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 Quarterly period ended April 29, 1995
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 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 April
29, 1995 was 10,416,520.
<PAGE>
INDEX
GOTTSCHALKS INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
April 29, 1995 and January 28, 1995 3
Consolidated statements of operations -
thirteen weeks ended April 29, 1995 and
April 30, 1994 4
Condensed consolidated statements of cash flows -
thirteen weeks ended April 29, 1995 and
April 30, 1995 5
Notes to condensed consolidated financial
statements - thirteen weeks ended April 29, 1995
and April 30, 1994 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Current Report on Form 8-K 21
SIGNATURES 22
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
April 29, January 28,
1995 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,277 $ 3,156
Cash held by GCC Trust 245 2,365
Receivables - net (Note 2) 19,918 30,436
Merchandise inventories (Note 3) 97,362 80,678
Other 13,055 10,066
Total current assets 133,857 126,701
PROPERTY AND EQUIPMENT 133,629 129,626
Less accumulated depreciation
and amortization 37,307 35,817
96,322 93,809
OTHER LONG-TERM ASSETS 11,861 12,843
$242,040 $233,353
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 4) $ 20,697 $ 17,844
Bank overdraft 9,476 9,853
Trade accounts payable 22,727 25,179
Accrued expenses 13,655 23,904
Accrued payroll and related
liabilities 4,770 5,267
Short-term obligation
(paid March 1995) 1,600
Current portion of long-term
obligations (Note 4) 5,017 5,154
Total current liabilities 76,342 88,801
LONG-TERM OBLIGATIONS
(less current portion):
Revolving line of credit (Note 4) 20,000
Notes, mortgage and bonds payable
(Note 4) 24,143 23,721
Capitalized lease obligations 9,768 9,951
53,911 33,672
DEFERRED INCOME (Note 5) 19,795 16,366
DEFERRED LEASE PAYMENTS AND OTHER 11,623 10,937
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock 104 104
Additional paid-in capital 55,918 55,964
Retained earnings 24,347 27,509
80,369 83,577
$242,040 $233,353
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - NOTE 1)
(In thousands of dollars, except share data)
Thirteen Weeks
Ended
April 29, April 30,
1995 1994
<S> <C> <C>
Net sales $77,934 $70,221
Service charges
& other income 3,041 2,282
80,975 72,503
COSTS & EXPENSES:
Cost of sales 55,381 48,036
Selling, general
& administrative
expenses 26,202 23,961
Depreciation &
amortization 1,859 1,389
Interest expense 2,633 2,627
Provision for unusual
items (Note 6) 268
86,075 76,281
LOSS BEFORE INCOME TAX
BENEFIT (5,100) (3,778)
Income tax benefit (1,938) (1,435)
NET LOSS $(3,162) $(2,343)
Net loss per common share $ (.30) $ (.22)
Weighted average number
of common shares
outstanding 10,416 10,413
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
Thirteen Weeks
Ended
April 29, April 30,
1995 1994
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (3,162) $ (2,343)
Adjustments to reconcile net
loss to net cash used in
operating activities (15,816) (9,211)
Net cash used in
operating activities (18,978) (11,554)
INVESTING ACTIVITIES:
Purchases of property and
equipment (10,699) (379)
Reimbursements received for
purchases of property and
equipment 6,700
Net cash used in
investing activities (3,999) (379)
FINANCING ACTIVITIES:
Proceeds from issuance of the
Fixed Base Certificates (Note 2) 40,000
Proceeds from revolving lines
of credit and long-term
obligations 129,118 53,706
Principal payments on revolving lines
of credit, short-term and long-term
obligations (107,763) (83,341)
Changes in bank overdraft and other 1,743 2,868
Net cash provided by
financing activities 23,098 13,233
INCREASE IN CASH 121 1,300
CASH AT BEGINNING OF YEAR 3,156 1,213
CASH AT END OF PERIOD $ 3,277 $ 2,513
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks Ended
April 29, 1995 and April 30, 1994
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 29,
1995 and April 30, 1994 are not necessarily indicative of the results that may
be expected for the year ended February 3, 1996, because of the seasonal nature
of the Company's business and the Company's LIFO inventory valuation adjustment
("LIFO adjustment"), currently recorded only at the end of each fiscal year
(Note
3). It is suggested that these 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 28, 1995.
The condensed consolidated balance sheet at January 28, 1995 has been derived
from the audited consolidated financial statements at that date.
2. RECEIVABLES SECURITIZATION PROGRAM
As described more fully in the Company's 1994 Annual Report on Form 10-K, the
Company entered into a five-and-a-half-year asset backed securitization program
in March 1994. Under the program, the Company automatically sells, without
recourse, all of its accounts receivable arising under its private label
customer
credit cards, together with rights to all collections and recoveries on such
receivables, 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") to be used as
collateral for securities previously issued to investors. The Company services
and administers the receivables in return for a monthly servicing fee.
In March 1994, fractional undivided ownership interests in certain of the
receivables were sold 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. Interest on the Fixed Base Certificates is earned by
the Certificateholders on a monthly basis and the outstanding principal balance
is to be repaid in equal monthly installments commencing September 1998 through
September 1999, through the application of credit card receivable principal
collections during that period. The issuance of the Fixed Base Certificates was
accounted for as a sale for financial reporting purposes. Accordingly, the $40.0
million of receivables underlying those certificates and the corresponding
obligations are excluded from the accompanying financial statements.
In 1994, a Variable Base Class A-2 Credit Card Certificate ("Variable Base
Certificate") in the principal amount of up to $15.0 million was also issued to
Bank Hapoalim as collateral for a revolving line of credit financing arrangement
with that bank (Note 4). The issuance of the Variable Base Certificate was
accounted for as a financing transaction and, accordingly, receivables
underlying
the Variable Base Certificate, totalling $6,548,000 at April 29, 1995, are
included in receivables reported in the accompanying financial statements. Such
receivables also include receivables underlying the Exchangeable and
Subordinated
Certificates, representing GCRC's retained interest in receivables sold in
connection with the issuance of the Fixed Base Certificates, totalling
$1,868,000
and $7,619,000 at April 29, 1995, respectively, and $3,883,000 of receivables
and
vendor claims that did not meet certain eligibility requirements of the program
as of April 29, 1995.
Under the program, collections of receivables through August 1998 are
automatically reinvested by GCRC in the purchase of newly-generated receivables
from the Company. The principal portion of such collections are transferred to
Shawmut Capital Corporation ("Shawmut") to repay outstanding borrowings on the
Company's line of credit with Shawmut (Note 4). The finance charge portion of
such collections are used first to pay monthly interest earned by the Fixed Base
Certificateholders and then to pay monthly interest due on outstanding
borrowings
under the line of credit with Bank Hapoalim and certain other costs associated
with the transaction.
3. MERCHANDISE INVENTORIES
Inventories, which consist of merchandise held for resale, are valued by the
retail method and are stated at last-in, first-out (LIFO) cost, which is not in
excess of market. The Company also includes in its valuation of inventories
certain indirect merchandise purchasing, handling and storage costs required to
be capitalized under uniform capitalization ("UNICAP") rules. Current cost,
which
approximate replacement cost, under the first-in, first-out (FIFO) method was
equal to the LIFO value of inventories at January 28, 1995.
The Company uses department store price indexes published by the Bureau of
Labor
Statistics ("BLS") to value its inventories under the LIFO method. Currently, a
valuation of inventory under the LIFO method is 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 adjustment.
4. DEBT
The Company has two revolving line of credit arrangements that provide working
capital financing of up to $65.0 million through March 1997. The Company's
primary revolving line of credit arrangement is with Shawmut Capital Corporation
("Shawmut") and provides for borrowings of up to $50.0 million through March
1997, increasing to $60.0 million during the months of November and December of
each year for seasonal inventory purchases. Interest on outstanding borrowings
is charged at a rate equal to LIBOR, as determined by Shawmut, plus 2.8% (9.1%
at April 29, 1995). At April 29, 1995, the maximum amount available for
borrowings of $35.2 million, as limited by a restrictive borrowing base, was
outstanding under the line of credit with Shawmut. Of this amount, $20.0 million
is classified as long-term in the accompanying financial statements as the
Company does not anticipate repaying that amount within one year of the balance
sheet date.
The Company's revolving line of credit arrangement with Bank Hapoalim (Note 2)
provides for borrowings of up to $15.0 million through March 1997. Borrowings
under the line of credit are limited to a percentage of the outstanding
principal
balance of receivables underlying the Variable Base Certificate and therefore,
are subject to any seasonal variations that may affect the outstanding principal
balance of such receivables. Interest on outstanding borrowings on the line of
credit is charged at a rate of LIBOR, as determined by the bank, plus 1.0%, not
to exceed a maximum of 12.0% (7.1% at April 29, 1995). At April 29, 1995, the
maximum amount available for borrowings of $5.5 million was outstanding under
the
line of credit with Bank Hapoalim.
The Company has long-term loan facilities with Wells Fargo Bank, N.A., ("Wells
Fargo") and Heller Financial, Inc. ("Heller"). The long-term loan with Wells
Fargo, due June 30, 1996, bears interest at a rate of 10 3/4% and had an
outstanding loan balance of $18.1 million at April 29, 1995. Management either
expects to refinance this obligation over a longer maturity period or replace it
with another long-term financing arrangement in the near-term. The long-term
mortgage loan with Heller, due January 1, 2002, bears interest at a rate of
10.45% and had an outstanding loan balance of $6.4 million at April 29, 1995.
The
Company also has Commercial Revenue Bonds, due December 1, 1995, with
outstanding
balances totalling $3.0 million at April 29, 1995. Management expects to repay
the bonds with additional long-term financings.
Certain of the Company's financing arrangements contain various restrictive loan
covenants. The Company was in violation of one covenant applicable to its
Shawmut
line of credit at April 29, 1995 and Shawmut has agreed to waive its rights with
respect to that violation as of that date.
5. DEFERRED INCOME
The Company received $4.0 million in April 1994 as incentive to enter into a
lease for one of the new stores opened during the first quarter of 1995.
Pursuant
to the arrangement, the $4.0 million was applied towards the purchase of
inventory for the new store. The arrangement provides that in the event gross
sales at that location are below a minimum specified amount as of the end of the
fifth year of the lease, either the Company or the landlord may elect to
terminate the lease at that time. In such an event, the Company would be
required
to repay the $4.0 million to the landlord. The $4.0 million received has been
recorded as deferred income for financial reporting purposes in the accompanying
financial statements.
6. CONTINGENCIES AND PROVISION FOR UNUSUAL ITEMS
As described more fully in the Company's 1994 Annual Report on Form 10-K, the
Company was party to three civil stockholder lawsuits related to an income tax
deduction on its 1985 federal tax return, certain of its financial reporting
practices and its guilty pleas to certain criminal charges arising out of these
matters. The Company's Consolidated Statement of Operations for the first
quarter
of 1994 includes a provision for unusual items of $268,000, consisting primarily
of legal fees and other costs incurred in connection with those lawsuits. The
stockholder litigation was settled in August 1994 and a provision of $3.5
million, representing the cost of the settlement and related legal fees and
other
costs was included in the Company's results of operations for the second quarter
of 1994. No costs in excess of previously accrued amounts have been incurred. In
accordance with the terms of the settlement, the Company funded $3.0 million
into
an irrevocable trust in February 1995.
The Company is also party to a lawsuit filed in 1992 by F&N Acquisition
Corporation ("F&N") under which F&N seeks damages arising out of the Company's
alleged breach of an oral agreement to purchase an assignment of a lease of a
former Frederick and Nelson store location in Spokane, Washington. In addition,
F&N is seeking an unspecified sum for its rejection of the next best offer to
purchase the assignment of the lease. In 1992, F&N received a partial summary
judgement against the Company under which the Company was ordered to pay F&N
damages of $3.0 million plus accrued interest from the date of the judgement.
The
judgement was reversed in 1994, however, and remanded to the United States
District Court for the Western District of Washington for further proceedings.
Management's estimate of amounts that may ultimately be payable to F&N were
previously accrued in fiscal 1993 and 1992. In connection with the F&N lawsuit,
an additional complaint was filed against the Company by Sabey Corporation
("Sabey"), the owner of the mall in which the Frederick and Nelson store was
located. The F&N and Sabey lawsuits were combined in May 1995. The Company is
continuing to pursue these matters vigorously. Management does not believe that
any additional costs that may be incurred in connection with the previously
described lawsuits, as combined, will be material to the operating results of
the
Company.
GOTTSCHALKS INC. AND SUBSIDIARIES
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 its results of operations for
the periods presented in the accompanying condensed consolidated financial
statements.
Thirteen Weeks Ended April 29, 1995 Compared To Thirteen Weeks Ended April 30,
1994
Results of Operations
As described more fully below, the Company's operating results in the first
quarter of 1995 were negatively impacted by unusually cold and rainy weather
conditions and competitive pressures during the period, resulting in lower than
expected sales and pressures on its gross margin. The Company's operating
results
in the first quarter of 1995 were also negatively impacted by higher costs
associated with opening two new stores in the fourth quarter of 1994 and three
new stores in the first quarter of 1995. These factors were partially offset by
increased service charge income and a reduction of selling, general and
administrative expenses as a percent of net sales during the period.
Management believes competitive pressures on its gross margin will continue and
is attempting to modify its merchandising strategy and implement new
merchandise-
related programs in its efforts to increase sales and improve its gross margin.
Management is also continuing efforts to counteract the pressures on its gross
margin by attempting to further reduce operating costs as a percent of net sales
through the implementation of cost containment programs designed to impact each
operating expense category of the Company and by continuing to focus on
enhancing
service charges and other revenues of the Company.
The following table sets forth for the periods indicated certain items from the
Company's Consolidated Statements of Operations, expressed as a percent of net
sales:
<TABLE>
<CAPTION>
First Quarter First Quarter
1995 1994
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges and other income 3.9 3.2
103.9 103.2
Costs and expenses:
Cost of sales 71.1 68.4
Selling, general and
administrative expenses 33.6 34.1
Depreciation and amortization 2.3 2.0
Interest expense 3.4 3.7
Provision for unusual items .4
110.4 108.6
LOSS BEFORE INCOME TAX BENEFIT (6.5) (5.4)
Income tax benefit (2.5) (2.0)
NET LOSS (4.0)% (3.4)%
</TABLE>
Net Sales
Net sales increased $7.7 million to $77.9 million in the first quarter of 1995
as compared to $70.2 million the first quarter of 1994, an 11.0% increase.
Comparable store sales, negatively impacted by both unusually cold and rainy
weather conditions and significant store remodeling projects in progress at
three
of the Company's Gottschalks stores during the period, decreased 2.9% in the
first quarter of 1995. The increase in net sales in the first quarter of 1995
reflects additional sales volume generated from five new Gottschalks stores not
open during the prior year's first quarter, including new stores opened in
Oakhurst and Sacramento, California in October and November 1994, respectively,
and new stores opened in Auburn, California, Carson City, Nevada and San
Bernardino, California, in February, March and April 1995, respectively.
Management is continuing efforts to increase sales volume through the controlled
expansion of the Company and is attempting to improve market share in the
Company's existing market areas through the development of new sales and
customer-service related programs. The Company currently intends to open three
additional new Gottschalks stores during the third and fourth quarters of 1995,
including two new stores in Tracy and Watsonville, California, and one new
replacement store in Visalia, California. (See "Liquidity and Capital
Resources.")
Service Charges and Other Income
Service charges and other income increased $700,000 to $3.0 million in the first
quarter of 1995 as compared to $2.3 million the first quarter of 1994, an
increase of 30.4%. As a percent of net sales, service charges and other income
increased to 3.9% in the first quarter of 1995 as compared to 3.2% in the first
quarter of 1994.
Service charges associated with the Company's customer credit cards increased
approximately $500,000 to $2.8 million in the first quarter of 1995 as compared
to $2.3 million the first quarter of 1994, an increase of 21.7%. This increase
is primarily attributable to an increase in the late charge fee assessed on
delinquent customer credit accounts, effective January 1995, which resulted in
increasing late charge fees by $471,000 in the first quarter of 1995 as compared
to the first quarter of 1994.
Other income, consisting primarily of the amortization of deferred income, was
$200,000 in the first quarter of 1995 as compared to expense of $25,000 in the
first quarter of 1994, an increase of $225,000. This increase primarily relates
to $94,000 of interest income on certain refundable deposits recognized during
the first quarter of 1995 as compared to a non-recurring loss of $200,000
recognized in connection with the receivables securitization program during the
first quarter of 1994. (See "Liquidity and Capital Resources").
Cost of Sales
Cost of sales increased $7.4 million to $55.4 million in the first quarter of
1995 as compared to $48.0 million the first quarter of 1994, an increase of
15.4%. The Company's gross margin percent decreased to 28.9% in the first
quarter
of 1995 as compared to 31.6% in the first quarter of 1994.
This decrease in gross margin percent relates primarily to an increase in
markdowns as a percent of net sales due to (i) the liquidation of mens, womens
and junior spring and summer apparel earlier in the spring season than is
typically required as a result of adverse weather conditions and competitive
pressures during the period; (ii) strong promotional activity related to new
store openings during the period; and (iii) increased use of coupons and special
pricing on certain merchandise as a means to direct customers into more
profitable departments and increase sales volume.
The Company's interim gross margin percent may not be indicative of its gross
margin percent for a full year, due to the seasonal nature of the Company's
business and its LIFO inventory valuation adjustment ("LIFO adjustment"),
currently recorded only at the end of each fiscal year. Management believes the
Company's fiscal 1995 LIFO adjustment will not materially affect its fiscal 1995
results of operations. Although the Company realized a benefit from its fiscal
1994 LIFO adjustment, no such similar benefit can be realized in fiscal 1995
because the Company's LIFO reserve for financial reporting purposes was
eliminated as a result of the 1994 LIFO adjustment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.2 million to $26.2
million in the first quarter of 1995 as compared to $24.0 million in the first
quarter of 1994, an increase of 9.2%. As a percent of net sales, selling,
general
and administrative expenses decreased to 33.6% in the first quarter of 1995 as
compared to 34.1% in the first quarter of 1994. Although the Company has
continued to realize the benefit of spreading its overhead costs over an
increasing selling base as a result of the new store openings in 1994 and in the
first quarter of 1995, the Company did experience increases in payroll and
advertising costs as a percent of net sales during this period. These increases
are primarily associated with a higher average rate of pay and higher
advertising
rates associated with certain of the market areas entered into in connection
with
those new store openings. In addition, these increases relate to increased
promotional activity designed to improve sales volume.
The Company is continuing to implement new programs on an ongoing basis designed
to reduce or control expenses associated with each operating expense category of
the Company. Although the Company generally incurs higher payroll and
advertising
costs in connection with its new stores, management expects to continue to be
able to leverage its other selling, general and administrative costs against
higher sales volume as a result of the three additional planned store openings
in the third and fourth quarters of fiscal 1995.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $500,000 to $1.9
million in the first quarter of 1995 as compared to $1.4 million in the first
quarter of 1994, an increase of 35.7%. As a percent of net sales, depreciation
and amortization expense increased to 2.3% in the first quarter of 1995 as
compared to 2.0% in the first quarter of 1994. These increases resulted
primarily
from an increase in depreciation expense and the amortization of new store pre-
opening costs as a result of completing and opening the new stores late in 1994
and in the first quarter of 1995. Costs associated with the opening of new
stores
are generally deferred and amortized on a straight-line basis not to exceed a
twelve month period.
Management expects depreciation expense and the amortization of store pre-
opening
costs as a percent of net sales will continue to increase during the remainder
of fiscal 1995 as a result of completing and opening the three additional
planned
stores in the third and fourth quarters of 1995.
Interest Expense
Interest expense remained unchanged at $2.6 million in the first quarters of
1995
and 1994. Because of the increase in sales volume, interest expense as a
percent
of net sales decreased to 3.4% in the first quarter of 1995 as compared to 3.7%
in the first quarter of 1994. The components of interest expense shifted during
this period. Increases in interest expense resulting from an increase in the
weighted-average interest rate charged on outstanding borrowings under the
Company's various lines of credit, (8.0% in the first quarter of 1995 as
compared
to 6.9% in the first quarter of 1994), increased borrowings under those lines of
credit and additional interest expense associated with the Fixed Base
Certificates and mortgage loan entered into in 1994 were fully offset by lower
interest resulting from the refinancing of a long-term credit facility with
proceeds from the issuance of the Fixed Base Certificates in the first quarter
of 1994 and the reversal of previously recognized loan fees no longer payable as
a result of such refinancing. (See "Liquidity and Capital Resources.")
Provision for Unusual Items
The provision for unusual items was $268,000 in the first quarter of 1994. As
described more fully in the Company's 1994 Annual Report on Form 10-K and Note
6 to the Condensed Consolidated Financial Statements, such amounts consisted
primarily of legal fees and other costs incurred in connection with stockholder
litigation against the Company which was settled in August 1994 and paid
February
1995. All costs associated with such settlement were fully reflected in the
Company's results of operations for the second quarter of 1994, and no
additional
costs in excess of such amounts have been incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". The interim
effective tax credit of (38.0%) for the first quarters of 1995 and 1994 relates
to net losses incurred during those periods and represents the Company's best
estimate of the annual effective tax rate for the fiscal year.
Net Loss
As a result of the foregoing, the Company recorded a net loss of $3.2 million in
the first quarter of 1995 as compared to a net loss of $2.3 million in the first
quarter of 1994. Prior to unusual items and income taxes, the operating loss
was
$5.1 million in the first quarter of 1995 as compared to $3.5 million in the
first quarter of 1994.
Liquidity and Capital Resources
Net cash used in operating activities was $19.0 million in the first quarter of
1995 as compared to $11.6 million in the first quarter of 1994, an increase of
$7.4 million. This increase is primarily attributable to increased inventory
requirements for new stores opened during the period, less $4.0 million received
during the first quarter of 1995 as incentive to open one of those new stores
(see Note 5 to the Condensed Consolidated Financial Statements). The increase in
inventory also resulted from lower than expected sales, in addition to planned
seasonal increases in inventory levels. The cash used by the increase in
inventory was partially offset by a decrease in customer credit card and other
receivables during the period. The decrease in credit card receivables is also
primarily seasonal in nature, in that receivables are typically at their highest
level following the Christmas selling season and decline thereafter as customers
repay their account balances. Net cash used in operating activities in the first
quarter of 1995 also includes the payment of $3.0 million into an irrevocable
trust in accordance with the terms of the settlement of the previously described
stockholder litigation.
Net cash used in investing activities was $4.0 million in the first quarter of
1995 as compared to $379,000 in the first quarter of 1994, an increase of $3.6
million. Net cash used in investing activities in the first quarter of 1995
consisted primarily of capital expenditures for tenant improvements,
construction
costs and furniture, fixtures and equipment associated with new and certain
existing store locations, less amounts received as reimbursement for certain of
those expenditures. Such amounts were provided for primarily by proceeds from a
long-term borrowing arrangement entered into in the previous fiscal year. Net
cash used in investing activities in the first quarter of 1994 consisted
primarily of expenditures for information system improvements and additional
enhancements to the Company's POS and computer processing capabilities.
Net cash provided by financing activities was $23.1 million in the first quarter
of 1995 as compared to $13.2 million in the first quarter of 1994, an increase
of $9.9 million. Net cash provided by financing activities in the first quarter
of 1995 consisted primarily of proceeds from the Company's revolving lines of
credit, net of repayments made on its various credit facilities during the
period. Net cash provided by financing activities in the first quarter of 1994
included borrowings on the Company's lines of credit and was partially offset by
the application of the $40.0 million proceeds received through the issuance of
the Fixed Base Certificates to repay all outstanding borrowings under a pre-
existing line of credit and long-term borrowing arrangement and to pay certain
costs associated with the transaction.
Working capital increased $19.6 million to $57.5 million at April 29, 1995 as
compared to $37.9 million at January 28, 1995. The Company's current ratio
increased to 1.75:1 at April 29, 1995 as compared to 1.43:1 at January 28, 1995.
The improved current ratio reflects the reclassification of $20.0 million of
outstanding borrowings under the Company's line of credit arrangement with
Shawmut to long-term pursuant to changes in certain provisions of the
arrangement.
A significant portion of the Company's working capital is provided for under a
five-and-a-half year asset-backed securitization program entered into in March
1994. Under the program, the Company automatically sells all of its accounts
receivable generated under its private label customer credit cards, together
with
rights to all collections and recoveries on such receivables, 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"), to be used for collateral
for
securities previously issued to investors.
In March 1994, fractional undivided ownership interests in certain of the
receivables were sold 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. The $40.0 million proceeds from the issuance of the
Fixed Base Certificates were used to repay outstanding borrowings under certain
pre-existing financing arrangements and to pay certain costs associated with the
transaction. Interest is earned by the Fixed Base Certificateholders on a
monthly
basis and the outstanding principal balance is to be repaid in equal monthly
installments commencing September 1998 through September 1999, through the
application of credit card principal collections during that period. In 1994, a
Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate")
was
also issued in the principal amount of up to $15.0 million to Bank Hapoalim as
collateral for a revolving line of credit financing arrangement with Bank
Hapoalim.
Under the program, collections of receivables though August 1998 are
automatically reinvested by GCRC in the purchase of newly-generated receivables
from the Company. The principal portion of such collections are transferred from
GCRC to Shawmut Capital Corporation ("Shawmut") on behalf of the Company to
repay
outstanding borrowings on the line of credit with Shawmut. The finance charge
portion of such collections are used first to pay monthly interest payable to
the
Fixed Base Certificateholders and then to pay monthly interest associated with
outstanding borrowings under the line of credit with Bank Hapoalim and certain
other costs associated with the program.
The Company has two revolving line of credit arrangements that provide working
capital financing of up to $65.0 million through March 1997. The Company's
primary revolving line of credit arrangement is with Shawmut Capital Corporation
("Shawmut"), and provides for borrowings of up to $50.0 million through March
1995, increasing to $60.0 million during the months of November and December of
each year for seasonal inventory purchases. Interest on outstanding borrowings
is charged at a rate equal to LIBOR, as determined by Shawmut, plus 2.8% (9.1%
at April 29, 1995). At April 29, 1995, the maximum amount available for
borrowings of $35.2 million, as limited by a restrictive borrowing base, was
outstanding under the line of credit arrangement with Shawmut. Of that amount,
$20.0 million is classified as long-term in the accompanying financial
statements
as the Company does not anticipate repaying that amount within one year of the
balance sheet date.
The Company's revolving line of credit arrangement with Bank Hapoalim provides
for borrowings of up to $15.0 million through March 1997. Borrowings under the
line of credit are limited to a percentage of the outstanding principal balance
of receivables underlying the Variable Base Certificate and therefore, are
subject to any seasonal variations that may affect the outstanding principal
balance of such receivables. Interest on outstanding borrowings on the line of
credit is charged at a rate of LIBOR, as determined by the bank, plus 1.0%, not
to exceed a maximum of 12.0% (7.1% at April 29, 1995). At April 29, 1995, the
maximum amount available for borrowings of $5.5 million was outstanding under
the
line of credit with Bank Hapoalim.
The Company's primary long-term financing arrangements are with Wells Fargo
Bank,
N.A. ("Wells Fargo") and Heller Financial, Inc. ("Heller"). The Company also has
Commercial Revenue Bonds, due December 1, 1995, with outstanding balances
totalling $3.0 million at April 29, 1995. The long-term loan with Wells Fargo,
due June 30, 1996, bears interest at a rate of 10 3/4% and had an outstanding
balance of $18.1 million at April 29, 1995. As described more fully below,
management expects to repay $8.0 million of the Wells Fargo loan with proceeds
from a sale and leaseback arrangement expected to be finalized in the near-term.
Management also expects to either refinance the remaining portion of the Wells
Fargo loan and the Commercial Revenue Bonds over a longer maturity period or to
replace the obligations with other long-term financing arrangements in the near-
term. The long-term mortgage loan with Heller, due January 1, 2002, bears
interest at a rate of 10.45% and had an outstanding loan balance of $6.4 million
at April 29, 1995.
Certain of the Company's financing arrangements contain various restrictive loan
covenants. The Company was in violation of one covenant applicable to its
Shawmut
line of credit at April 29, 1995 and Shawmut has agreed to waive its rights with
respect to such violation.
Management is currently negotiating the sale and leaseback of its department
store located in Capitola, California during the second quarter of 1995. The
Capitola store currently has a lis pendes filed on it in connection with the UML
Financial Corporation Case. (See Part II, Item I, "Legal Proceedings.") The
Capitola store location is currently included in the collateral pool underlying
the long-term loan with Wells Fargo. Accordingly, the $11.6 million proceeds
expected to be received from the proposed transaction must first be used to
repay
$8.0 million of the outstanding balance of the Wells Fargo loan, to release the
collateral. The remaining $3.6 million is expected to be used to pay certain
costs associated with the transaction and to fund the Company's expansion and
remodeling program. No significant gain or loss for financial reporting purposes
is expected to be recognized in connection with the proposed transaction.
The Company's 1995 expansion and remodeling program included the opening of a
new
40,000 square foot department store in Auburn, California, a new 204,000 square
foot department store in San Bernardino, California and a new 58,000 square foot
department store in Carson City, Nevada, during the first quarter of 1995. The
Company also expects to open a new 113,000 square foot department store in
Tracy,
California, a new 75,000 square foot department store in Watsonville, California
and a new 150,000 square foot department store in Visalia, California, as a
replacement for an existing store at that location, by the end of 1995. The
Company also has store remodeling projects at five of its store locations
currently in progress. As of April 29, 1995, the estimated remaining cost to
complete such projects, net of amounts to be contributed by mall owners or
developers of certain of the projects, is $2.7 million. Such costs are expected
to be provided for primarily with proceeds from the previously described sale
and
leaseback arrangement. The Company continually investigates potential sites for
new stores, and capital expenditure plans may change as opportunities for new
stores develop. The opening of new stores is subject to a variety of conditions
precedent and other factors. As a result, there can be no assurance that such
stores will in fact be opened or that their opening will not be delayed.
During the first quarter of 1995, the Company's liquidity was adversely affected
by its operating results, new store construction and pre-opening costs and
inventory levels in excess of anticipated amounts. The Company's short-term
liquidity position improved shortly after the end of the quarter, however, as a
result of a temporary increase to its line of credit availability received from
Shawmut and the reduction of inventory to planned levels. Additional amounts are
also expected to become available for borrowings under the line of credit with
Bank Hapoalim as a result of a projected increase in the underlying receivables.
In addition to the previously described sale and leaseback arrangement,
management is also evaluating an additional long-term financing arrangement to
be collateralized by certain of the Company's owned store locations, and expects
to finalize such an arrangement during the second half of fiscal 1995.
Management
believes the previously described financing arrangements, combined with the
contemplated financing arrangement, will provide the Company with adequate funds
for its needs. Management is continuing to evaluate additional alternative
financing sources on an ongoing basis.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described more fully in Part I, Item 3, "Legal Proceedings" of the Company's
Annual Report on Form 10-K for the year ended January 28, 1995, the Company is
the defendant in a lawsuit filed in California Superior Court for the County of
Fresno (UML Financial Corporation and M.J.M and Associates, Inc. v. Gottschalks
Inc., et al., Case No. 514020 7). The plaintiffs allege breach of contract,
fraud, deceit and promissory estoppel in connection with an alleged agreement
for
certain sale-leaseback financing involving six of the Company's department
stores
and unspecified equipment. The plaintiffs seek specific performance as well as
monetary damages and have filed notices of lis pendens on the Company's stores
in Capitola, Eureka and Yuba City, California. The Company moved to expunge the
lis pendens and a hearing on its motion was held on June 8, 1995. The Court has
not yet ruled on the Company's motion. The Company is vigorously defending this
case and management does not believe that the ultimate outcome of this case will
have a material adverse effect upon the financial condition or results of
operations of the Company.
The lawsuits filed against the Company by the Frederick and Nelson Acquisition
Corporation and the Sabey Corporation have been consolidated into one action
pending in the United States District Court for the Western District of
Washington (CitiBank, N.A. v. Gottschalks Inc. and Sabey Corporation v.
Gottschalks Inc., Case No. C95-1862). The origin of lawsuits is described more
fully in the Company's Annual Report on Form 10-K for the year ended January 28,
1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the requirements of Item 601
of Regulation S-K:
Exhibit No. Description
10.40 Waiver Agreement dated May 12, 1995, by and
between Gottschalks Inc. and Shawmut Capital
Credit Corporation.
27 Financial Data Schedule
(b) The Company did not file a Current Report on Form 8-K during the thirteen
week period ended April 29, 1995.
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 13, 1995
s/Joseph W. Levy
Joseph W. Levy, Chairman and Chief
Executive Officer (principal executive
officer)
June 13, 1995
s/Alan A. Weinstein
Alan A. Weinstein, Senior Vice
President and Chief Financial Officer
(principal accounting and financial
officer)
May 12, 1995
Mr. Alan A. Weinstein
Executive Vice President/
Chief Financial Officer
Gottschalks, Inc.
7 River Park Place East
Fresno, CA. 93720
RE: Covenant Waiver under Loan and Security Agreement
dated as of March 30, 1994, as amended ("Loan Agreement")
Dear Alan:
Gottschalks, Inc. ("Borrower") has requested Shawmut Capital Corporation
("Shawmut Capital") to waive and agrees to waive Shawmut Capital's remedies
arising from Borrower's failure to satisfy certain requirements of Section 8.3
of the Loan Agreement. This will confirm the understanding and agreement
between
Borrower and Shawmut Capital with respect to certain provisions of Section 8.3
of the Loan Agreement as set forth below. All capitalized terms that are
defined
in the Loan Agreement and are used without definition herein shall have the
meanings given to them in the Loan Agreement.
Section 8.3 (D)(ii) of the Loan Agreement requires that Borrower maintain, on a
fiscal quarter-to-date basis, Consolidated Adjusted Net Earnings from Operations
of not less than <$3,000,000> during its fiscal quarter ended April 1995.
Shawmut Capital hereby waives any Default or Event of Default under the Loan
Agreement arising from any failure by Borrower to satisfy the foregoing
requirement during such fiscal quarter.
This letter shall not constitute an amendment or waiver by Shawmut Capital of
any
provisions of the Loan Agreement, or a waiver or agreement to forbear with
respect to any Default or Event of Default thereunder, except to the extent
specifically dealt with herein. Shawmut Capital shall not be under any
obligation to agree to further amendments or grant any further waivers or
forbearances with respect to the Loan Agreement. Except to the extent
specifically amended or superseded by the terms hereof, all of the provisions of
the Loan Agreement shall remain in full force and effect to the extent in effect
on the date hereof.
Please execute the enclosed copy of this letter on behalf of Borrower and return
it to Shawmut Capital to indicate your acknowledgement of and agreement to the
foregoing.
Very truly yours,
SHAWMUT CAPITAL CORPORATION
s/Greg F. Ennis
Greg F. Ennis
Vice President
ACKNOWLEDGED AND AGREED TO ON THIS
15TH DAY OF MAY, 1995
GOTTSCHALKS, INC.
By: s/Alan A. Weinstein
Its: Senior Vice President/C.F.O.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule is being filed pursuant to Article 5 of Regulation
S-X. Amounts presented have been derived from the Company's quarterly report on
form 10-Q for the period ended April 30, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-END> APR-29-1995
<CASH> 3,227
<SECURITIES> 0
<RECEIVABLES> 21,047
<ALLOWANCES> 1,129
<INVENTORY> 97,362
<CURRENT-ASSETS> 133,857
<PP&E> 133,629
<DEPRECIATION> 37,307
<TOTAL-ASSETS> 242,040
<CURRENT-LIABILITIES> 76,342
<BONDS> 53,911
<COMMON> 104
0
0
<OTHER-SE> 80,265
<TOTAL-LIABILITY-AND-EQUITY> 242,040
<SALES> 77,934
<TOTAL-REVENUES> 80,975
<CGS> 55,381
<TOTAL-COSTS> 55,381
<OTHER-EXPENSES> 1,859
<LOSS-PROVISION> 2,120
<INTEREST-EXPENSE> 2,633
<INCOME-PRETAX> (5,100)
<INCOME-TAX> (1,938)
<INCOME-CONTINUING> (3,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,162)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
