS, INC., a
Delaware Corporation
("Company");
and
(2)GERALD H. BLUM ("Consultant").
RECITALS:
A.Consultant has been employed by the Company since
September, 1951. Since that time, Consultant has had a wide
variety of experience in all aspects of the Company's business.
From February, 1982 to November, 1993, Consultant served as
President and Chief Operating Officer of the Company. Effective
November 11, 1993, Consultant resigned his position as President
and Chief Operating Officer of the Company and assumed the
position of Vice Chairman of the Board of Directors of the
Company, while remaining an employee of the Company and
continuing to perform many of the same duties he performed in the
past.
B.The Company recognizes the extensive experience
that Consultant has in the retailing industry and his unique and
lengthy involvement in the Company's growth and success. The
Company wishes to continue to draw on Consultant's knowledge and
experience, and Consultant wishes to continue his relationship
with the Company but at a reduced level, but not less than a
half-time basis as compared to the period immediately preceding
the effective date of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and
of the respective covenants and agreements of the parties herein
contained, the parties hereto, intending to be legally bound,
agree as follows:
Section 1. Term of Consulting Duties. The Company
hereby employs Consultant and Consultant hereby accepts
employment as a consultant with the Company for the period of
June 1, 1994 through May 31, 1999. On June 1, 1995, and each
June 1 thereafter, the term of this Consulting Agreement
("Agreement") shall be extended by one (1) additional year,
unless (i) otherwise terminated in Section 4 Termination
hereinbelow or (ii) the Company, through its Board of Directors,
elects on or before May 1, 1995, or on or before any May 1 of any
year thereafter, not to extend the term of this Consulting
Agreement, in which case the term of this Agreement shall not be
extended and the Agreement shall terminate on June 1 of the year,
four (4) years thereafter.
Section 2. Duties of Consultant. Consultant is hereby
hired to perform services for the Company as a Consultant in the
areas of Consultant's expertise as specified on Exhibit "A"
attached hereto to the extent permitted by Consultant's mental
and physical health. Consultant hereby resigns, effective
immediately, as Secretary of the Company. Consultant may, so
long as he continues to be re-elected, continue to serve as Vice
Chairman of the Board, provided that Consultant shall not be
deemed in that or in any other capacity to constitute an officer
of the Company. In that capacity, Consultant shall be under the
reasonable direction of the Chief Executive Officer of the
Company. Consultant shall also provide advice and counsel, as
requested, to the Company's Board of Directors, Executive
Committee and/or Chief Executive Officer and other officers on
general managerial matters.
Section 3. Compensation. The Consultant shall receive
the following compensation for his duties hereunder:
(a)Salary. The Company shall pay to Consultant
during the term of this Agreement the annual salary of two
hundred thousand dollars ($200,000), payable in equal monthly
installments each calendar month during the term of this
Agreement. The Company shall continue to deduct state and
federal taxes.
(b)Expenses. During the term of this Agreement,
the Consultant shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by him (approved in advance
by the Chief Executive Officer) in performing services hereunder,
provided that the Consultant properly accounts for such expenses
in accordance with Company policy.
(c)Fringe Benefits. During the term of this
Agreement, the Consultant shall be entitled to continue to
participate in or receive benefits under all of the Company's
employee benefits plans and arrangements in effect on the date
hereof, including, but not limited to, health and medical plans
for Consultant and his eligible dependents, or plans or
arrangements providing the Consultant with at least equivalent
benefits thereunder. During the term of this Agreement, the
Consultant shall be entitled to participate in or receive
benefits under any retirement or pension plan, supplemental
retirement or pension plan, profit sharing plan, savings plan,
life insurance, stock option, disability, health and medical
plans or arrangements made available by the Company in the future
to its Chief Executive Officer, President, Chief Operating
Officer, Chief Financial Officer, Senior or Executive Vice
Presidents, or any of them ("Executive Group"), subject to the
terms, conditions and overall administration of such plans and
arrangements. Nothing paid to the Consultant under any plan or
arrangement described in this paragraph (c) whether presently in
effect or made available in the future, shall be deemed to be in
lieu of compensation to be paid to the Consultant pursuant to
paragraph (a) above.
(d)Miscellaneous.
(1) Office and Clerical
Expense.
During this Agreement, and in addition to the compensation
provided for in this Section 3, the Company shall reimburse
Consultant twelve thousand dollars ($12,000) per year for
clerical and office rental expense payable monthly. Consultant
shall, within thirty (30) days of the effective date of this
Agreement, vacate his current office in the Executive Offices of
the Company. Consultant shall be entitled to purchase his desk
and office furnishings from the Company at the book value for
such furniture and office furnishings as carried on the books of
the Company for accounting purposes.
(2) Legal Costs. The Company shall,
within fifteen (15) days after the effective date of this
Agreement, reimburse Consultant for attorneys' fees and costs
incurred by Consultant from September 21, 1993, through the
effective date of this Agreement in connection with events
leading to, and the preparation of, this Agreement. O. James
Woodward III, a member of the Board of Directors of the Company,
shall be allowed to review the billing statements for such
attorneys' fees and costs to assure their reasonableness;
provided, however, that such review shall not be deemed a waiver
of the attorney-client privilege between Consultant and his
attorneys with respect to any privileged communications.
Section 4. Termination.
(a)Death. This Agreement shall terminate upon
Consultant's death.
(b)Disability. If, as a result of the
Consultant's incapacity due to physical or mental illness, the
Consultant shall have been absent from his duties hereunder for
150 consecutive business days, and within 30 days after a Notice
of Termination (as hereinafter defined), is given by the Company,
if the Consultant shall not have returned to the performance of
his duties hereunder, the Company may terminate this Agreement.
(c)Cause. The Company may terminate the
Consulting Duties hereunder "for cause." For the purposes of
this Agreement, termination "for cause" shall mean termination
because of the Consultant's (i) willful misconduct, (ii) repeated
failure to perform stated duties despite written warnings
covering a period of at least ninety (90) business days,
(iii) substance abuse, (iv) theft of Company property,
(v) disclosure of Company's trade secrets to Company's
competitors without Company approval or (vi) acceptance of
employment in a consulting position with a competitor of the
Company, any of which must have occurred during the period of
this Agreement.
(d)Termination By the Consultant. The
Consultant may terminate this Agreement for any reason by giving
a Notice of Termination hereunder to the Company.
(e)Notice of Termination. Any termination by
the Company pursuant to paragraphs (b) or (c) above or by the
Consultant pursuant to paragraph (d) above shall be communicated
by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision
in this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated.
(f)Date of Termination. Date of termination of
this Agreement shall mean (i) if terminated by his death, the
date of his death; (ii) if terminated pursuant to paragraph (b)
above, 30 days after Notice of Termination is given, provided
that the Consultant shall not have returned to the performance of
his duties during such 30-day period; and (iii) if terminated
pursuant to paragraphs (c) or (d) above, the date specified in
the Notice of Termination.
Section 5. Compensation Upon Termination.
(a)Compensation Upon Death. In the event of the
termination of this Agreement by reason of Consultant's death
during the first three (3) years of this Agreement, Consultant's
spouse or other designated beneficiary shall receive the
compensation otherwise payable to Consultant under Section 3(a)
above for an additional period of twelve (12) months following
such termination, and the terms of Section 6 hereof shall apply.
Payments under Section 6 shall be in addition to any payments the
Consultant's spouse, beneficiaries or estate may be entitled to
receive pursuant to any other pension or employee benefit plan or
life insurance policy maintained by the Company for Consultant.
(b)Disability Compensation. During any period
that the Consultant fails to perform Consulting Duties hereunder
as a result of incapacity due to physical or mental illness, the
Consultant shall continue to receive his full salary in
accordance with Section 3(a) hereof until the Consulting Duties
are terminated pursuant to Section 4(b) hereof. If such
termination occurs during the first three (3) years of this
Agreement, Consultant, or Consultant's spouse or other designated
beneficiary in the event of Consultant's death, shall receive the
compensation otherwise payable to Consultant under Section 3(a)
at the rate in effect at the time Notice of Termination is given
for an additional period of twelve (12) months following such
termination, and the terms of Section 6 hereof shall then apply.
(c)Termination for Cause. If this Agreement is
terminated "for cause," the Company shall pay Consultant his full
salary through the Date of Termination at the rate in effect at
the time Notice of Termination is given, and the terms of
Section 6 shall then apply.
(d)Voluntary Termination. If the Consultant
shall terminate this Agreement, the Company shall pay the
Consultant, through the Date of Termination, his full salary at
the rate in effect at the time Notice of Termination is given,
and the terms of Section 6 shall then apply.
Section 6. Retirement Benefits. Upon termination of
this Agreement for any reason, Consultant and/or his
beneficiaries shall be entitled to benefits as set forth in this
Section 6:
(a)Future Retirement Plan. Consultant and/or
his beneficiaries shall be entitled to receive retirement or
other benefits equivalent to, and for the periods provided for,
those benefits that may be adopted by the Company for its
"Executive Group" in the future, as described in Section 3(c).
(b)Health Insurance. Upon termination of this
Agreement, Consultant shall be permitted, at Consultant's cost,
to continue to participate in the same health and medical plan,
or its equivalent, as provided to the "Executive Group." The
cost to Consultant shall be the cost of the premium for such
health and medical plan, which premium shall be the same as would
be chargeable under the Federal COBRA law. Nothing in this
Section 6(b) shall be deemed to modify the provisions of
Section 3(c) which require that the Company pay the premium for
the health and medical plan for Consultant during this Agreement.
(c)COLA Provision. If any person occupying the
position of Chairman and/or Chief Executive Officer of the
Company ("Retired CEO") retires during the lifetime of Consultant
and such Retired CEO's retirement plan or arrangement provides
for any type of cost of living adjustment, escalator or other
mechanism for increasing the level of retirement benefits for
such Retired CEO after the date of such Retired CEO's retirement
("COLA Provision"), the Consultant's compensation under
Section 3(a) and the level of benefits payable
under this Section 6 shall be increased by the same percentage as
that permitted under the COLA Provision for the Retired CEO.
(d) No Change or Modification. Notwithstanding
any provisions to the contrary in the retirement or pension plans
adopted by the Company in the future for its "Executive Group,"
the Company shall have no power to modify or terminate the
benefits provided under this Section 6.
Section 7. No Mitigation. The Consultant shall not be
required to mitigate the amount of any payment provided for in
this Agreement in connection with or following termination of
this Agreement by seeking other employment or otherwise, nor
shall the amount of any such payment provided for herein be
reduced by any compensation earned by the Consultant as the
result of employment by another employer after the termination of
this Agreement. This shall not restrict the Company from
exercising its right to terminate "for cause" under Section 4(c)
for Consultant being employed by a competitor.
Section 8. Tolling of Limitations Period. Without
admitting the validity of any possible claims by Consultant, the
Company agrees that the statute of limitations shall be tolled,
from the effective date of this Agreement through its
termination, with respect to any possible claims by Consultant
against Company arising out of or in any way relating to
Consultant's employment with the Company prior to the effective
date of this Agreement.
Section 9. Attorneys' Fees. In the event of default
under this Agreement, the defaulting party shall be liable to the
non-defaulting party for all expenses and costs incurred by the
non-defaulting party in protecting or enforcing its rights under
this Agreement including, but not limited to, reasonable
attorneys' fees.
Section 10. Successors; Binding Agreement.
(a)This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company or by any
merger or consolidation in which the Company is not the surviving
or resulting corporation, or upon any transfer of all or
substantially all of the assets of the Company. In the event of
any such merger, consolidation or transfer of assets, the
provisions of this Agreement shall bind and inure to the benefit
of the surviving or resulting corporation, or the corporation to
which such assets shall have been transferred, as the case may
be.
(b)The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation
or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance
satisfactory to the Consultant, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement. The Company shall
immediately advise Consultant of its failure to obtain such
Agreement. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to the
Company's business and/or assets as aforesaid which executes and
delivers the Agreement provided for in this paragraph (b) or
which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(c)This Agreement and all rights of the
Consultant hereunder shall inure to the benefit of and be
enforceable by the Consultant's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
Section 11. Notice. For the purposes of this
Agreement, notices and all other communications provided for in
this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Consultant:
Gerald H. Blum
2020 West Alluvial
Fresno, California 93711
If to the Company:
GOTTSCHALKS, INC.
Post Office Box 28920
Fresno, California 93729
Attention: Board of Directors
Or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
Section 12. Miscellaneous. No provision of this
Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed
by the Consultant and such officer or agent as may be
specifically designated by the Board of Directors of the Company.
No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of
California.
Section 13. Validity. The invalidity or
unenforceability of any provision or provisions of this Agreement
shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and
effect.
Section 14. Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be
deemed to be an original but all of which together will
constitute one and the same instrument.
Section 15. Entire Agreement. This Agreement,
including Exhibit A attached hereto, embodies the entire
Agreement of the parties respecting the employment of the
Consultant and his retirement.
Section 16. Term of Agreement. This Agreement shall
be effective on the date last written below and shall terminate
as provided in Section 1 hereof except as otherwise provided
herein and further provided that any and all covenants governing
the payment of benefits as provided in Section 6 hereof shall
survive.
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IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date written below.
"COMPANY"
GOTTSCHALKS, INC.
By: s/Joseph W. Levy
Title: Chairman and Chief Executive Officer
Date: May 27, 1994
"CONSULTANT"
s/Gerald H. Blum
Gerald H. Blum
Date: May 27, 1994
EXHIBIT A
In addition to advice and counsel on general managerial
matters, the Chief Executive Officer may direct Consultant to
perform the following duties:
1.Editing, including selecting the cover story, for
the Gottschalks' quarterly newsletter, THE RETAILER. The
ultimate decision on articles and copy would remain with the
officer designated by the Chief Executive Officer. Subject to
approval by the Chief Executive Officer, Consultant will also
select the editor.
2.Review letters of intent, building site locations,
leases and any other legal documents specified by the Chief
Executive Officer or the Company's legal counsel.
3.Organize and chair the annual Top Sales Achiever's
Banquet and Awards function. With the approval of the Chief
Executive Officer or other designated official of the Company,
select the top 20 sales persons for the Company each year.
4.Consult with outside vendors and administrators
concerning fringe benefits, including health insurance, life
insurance and disability insurance, and work with officials
designated within the Company by the Chief Executive Officer on
benefit packages, rates, cost containment, etc.
5.Continue preparation of a brief history of the
Company.
6.Represent the Company on the Board of Directors of
the following organizations:
(a)California Retailer's Association;
(b)National Retail Federation;
(c)Liberty Mutual Advisory Board; and
(d)University of Santa Clara Retail Management
Institute.
7.In order to maintain the Company's presence and
visibility, Consultant is encouraged to continue participation in
the following organizations and such other organizations as are
mutually agreed upon by the Chief Executive Officer and
Consultant:
(a)California State University Fresno Business
Advisory Council;
(b)Fresno County Visitor's and Convention
Bureau;
(c)C.A.R.E.;
(d)Stanford Alumni Association; and
(e)Rotary Club of Fresno.
8.Such other projects and duties as are consistent
with Consultant's expertise and experience.
SEVERANCE AGREEMENT
This Severance Agreement, made as of this 17 day of June, 1993
(this "Agreement"), by and between Gottschalks Inc., a Delaware Corporation
("Company") and Stephen J. Furst, an individual.
The Company hereby agrees that in the event that your employment with the
Company is terminated by notice of the Company, the Company will pay you a
severance benefit equal to six (6) months salary, determined at your annual
base rate of pay in effect at the time of your termination (such benefit
herein referred to as the "Severance Benefit").
For purposes of this agreement, "annual base rate of pay" means only your
annual base salary, excluding all other income received by you, such as,
but not limited to, bonuses, incentive compensation, fringe benefits,
commissions, overtime, retainers, fees under contracts, income arising
from the exercise of stock options, or expense allowances granted by the
Company.
Your Severance Benefit, less applicable tax withholding, will be paid to
you out of the general assets of the Company in the same form and at the
same time as your salary otherwise would have been paid to you if you had
continued to be employed by the Company.
The Severance Benefit described herein shall be paid to you only in the
event of the termination of your employment by notice from the Company
and only if you remain at work, and perform each and every duty of your
employment, until your scheduled date of termination (unless the Company
consents to an earlier date of termination prior to such date).
The Severance Benefit is not applicable to and will not be paid in the
event of any other loss of employment, such as due to a quit, retirement,
resignation, or death. Nor will the Severance Benefit hereunder be paid
in the event the Company sells all or part of its business
(or otherwise merges, divides consolidates or reorganizes) and
you have the opportunity to continue employment with the buyer
(or one of the resulting entities in the event of a merger, division,
consolidation or reorganization), regardless of whether the terms and
conditions of your employment are the same as your prior employment
with the Company.
Moreover, the Severance Benefit is not applicable to and will not be paid
in the event of termination for misconduct or cause, such as for,
but not limited to, insubordination or dishonesty, poor or inadequate
performance or in any way hampering the smooth transition in
Company management.
For the purpose of this Agreement, "quit" shall not include termination
of employment as the result of a constructive discharge, which for
purposes of this Agreement shall include only a case in which you quit
in the event your annual base rate of pay is reduced by 10% or more,
or your primary job location is changed by 200 miles or more.
It is noted that the Company's Compensation Committee and its auditors,
Deloitte & Touche, are working on a new incentive program, which would
base executive income on performance and profit, and it is expected that
this program will be in place before you complete your first year of
employment.
Nothing contained herein shall be construed as conferring on you the
right to continue in the employ of the Company in your present or any
other capacity. This Agreement may be amended only by a subsequent
written Agreement signed by you and an authorized representative of the
Company. Any disputes concerning this Agreement shall be resolved through
arbitration. In the event of such a dispute, you shall designate one
arbitrator, the Company shall designate one arbitrator and the arbitrators
designated by the parties shall designate the third arbitrator. If a
dispute is referred to arbitration, the decision of the panel of
arbitrators shall be terms of this agreement and the principles set
forth herein. The arbitrators' decision or any settlement reached by
the parties shall be binding upon the parties.
GOTTSCHALKS INC.
By: s/ Joe Levy
Title: Chairman
Agreed to this 17th day of June, 1993.
s/ Stephen J. Furst
