UNITED STATES
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 the quarterly period ended July 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 July
30, 1994 was 10,516,520.
<PAGE>
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
July 30, 1994 and January 29, 1994 2
Consolidated statements of operations -
thirteen weeks and twenty-six weeks ended
July 30, 1994 and July 31, 1993 3
Condensed consolidated statements of cash flows -
twenty-six weeks ended July 30, 1994 and
July 31, 1993 4
Notes to condensed consolidated financial
statements - thirteen weeks and twenty-six
weeks ended July 30, 1994 and July 31, 1993 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to Vote of Security
Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars) July 30, 1994 January 29, 1994
(Unaudited)
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 2,052 $ 1,213
Restricted cash (Note 2) 1,115
Receivables held for
securitization and sale (Note 3) 40,000
Receivables - net 14,114 25,436
14,114 65,436
Merchandise inventories (Note 4) 71,315 60,465
Other 12,312 12,573
Total current assets 100,908 139,687
PROPERTY AND EQUIPMENT 129,816 128,835
Less accumulated depreciation
and amortization 35,432 32,439
94,384 96,396
OTHER LONG-TERM ASSETS 13,148 12,247
$208,440 $248,330
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 5) $ 19,388 $ 49,700
Trade accounts payable 26,081 18,851
Accrued expenses 16,877 21,708
Accrued payroll and related
liabilities 4,546 5,013
Short-term obligation (Note 5) 6,000
Current portion of long-term
obligations 1,482 12,268
Total current liabilities 74,374 107,540
LONG-TERM OBLIGATIONS
(less current portion):
Notes and bonds payable (Note 5) 21,060 21,508
Capitalized lease obligations 9,755 9,985
30,815 31,493
DEFERRED INCOME 16,613 16,859
DEFERRED LEASE PAYMENTS AND OTHER 10,778 10,320
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock 104 104
Additional paid-in capital 56,089 56,021
Retained earnings 19,667 25,993
75,860 82,118
$208,440 $248,330
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
<TABLE>
Thirteen Weeks Twenty-Six Weeks
Ended Ended
July 30, July 31, July 30, July 31,
1994 1993 1994 1993
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 80,515 $ 76,223 $150,736 $142,056
Service charges
& other income 2,432 2,151 4,714 4,455
82,947 78,374 155,450 146,511
COSTS & EXPENSES:
Cost of sales 55,586 52,637 103,622 97,689
Selling, general
& administrative
expenses 25,959 25,796 49,920 50,603
Depreciation &
amortization 1,369 1,515 2,758 3,092
Interest expense 2,275 1,811 4,902 3,592
Provision for unusual
items (Note 6) 3,565 472 3,833 1,116
88,754 82,231 165,035 156,092
LOSS BEFORE INCOME
TAX BENEFIT (5,807) (3,857) (9,585) (9,581)
Income tax benefit (1,824) (1,427) (3,259) (3,545)
NET LOSS $ (3,983) $ (2,430) $ (6,326) $ (6,036)
Net loss per common
share $ (.38) $ (.23) $ (.61) $ (.58)
Weighted average number
of common shares
outstanding 10,416 10,359 10,414 10,367
</TABLE>
See notes to condensed consolidated financial statements.<PAGE>
GOTTSCHALKS INC. AND
SUBSIDIARY
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - NOTE 1)
(In thousands of dollars)
<TABLE>
Twenty-Six Weeks
Ended
July 30, July 31,
1994 1993
<CAPTION>
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (6,326) $ (6,036)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities 3,914 1,570
(2,412) (4,466)
INVESTING ACTIVITIES:
Purchases of property and
equipment (1,041) (4,138)
(1,041) (4,138)
FINANCING ACTIVITIES:
Proceeds from securitization
and sale of receivables (Note 3) 40,000
Proceeds from revolving line
of credit and short-term
obligation 88,155 54,322
Principal payments on revolving line
of credit and long-term obligations (123,931) (45,462)
Issuance of common stock pursuant
to stock option plan 94
Retirement of common stock pursuant
to stock option plan (97)
Purchases of common stock for treasury (154) (166)
Proceeds from sale of treasury stock 225
4,292 8,694
INCREASE IN CASH 839 90
CASH AT BEGINNING OF YEAR 1,213 1,106
CASH AT END OF PERIOD $ 2,052 $ 1,196
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks and Twenty-Six Weeks Ended
July 30, 1994 and July 31, 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
and twenty-six week periods ended July 30, 1994 and July 31, 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 July 30, 1994 consists of $870,000 of customer credit card
payments to be remitted to GCC Trust and $245,000 for the payment of monthly
interest to holders of Fixed Base Certificates (Note 3). There was no
restricted cash at January 29, 1994.
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"). The Company has continued to service and administer the receivables
in return for a monthly servicing fee.
On March 30, 1994, GCC Trust sold at par value, undivided ownership interests
in certain of 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. On March 30, 1994, GCC Trust also
issued to GCRC a Subordinated Certificate and an Exchangeable Certificate,
representing GCRC's retained interest in the receivables. Net receivables
included in the accompanying condensed consolidated balance sheets represents
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 the 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, to retire
Company's $11.0 million Senior Notes due June 1996, and to pay certain costs
related to the securitization transaction. During the period subsequent to
March 30, 1994 and through July 30, 1994, the Company sold an additional $47.5
million of receivables under the program. After the initial sale, receivables
are generally sold at a discount of 1%. Aggregate proceeds from such sales,
totalling $46.8 million, were used to fund the working capital requirements of
the Company and are reported as cash flows from operating activities in the
accompanying statement of cash flows. The proceeds from the initial
securitization and sale of receivables of $40.0 million are reported as cash
flows from financing activities 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, 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.
The Company has reached an agreement in principal that will provide for the
issuance of a Variable Base Class A-2 Credit Card Certificate ("Variable Base
Certificate") in the principal amount of up to $15.0 million from GCC Trust to
Bank Hapaolim. The Variable Base Certificate, representing certain
receivables held by GCC Trust (excluding receivables underlying the Fixed Base
Certificate and GCRC's retained interest), is to be used as collateral for a
revolving line of credit financing arrangement with Bank Hapaolim that will
provide the Company with borrowings of up to a maximum of $15.0 million
through October 1996. Advances on the line of credit will not be permitted
after October 1996 and all outstanding borrowings must be repaid by March 30,
1997. The maximum amount available for borrowings on the line of credit
arrangement is restricted by the outstanding principal balance of receivables
underlying the Variable Base Certificate. Interest on outstanding borrowings
on the line of credit will be charged at a rate of LIBOR plus 1.0%, not to
exceed a maximum of 12.0%. Management believes there will be an adequate
level of receivables held by GCC Trust to provide for borrowings on the line
of credit to be secured by the Variable Base Certificate beginning in November
1994, and management believes the agreement with Bank Hapaolim will be
finalized prior to that time. The Company intends to use proceeds from such
borrowings to reduce outstanding indebtedness on the Company's line of credit
arrangement with Barclays Business Credit, Inc. (Note 5).
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, which approximates replacement cost, under
the first-in, first-out (FIFO) method exceeded the LIFO value of inventories
by $3,202,000 at January 29, 1994. Valuation of inventory under the LIFO
method is presently made only at the end of each year based on actual
inventory levels and costs at that time. Since these factors are subject to
variability beyond the control of management, interim results of operations
are subject to the final year-end LIFO inventory valuation.
5. DEBT FINANCING
The Company has a revolving line of credit arrangement with Barclays Business
Credit, Inc., ("Barclays"), which provides for borrowings of up to $35.0
million through March 30, 1997, limited to a restrictive borrowing base ($33.8
million at July 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% (7.5% at July 30, 1994). At July 30, 1994, $19.4 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 November 30, 1994, is a
$6.0 million term loan bearing interest at rates ranging from 10% to 10 1/2%.
The long-term loan, due June 30, 1996, has a total outstanding loan balance of
$18.4 million at July 30, 1994 and bears interest at a rate of 10 1/4% at July
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
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 reduce the Company's outstanding indebtedness
to Barclays by $5.0 million. The Company was unable to finalize such an
arrangement prior to June 30, 1994. Wells Fargo extended the maturity date of
the $6.0 million term loan, originally due June 28, 1994, to November 30, 1994
(Note 3). The Company also paid an additional loan fee to Barclays and was
relieved of the obligation to reduce outstanding borrowings by $5.0 million on
the Barclays line of credit.
Management believes that proceeds from the line of credit expected to be
provided by Bank Hapaolim (Note 3), together with a seasonal increase in
internally generated funds during the Christmas selling season, will provide
the Company with adequate cash resources to repay all outstanding borrowings
under the line of credit arrangement with Barclays for thirty consecutive days
during the period of December 1, 1994 through January 31, 1995.
The Company also anticipates entering into a long-term financing arrangement
through the mortgage of certain property of the Company. Proceeds from the
contemplated arrangement, expected to be finalized prior to November 30, 1994,
are first to be used to repay the $6.0 million term loan with Wells Fargo and
then to repay a portion of any outstanding borrowings on the Company's line of
credit agreement with Barclays.
6. CONTINGENCIES AND PROVISION FOR UNUSUAL ITEMS
As described more fully in the Annual Report on Form 10-K for the year ended
January 29, 1994, the Company and certain of its past and present officers and
directors are parties to three civil lawsuits related to an income tax
deduction on the Company's 1985 Federal tax return and the reports and
registration statements filed by the Company with the Securities and Exchange
Commission. On August 26, 1994, the Company reached an agreement to settle
all aspects of those lawsuits. Included in the Company's results of
operations for the thirteen and twenty-six week periods ended July 30, 1994 is
a provision of $3,500,000, representing the cost of the proposed settlement
and certain related legal fees and other costs.
F&N Acquisition Corporation ("F&N") obtained a partial summary judgment
against the Company on April 22, 1993 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 and the Company
was ordered to pay F&N damages of $3,038,000 plus accrued interest from the
date of the judgment. Amounts payable under the judgement were fully accrued
as of January 29, 1994. The Company is continuing to pursue the matter
vigorously, however, and an appeal of the court's judgment is presently
pending before the United States Court of Appeals for the Ninth Circuit.
On June 3, 1994, an additional complaint was filed against the Company by
Sabey Corporation, the owner of the mall in which the Frederick & Nelson
store was located. The complaint seeks damages suffered by the mall due to
the Company's failure to purchase and assume the Frederick & Nelson store
lease. Inasmuch as the ultimate outcome of this additional lawsuit cannot
presently be determined, no provision for any loss that may result upon its
resolution has been made in the financial statements.
The Company recorded an aggregate of $3,565,000 and $472,000 during the
thirteen week periods and $3,833,000 and $1,116,000 during the twenty-six week
periods ended July 30, 1994 and July 31, 1993, respectively, related to the
government's investigation of a tax deduction on the Company's 1985 Federal
tax return and the reports and registration statements filed by the Company
with the Securities and Exchange Commission and related stockholder
litigation. Management does not anticipate that any additional costs related
to these matters that may be incurred will be material to the operating
results of the Company.<PAGE>
GOTTSCHALKS INC. AND SUBSIDIARY
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 results of operations for
the periods presented in the accompanying condensed consolidated financial
statements.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 30, 1994 Compared To Thirteen Weeks Ended July 31,
1993
The Company recorded a net loss of $3,983,000, or $.38 per common share, in
the second quarter of 1994 as compared to $2,430,000, or $.23 per common
share, in the second quarter of 1993. The operating loss prior to income
taxes and unusual items was $2,242,000 in the second quarter of 1994 as
compared to $3,385,000 in the second quarter of 1993. The reduction in the
operating loss of $1,143,000 was primarily the result of an increase in sales
volume, higher service charge income associated with the Company's customer
credit cards and a reduction in selling, general and administrative expenses
as a percent of net sales. These factors were partially offset by increased
interest expense and higher advertising costs.
The net loss in the second quarters of 1994 and 1993 includes unusual items
totalling $3,565,000 and $472,000, respectively. As discussed more fully in
Part II, Item I, Legal Proceedings, and in Note 6 to the condensed
consolidated financial statements, the unusual items in the second quarter of
1994 include a charge of $3,500,000 to reflect a provision for a proposed
settlement of the stockholder litigation presently pending against the Company
and related legal fees and other costs. Additional unusual items in the
second quarter of 1994 and the unusual items in the second quarter of 1993
consist primarily of legal fees incurred in connection with the government's
investigation of a tax deduction on the Company's 1985 Federal tax return and
the reports and registration statements filed by the Company with the
Securities and Exchange Commission and related stockholder litigation.
Management does not anticipate that any additional costs related to these
matters that may be incurred will be material to the operating results of the
Company.
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:
<TABLE>
Second Quarter Second Quarter
1994 1993
<CAPTION>
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges and other income 3.0 2.8
103.0 102.8
Costs and Expenses:
Cost of sales 69.0 69.1
Selling, general and
administrative expenses 32.2 33.8
Depreciation and amortization 1.7 2.0
Interest expense 2.8 2.4
Provision for unusual items 4.5 .6
110.2 107.9
LOSS BEFORE INCOME TAX BENEFIT (7.2) (5.1)
Income tax benefit (2.3) (1.9)
NET LOSS (4.9)% (3.2)%
</TABLE>
Net sales increased to $80.5 million in the second quarter of 1994 as compared
to $76.2 million in the second quarter of 1993, or 5.6%. This increase of
$4.3 million is primarily attributable to an increase in comparable store
sales resulting primarily from strong retail activity and improved economic
conditions in certain of the Company's market areas. Comparable store sales
increased 5.7% over the prior year's second quarter.
Service charges and other income increased to $2.4 million in the second
quarter of 1994 as compared to $2.2 million in the second quarter of 1993.
Service charges, including servicing fees associated with the Company's
customer credit cards, increased to $2.1 million in the second quarter of 1994
as compared to $1.9 million in the second quarter of 1993, or 10.5%. This
increase relates to an increase in the Company's credit card sales as a
percent of net sales to 43.1% in the second quarter of 1994 as compared to
38.2% in the second quarter of 1993, and occurred primarily as a result of a
new Instant Credit program initiated in October 1993. In addition, 4.1% of
this increase relates to late charge fees on delinquent customer credit card
accounts that were not assessed prior to January 1994. Other income in the
second quarter of 1994 includes $116,000 of interest income related to income
tax refunds.
Cost of sales increased to $55.6 million in the second quarter of 1994 as
compared to $52.6 million in the second quarter of 1993, or 5.6%. The
Company's gross margin percent remained substantially unchanged at 31.0% in
the second quarter of 1994 as compared to 30.9% in the second quarter of 1993
despite the increase in sales volume as a result of an increase in
promotional markdowns as a percent of net sales necessitated by intense
competition and the liquidation of seasonal merchandise during the quarter.
Selling, general and administrative expenses remained unchanged at $26.0
million in the second quarters of 1994 and 1993. Selling, general and
administrative expenses as a percent of net sales decreased to 32.2% in the
second quarter of 1994 as compared to 33.8% in the second quarter of 1993.
This decrease as a percent of net sales occurred as a result of an increase in
sales volume and continued focus on expense control measures throughout the
Company. The Company also realized the benefit of interim experience
adjustments resulting in a reduction to required workers' compensation claim
reserves. These factors, which resulted in lower selling, general and
administrative expenses as a percent of net sales, were partially offset by an
increase in advertising and other promotional costs.
Depreciation and amortization expense decreased to $1.4 million in the second
quarter of 1994 as compared to $1.5 million in the second quarter of 1993, or
9.6%. Depreciation and amortization expense as a percent of net sales
decreased to 1.7% in the second quarter of 1994 as compared to 2.0% in the
second quarter of 1993. These decreases 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. The Company expects to realize an
increase in depreciation expense and amortization of store pre-opening costs
beginning in the fourth quarter of 1994 as a result of completing and opening
the new stores in Oakhurst and Sacramento, California.
Interest expense increased to $2.3 million in the second quarter of 1994 as
compared to $1.8 million in the second quarter of 1993, or 25.6%.
Interest expense as a percent of net sales increased to 2.8% in the second
quarter of 1994 as compared to 2.4% in the second quarter of 1993. These
increases 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
second quarter of 1993 to a weighted average interest rate of 7.39% during the
second quarter of 1994 and additional interest expense related to the Fixed
Base Certificate sold in connection with the receivables securitization
program, and were partially offset by reduced borrowings on the line of credit
resulting from the application of proceeds from the securitization and sale of
the Company's receivables in the first quarter of 1994.
The Company accounts for income taxes in accordance with Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". The effective tax
rate in the second quarter of 1994 was a credit of (31.4%) as compared to a
credit of (37.0%) in the second quarter of 1993. The reduction in the
effective tax rate resulted primarily from the impact of statutory annual
limitations to state net operating loss carryforwards.
Twenty-Six Weeks Ended July 30, 1994 Compared to Twenty-Six Weeks Ended July
31, 1993
The Company recorded a net loss of $6,326,000, or $.61 per common share, in
the first half of 1994 as compared to $6,036,000, or $.58 per common share, in
the first half of 1993. The operating loss prior to income taxes and unusual
items was $5,752,000 in the first half of 1994 as compared to $8,465,000 in
the first half of 1993. The reduction in the operating loss of $2,713,000 was
primarily the result of an increase in sales volume, higher service charge
income associated with the Company's customer credit cards and a reduction in
selling, general and administrative expenses as a percent of net sales. These
factors were partially offset by increased interest expense and higher
advertising costs.
The net loss in the first half of 1994 and 1993 includes unusual items
totalling $3,833,000 and $1,116,000, respectively. As discussed more fully in
Part II, Item I, Legal Proceedings, and in Note 6 to the condensed
consolidated financial statements, the unusual items in the first half of 1994
include a charge of $3,500,000 to reflect a provision for a proposed
settlement of the stockholder litigation presently pending against the Company
and related legal fees and other costs. Additional unusual items in the first
half of 1994 and the unusual items in the first half of 1993 related primarily
to the government's investigation of a tax deduction on the Company's 1985
Federal tax return and the reports and registration statements filed by the
Company with the Securities and Exchange Commission and related stockholder
litigation. Management does not anticipate that any additional costs related
to these matters that may be incurred will be material to the operating
results of the Company.<PAGE>
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:
<TABLE>
First Half First Half
1994 1993
<CAPTION>
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges and other income 3.1 3.1
103.1 103.1
Costs and Expenses:
Cost of sales 68.7 68.7
Selling, general and
administrative expenses 33.1 35.6
Depreciation and amortization 1.8 2.2
Interest expense 3.3 2.5
Provision for unusual items 2.6 .8
109.5 109.8
LOSS BEFORE INCOME TAX BENEFIT (6.4) (6.7)
Income tax benefit (2.2) (2.5)
NET LOSS (4.2)% (4.2)%
</TABLE>
Net sales increased to $150.7 million in the first half of 1994 as compared to
$142.1 million in the first half of 1993, or 6.1%. This increase of $8.6
million is primarily attributable to an increase in comparable store sales
resulting from strong retail activity and improved economic conditions in
certain of the Company's market areas. Comparable store sales also increased
6.1% over the prior year's first half.
Service charges and other income increased to $4.7 million in the first half
of 1994 as compared to $4.6 million in the first half of 1993. Service
charges, including servicing fees associated with the Company's customer
credit cards, increased to $4.4 million in the first half of 1994 as compared
to $4.1 million in the first half of 1993, or 7.3%. This increase relates to
an increase in the Company's credit card sales as a percent of net sales to
41.8% in the first half of 1994 as compared to 37.6% in the first half of
1993, and occurred primarily as a result of a new Instant Credit program
initiated in October 1993. In addition, 3.8% of this increase relates to late
charge fees on delinquent customer credit card accounts that were not assessed
prior to January 1994. Other income in the first half of 1994 includes a
$200,000 loss related to the receivables securitization program (Note 3), and
was partially offset by $116,000 of interest income related to income tax
refunds.
Cost of sales increased to $103.6 million in the first half of 1994 as
compared to $97.7 million in the first half of 1993, or 6.1%. The Company's
gross margin percent remained unchanged at 31.3% in the first half of 1994 and
1993 despite the increase in sales volume primarily as a result of an increase
in promotional markdowns as a percent of net sales resulting from intense
competition and the liquidation of seasonal merchandise.
Selling, general and administrative expenses decreased to $49.9 million in the
first half of 1994 as compared to $50.6 million in the first half of 1993, or
1.3%. Selling, general and administrative expenses as a percent of net sales
decreased to 33.1% in the first half of 1994 as compared to 35.6% in the first
half of 1993. These decreases occurred as a result of an increase in sales
volume, a reduction in payroll and related costs through the restructuring of
the Company's sales, buying and support staff, and continued focus on expense
control measures throughout the Company. The Company also realized the
benefit of interim experience adjustments resulting in a reduction to required
workers' compensation claim reserves. These factors, which resulted in lower
selling, general and administrative expenses as a percent of net sales, were
partially offset by an increase in advertising and other promotional costs.
Depreciation and amortization expense decreased to $2.8 million in the first
half of 1994 as compared to $3.1 million in the first half of 1993, or 10.8%.
Depreciation and amortization expense as a percent of net sales decreased to
1.8% in the first half of 1994 as compared to 2.2% in the first half 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. The Company expects to realize an increase in deprecation expense and
amortization of store pre-opening costs beginning in the fourth quarter of
1994 as a result of completing and opening the new stores in Oakhurst and
Sacramento, California.
Interest expense increased to $4.9 million in the first half of 1994 as
compared to $3.6 million in the first half of 1993, or 36.5%. Interest
expense as a percent of net sales increased to 3.3% in the first half of 1994
as compared to 2.5% in the first half of 1993. These increases 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 half of 1993 to a
weighted average interest rate of 7.12% during the first half of 1994 and
additional interest expense related to the Fixed Base Certificate sold in
connection with the receivables securitization program, and were partially
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 in 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 effective tax
rate in the first half of 1994 was a credit of (34.0%) as compared to a credit
of (37.0%) in the first half of 1993. The reduction in the effective tax rate
resulted primarily from the impact of statutory annual limitations to state
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable, excluding amounts held for securitization
and sale at January 29, 1994, decreased to $14.1 million at July
30, 1994 from $25.4 million at January 29, 1994. This decrease
of $11.3 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 second quarter of 1993,
accounts receivable decreased $39.0 million from $53.1 million.
This decrease resulted primarily from the securitization and sale
of certain of the Company's customer credit card receivables
under an asset-backed securitization program in March 1994 (Note
3).
Merchandise inventories increased to $71.3 million at July 30,
1994 from $60.5 million at January 29, 1994. This increase of
$10.8 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 second quarter of 1993,
inventories increased $5.7 million from $65.6 million. This
increase relates to additional inventories needed to support
increased sales, inventories related to the new store in Redding,
California not open in the second quarter of the prior year and
inventories currently being received for the new stores in
Oakhurst and Sacramento, California, to be opened in October and
November 1994, respectively.
Working capital decreased to $26.5 million at July 30, 1994 from
$32.1 million at January 29, 1994. The Company's current ratio
increased to 1.36:1 at July 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 (Note 3), and reduced
outstanding borrowings on the Company's line of credit and other
long-term obligations resulting from the application of proceeds
from the receivables securitization program.
Additions to property and equipment were $1.0 million in the
first half of 1994 as compared to $4.1 million in the first half
of 1993. The $1.0 million of additions in the first half of 1994
related primarily to the purchase of a new payroll software
package, construction and remodeling costs associated with new
stores to be opened in 1994 and 1995, and the remodel of certain
of the Company's existing store locations. The $4.1 million of
additions in the first half of 1993 consisted primarily of $3.5
million related to the construction and fixturing of the new
store opened in Hanford, California, $200,000 related to the
remodel of certain of the Company's existing store locations 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 outstanding borrowings under a pre-
existing line of credit and long-term credit facility and to pay
certain costs related to the securitization transaction.
Subsequent to March 30, 1994 and through July 30, 1994, the
Company sold an additional $47.5 million of receivables under the
program. After the initial sale, receivables are generally sold
at a discount of 1%. Aggregate proceeds from such sales,
amounting to $46.8 million, were used to fund working capital
requirements of the Company.
The Company has reached an agreement in principal that will
provide for the issuance of a Variable Base Class A-2 Credit Card
Certificate ("Variable Base Certificate") in the principal amount
of up to $15.0 million from GCC Trust to Bank Hapaolim. The
Variable Base Certificate, representing certain receivables held
by GCC Trust (excluding receivables underlying the Fixed Base
Certificate and GCRC's retained interest), is to be used as
collateral for a revolving line of credit financing arrangement
with Bank Hapaolim that will provide the Company with borrowings
of up to a maximum of $15.0 million through October 1996.
Additional advances on the line of credit will not be permitted
after October 1996 and all outstanding borrowings must be repaid
by March 30, 1997. Interest on outstanding borrowings on the line
of credit will be charged at a rate of LIBOR plus 1.0%, not to
exceed a maximum of 12.0%. The maximum amount available for
borrowings on the line of credit arrangement is restricted by the
outstanding principal balance of receivables underlying the
Variable Base Certificate. The outstanding principal balance of
such receivables is subject to seasonal variations, and as a
result, the amount available for borrowings against the Variable
Base Certificate will be highest during the Christmas selling
season and will decline thereafter. Management believes there
will be an adequate level of receivables held by GCC Trust to
provide for borrowings on the line of credit to be secured by the
Variable Base Certificate beginning in November 1994 and
management believes the agreement with Bank Hapaolim will be
finalized prior to that time.
The Company has a revolving line of credit arrangement with
Barclays Business Credit, Inc., ("Barclays"), which provides for
borrowings of up to $35.0 million through March 30, 1997, limited
to a restrictive borrowing base ($33.8 million at July 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% (7.5% at July 30, 1994). At
July 30, 1994, $19.4 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
November 30, 1994, is a $6.0 million term loan bearing interest
at rates ranging from 10% to 10 1/2%. The long-term loan, due
June 30, 1996, has a total outstanding loan balance of $18.4
million at July 30, 1994 and bears interest at a rate of 10 1/4%
at July 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 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 Barclays
by $5.0 million. The Company was unable to finalize such an
arrangement prior to June 30, 1994. Wells Fargo extended the
maturity date of the $6.0 million term loan, originally due June
30, 1994, to November 30, 1994. The Company also paid an
additional loan fee to Barclays and was relieved of the
obligation to reduce outstanding borrowings by $5.0 million on
the Barclays line of credit.
The Company believes that proceeds from the line of credit
expected to be provided by Bank Hapaolim, together with a
seasonal increase in internally generated funds during the
Christmas selling season, will provide the Company with adequate
cash resources to repay all outstanding borrowings under the line
of credit arrangement with Barclays for thirty consecutive days
during the period of December 1, 1994 through January 31, 1995.
The Company also anticipates entering into a long-term financing
arrangement through the mortgage of certain property of the
Company. Proceeds from the contemplated arrangement, expected to
be finalized prior to November 30, 1994, are to be used first to
repay the $6.0 million term loan with Wells Fargo and then to
repay a portion of any outstanding borrowings on the line of
credit arrangement with Barclays.
The Company intends to open a new 24,000 square foot store in
Oakhurst, California in October 1994, a new 190,000 square foot
store in Sacramento, California in November 1994, and a new
150,000 square foot store to replace its smaller existing store
location in Visalia, California, a new 56,000 square foot store
in Carson City, Nevada and a new 100,000 square foot store in
Tracy, California in 1995. The estimated cost to open the new
stores, net of amounts to be contributed by mall owners or
developers of certain of the projects, is approximately $2.9
million. Such costs are expected to be financed primarily
through internally generated funds.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described more fully in the Company's Annual Report on Form
10-K for the year ended January 29, 1994, the Company and certain
of its past and present officers and directors are parties to
three civil lawsuits related to an income tax deduction on the
Company's 1985 Federal tax return and the reports and
registration statements filed by the Company with the Securities
and Exchange Commission. On August 26, 1994, the Company
announced that it has reached an agreement to settle all aspects
of those lawsuits. Pursuant to the terms of the proposed
settlement, which remains subject to Court approval, the Company's
former accountant, Ernst & Young, will pay $2.0 million and the
Company will pay $3.0 million to settle the class action pending
in the United States District Court for the Northern District of
California, (Annoni v. Gottschalks; filed July 15, 1993) and the
class and derivative actions pending in the Superior Court of
California, County of Fresno (Ponder v. Gottschalks; filed April
30, 1993 and Ponder v. Ernst & Young; filed May 11, 1993,
respectively). The Company's results of operations for the
thirteen and twenty-six week period ended July 30, 1994 include a
provision of $3.5 million, representing the cost of the proposed
settlement and related legal fees and other costs.
As more fully described in the Company's Annual Report on Form
10-K for the year ended January 29, 1994, Frederick & Nelson
Acquisition Corp. ("F&N") has obtained a partial summary
judgement against the Company in the amount of $3,038,000 plus
accrued interest from the date of the judgement for breach of an
agreement to purchase a former Frederick & Nelson store located
in Spokane, Washington. The Company accrued all amounts payable
under the judgement as of January 29, 1994. On June 3, 1994, an
additional complaint was filed against the Company in the Federal
District Court of the Western District of Washington by Sabey
Corporation, the owner of the mall in which the Frederick &
Nelson store was located. The complaint seeks damages suffered
by the mall due to the Company's failure to purchase and assume
the Frederick & Nelson store lease. Since the ultimate outcome
of this lawsuit cannot presently be determined, no provision for
any loss that may result upon its resolution has been made in the
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 1994, the Company held its Annual Meeting of
Stockholders at which the following matters were submitted to a
vote of the Company's stockholders:
1. The election of ten nominees for director. The following
represents a tabulation of the votes cast for each or the ten
nominees for director:
<TABLE>
<CAPTION>
Nominee for Director Votes For Votes Against
<S> <C> <C>
Joseph W. Levy 9,578,103 104,241
Gerald H. Blum 9,575,042 107,302
Karen L. Blum 9,556,800 125,444
Bret W. Levy 9,561,519 120,825
Sharon Levy 9,577,081 105,263
Joseph J. Penbera 9,578,702 103,642
Frederick R. Ruiz 9,581,182 101,162
O. James Woodward III 9,580,849 101,495
Max Gutmann 9,576,693 105,649
Stephen J. Furst 9,478,862 103,482
</TABLE>
2. A proposal to approve the Company's 1994 Key Employee
Incentive Stock Option Plan. Such proposal was approved as
follows:
<TABLE>
Number of Votes
<S> <C>
For: 7,540,282
Against: 210,357
Abstain: 456,519
Broker Non-Votes: 1,475,186
</TABLE>
3. A proposal to approve the Company's 1994 Director
Nonqualified Stock Option Plan. Such proposal was approved
as follows:
<TABLE>
Number of Votes
<S> <C>
For: 7,383,214
Against: 346,472
Abstain: 477,472
Broker Non-Votes: 1,475,186
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed pursuant to the requirements
of Item 601 of Regulations S-K:
Exhibit No. Description
10.80 New Term Loan Maturity Date Extension dated
July 11, 1994 by and between Gottschalks
Inc. and Wells Fargo Bank, N.A.
(b) The Company did not file a Current Report on Form 8-K
during the thirteen week period ended July 30, 1994.<PAGE>
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)
September 13, 1994
s/Joseph W. Levy
(Joseph W. Levy, Chairman
and Chief Executive Officer)
September 13, 1994
s/Alan A. Weinstein
(Alan A. Weinstein, Senior Vice
President and Chief Financial Officer)
FIRST AMENDMENT TO 1994 AMENDED
AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO 1994 AMENDED AND RESTATED CREDIT
AGREEMENT (this "Amendment") is entered into as of August 26, 1994, by and
between GOTTSCHALKS INC., a Delaware corporation ("Borrower"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain 1994 Amended and Restated Credit Agreement between
Borrower and Bank dated as of March 30, 1994, as amended from time to time
(the "Credit Agreement");
WHEREAS, Borrower has requested from Bank a second extension of the New
Term Loan Maturity Date for the New Term Loan granted pursuant to the Credit
Agreement, and Bank has agreed to provide said second extension on the terms
and conditions contained herein, and
WHEREAS, Bank and Borrower have agreed to amend the Credit Agreement to
reflect said second extension of the New Term Loan Maturity Date and to
correct a mistake in the rate of interest described in the Credit Agreement as
applicable to the Loans.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.01 is hereby amended to provide that the New Term Loan
Maturity Date defined therein shall be "November 30, 1994."
2. Section 2.03(a) is hereby deleted in its entirety, and the following
substituted therefor:
"(a) Prior to Default. Each Loan shall bear, and Borrower agrees to pay,
interest on the outstanding principal amount thereof until due (whether
at maturity, by reason of prepayment or acceleration or otherwise), (i) for
the period ending on June 30, 1994, at a rate of ten percent (10.0%) per
annum, and (ii) for each calendar quarter thereafter, beginning with the
calendar quarter commencing on July 1, 1994, at a rate equal to one-quarter
percent (1/4%) per annum in excess of the rate applicable during the prior
calendar quarter, such increase to be effective as of the first day of the
calendar quarter."
3. As a condition to the second extension of the New Term Loan Maturity
Date provided hereby, Borrower shall reimburse Bank, immediately upon demand,
for all costs and expenses of Bank incurred in connection with all title
insurance endorsements, if any, required by Bank to insure the continued
priority of Bank's liens on Borrower's real property securing the New Term loan.
4. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exist no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as o the day and year first written above.
GOTTSCHALKS INC. WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:_________________________________ By:s/Brian Santos_________________
Title:________________________________ Title:Vice President______________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Quarterly Report on Form 10-Q for the period ended July 30, 1994 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> JAN-29-1994
<PERIOD-END> JUL-30-1994
<CASH> 2,052
<SECURITIES> 0
<RECEIVABLES> 13,069
<ALLOWANCES> 1,045
<INVENTORY> 71,315
<CURRENT-ASSETS> 100,908
<PP&E> 129,816
<DEPRECIATION> 35,432
<TOTAL-ASSETS> 208,440
<CURRENT-LIABILITIES> 74,374
<BONDS> 30,815
<COMMON> 104
0
0
<OTHER-SE> 75,756
<TOTAL-LIABILITY-AND-EQUITY> 208,440
<SALES> 150,736
<TOTAL-REVENUES> 155,450
<CGS> 103,622
<TOTAL-COSTS> 52,168
<OTHER-EXPENSES> 3,833
<LOSS-PROVISION> 510
<INTEREST-EXPENSE> 4,902
<INCOME-PRETAX> (9,585)
<INCOME-TAX> (3,259)
<INCOME-CONTINUING> (6,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,326)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
