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 May 4, 1996
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
incorporation or organization) No.
7 River Park Place East, Fresno, California 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (209) 434-8000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the Registrant was required to file
such reports); and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
The number of shares of the Registrant's common stock
outstanding as of May 4, 1996 was 10,427,959.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARIES
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
May 4, 1996 and February 3, 1996 2
Consolidated statements of operations -
thirteen weeks ended May 4, 1996 and
April 29, 1995 3
Condensed consolidated statements of cash flows -
thirteen weeks ended May 4, 1996 and
April 29, 1995 4
Notes to condensed consolidated financial statements -
thirteen weeks ended May 4, 1996 and
April 29, 1995 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
<TABLE>
<CAPTION>
(In thousands of dollars)
May 4, 1996 February 3, 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,825 $ 5,113
Cash held by GCC Trust 245 2,280
Receivables - net 23,166 33,243
Merchandise inventories 99,831 87,507
Other 11,394 10,915
Total current assets 139,461 139,058
PROPERTY AND EQUIPMENT 129,360 129,549
Less accumulated depreciation and
amortization 38,950 40,299
90,410 89,250
OTHER LONG-TERM ASSETS 10,237 10,733
$240,108 $239,041
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 43,625 $ 45,164
Trade accounts payable 29,007 27,394
Accrued expenses and other liabilities 20,450 18,759
Short-term obligation 2,743 2,743
Current portion of long-term obligations 2,205 2,094
Total current liabilities 98,030 96,154
LONG-TERM OBLIGATIONS (less current portion):
Notes and bonds payable (Note 4) 26,427 25,654
Capitalized lease obligations (Note 5) 6,711 9,218
33,138 34,872
DEFERRED INCOME 20,027 20,265
DEFERRED LEASE PAYMENTS AND OTHER 11,930 9,833
STOCKHOLDERS' EQUITY 76,983 77,917
$240,108 $239,041
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
May 4, April 29,
1996 1995
<S> <C> <C>
Net sales $85,560 $77,934
Service charges & other income 3,829 3,041
89,389 80,975
COSTS & EXPENSES:
Cost of sales 58,730 55,381
Selling, general & administrative
expenses 28,003 26,202
Depreciation & amortization 1,905 1,859
Interest expense 2,850 2,633
91,488 86,075
LOSS BEFORE INCOME TAX BENEFIT (2,099) (5,100)
Income tax benefit (777) (1,938)
NET LOSS $(1,322) $(3,162)
Net loss per common share $ (.13) $ (.30)
Weighted average number of
common shares outstanding 10,428 10,416
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - NOTE 1)
(In thousands of dollars)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
May 4, April 29,
1996 1995
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,322) $ (3,162)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities 4,025 (15,816)
Net cash provided by (used in)
operating activities 2,703 (18,978)
INVESTING ACTIVITIES:
Purchases of property and equipment,
net of reimbursements received (3,494) (3,999)
Proceeds from sale/leaseback arrangements 280
Other 22
Net cash used in investing activities (3,192) (3,999)
FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 109,730 128,370
Principal payments on revolving lines of credit(111,269) (105,517)
Proceeds from long-term obligations 750
Principal payments on long-term obligations (507) (2,248)
Bank overdraft and other 2,247 1,743
Net cash provided by financing activities 201 23,098
INCREASE (DECREASE) IN CASH (288) 121
CASH AT BEGINNING OF YEAR 5,113 3,156
CASH AT END OF PERIOD $ 4,825 $ 3,277
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks Ended May 4, 1996 and April 29, 1995
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
period ended May 4, 1996 are not necessarily indicative of the
results that may be expected for the year ending February 1,
1997, 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 (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 February 3, 1996.
The condensed consolidated balance sheet at February 3, 1996 has
been derived from the audited consolidated financial statements
at that date.
2. RECEIVABLES SECURITIZATION PROGRAM
As described more fully in the Company's 1995 Annual Report on
Form 10-K, the Company automatically sells all of its accounts
receivable arising under its private label customer credit cards
to a wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"), and 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. The Company has issued the following certificates as of May
4, 1996 under the receivables securitization program:
Fixed Base Certificates. In 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.
Variable Base Certificate. 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, totaling $8.9 million and $17.9
million at May 4, 1996 and February 3, 1996, respectively, are
included in receivables reported in the accompanying financial
statements.
Receivables reported in the accompanying financial statements
also include $9.1 million and $8.0 million of receivables as of
May 4, 1996 and February 3, 1996, respectively, representing
GCRC's retained interest in receivables sold in connection with
the issuance of the Fixed Base Certificates and receivables,
accrued finance charges and vendor claims that did not meet
certain eligibility requirements of the program totaling $5.2
million and $7.3 million as of May 4, 1996 and February 3, 1996,
respectively.
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 value. The Company
includes in its valuation of inventories certain indirect
merchandise purchasing, handling and storage costs in conformity
with uniform capitalization rules. Current cost, which
approximates replacement cost, under the first-in, first-out
(FIFO) method was equal to the LIFO value of inventories at
February 3, 1996. A 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 adjustment.
4. DEBT OBLIGATIONS
Revolving Lines of Credit. The Company's primary revolving
line of credit arrangement is with Fleet Capital Corporation
("Fleet") and provides for borrowings of up to $66.0 million
through March 1997. Borrowings under the line of credit are
limited to 60% of eligible merchandise inventories through the
month of December 1996 and 50% of eligible inventory from
January 1997 through March 1997. Interest on outstanding
borrowings under the line of credit is currently charged at a
rate equal to LIBOR plus 3.75% (9.2% at May 4, 1996). The
maximum amount available for borrowings under the line of credit
was $47.1 million as of May 4, 1996, of which $36.1 million was
outstanding as of that date.
The Company also has a revolving line of credit arrangement with
Bank Hapoalim (Note 2) which provides for additional 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, the Company's borrowing capacity
under the line of credit is subject to 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 plus 1.0% (6.5% at May 4,
1996). At May 4, 1996, $7.5 million, which was the maximum
amount available for borrowings as of that date, was outstanding
under the line of credit with Bank Hapoalim.
Long-Term Borrowings. The Company has four fifteen-year
mortgage loans with Midland Commercial Funding ("Midland") with
outstanding balances totaling $19.9 million at May 4, 1996. The
Midland loans, due October and November 2010, bear interest at
rates ranging from 9.23% to 9.39%. The Company also has the
following other long-term loan facilities: (i) a loan payable with
Heller Financial, Inc. ("Heller"), due January 2002, which bears
interest at a rate of 10.45% and had an outstanding loan balance
of $5.5 million at May 4, 1996; (ii) a five-year 10.0% note
payable to Federated Department Stores, Inc., entered into on
March 29, 1996, with an outstanding balance of $1.3 million at May
4, 1996; and (iii) other long-term obligations with outstanding
balances totaling $1.3 million at May 4, 1996.
Short-Term Obligation. The Company has a short-term loan with
Wells Fargo Bank, N. A., with an outstanding balance of $2.7
million at May 4, 1996. The short-term loan, due September 5,
1996, currently bears interest at 2% above the prime rate of
interest.
As described more fully in the Company's 1995 Annual Report of
Form 10-K, certain of the Company's debt agreements contain
various restrictive covenants. The Company was in compliance with
all such restrictive covenants as of May 4, 1996.
5. LEASE ARRANGEMENTS
On March 29, 1996, the Company finalized an agreement with
Broadway Stores, Inc. ("Broadway"), a wholly-owned subsidiary of
Federated, and the landlord, whereby the Company vacated its
present location in the Modesto, California Vintage Faire Mall and
sub-leased the Broadway's former store in that mall for the
remaining twelve years of the Broadway lease. The Company
recognized a gain of $823,000 in the first quarter of 1996 upon
the termination of the original lease, which had been accounted
for as a capital lease by the Company, representing the difference
between the capital lease obligation and the net book value of the
related assets recorded under the capital lease. Pursuant to a
letter of intent dated April 16, 1996, the Company also vacated
its present location in the Fresno Fashion Fair Mall and reopened
a new store in that mall in the former Broadway store location.
Management expects to finalize a new twenty-year lease for the
Fashion Fair location during the second quarter of 1996.
The Company received $4.0 million in the first quarter of fiscal
1995 as an incentive to enter into a lease in connection with one
of the fiscal 1995 new store openings. 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 lessor may elect to terminate the lease
at that time. The Company has a further right to terminate the
lease after the tenth year of the lease if gross sales are below a
minimum specified amount. If either party elected to terminate the
lease at the end of the fifth year, the Company would be required
to repay the $4.0 million to the lessor. The $4.0 million received
was recorded as deferred income for financial reporting purposes
and is being amortized into income on a straight-line basis over
the ten-year minimum lease period. Management believes the
likelihood the lease will be terminated by either party after the
fifth year of the lease is remote.
6. CONTINGENCIES
The Company is party to a lawsuit filed in 1992 by F&N Acquisition
Corporation ("F&N") under which F&N originally claimed 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
claimed unspecified damages 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 1992. An amendment to the original breach of
contract claim contained in the F&N lawsuit was filed on January
29, 1996 alleging, among other things, that the Company breached
the contract by deliberately delaying its performance. In addition
to breach by intentional delay and impossibility, the plaintiffs
have claimed fraud and negligent misrepresentations by executives
of the Company.
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 and
the lawsuits are scheduled for trial in July 1996. Due to the
uncertainty of litigation, it is impossible to predict the
ultimate outcome of the litigation. In the event there is an
adverse outcome to the litigation, it is possible such outcome
will exceed the Company's previously recorded reserve. However,
management is continuing to vigorously defend the lawsuits and
does not believe that any additional costs that may be incurred in
connection with such lawsuits, as combined, will be material to
the operating results of the Company.<PAGE>
GOTTSCHALKS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant
factors which have affected the Company's financial position and
its results of operations for the periods presented in the
accompanying condensed consolidated financial statements.
Thirteen Weeks Ended May 4, 1996 Compared To Thirteen Weeks
Ended April 29, 1995
Results of Operations
The Company recorded a net loss of $1.3 million in the first
quarter of 1996 as compared to a net loss of $3.2 million in the
first quarter of 1995. The Company's improved operating results
in the first quarter of 1996 resulted primarily from increased
sales volume, an improved gross margin and lower selling,
general and administrative expenses as a percent of net sales
which were due to an improved retail economic environment, a
return to normal weather conditions during the period and to the
implementation of revised operational and merchandising
strategies aimed at improving the performance of certain under-performing
stores, improving gross margins and reducing certain
operating costs. The Company's operating results in the first
quarter of 1996 also includes a gain of $583,000, net of the tax
effect, resulting from the termination of a lease. (See Note 5
to the Condensed Consolidated Financial Statements and
"Liquidity and Capital Resources"). The Company's operating
results in the first quarter of 1995 were negatively impacted by
reduced comparable store sales and gross margins resulting from
unusually cold and rainy weather conditions in many of the
Company's market areas during the period.
The following table sets forth for the periods indicated certain
items from the Company's Consolidated Statements of Operations
as a percent of net sales:
<TABLE>
<CAPTION>
First Quarter
1996 1995
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges & other income 4.5 3.9
104.5 103.9
Costs and Expenses:
Cost of sales 68.6 71.1
Selling, general & administrative
expenses 32.7 33.6
Depreciation & amortization 2.2 2.3
Interest expense 3.4 3.4
106.9 110.4
LOSS BEFORE INCOME TAX BENEFIT (2.4) (6.5)
Income tax benefit (0.9) (2.5)
NET LOSS (1.5)% (4.0)%
Net Sales
</TABLE>
Net sales increased $7.7 million to $85.6 million in the first
quarter of 1996 as compared to $77.9 million in the first
quarter of 1995, a 9.9% increase. This increase reflects
additional sales volume generated from six new Gottschalks
stores not open for the entire period in the prior year. New
stores opened in California during the period include stores in
Auburn (February 1995), San Bernardino (April 1995),
Watsonville (August 1995) and Tracy (October 1995). The Company
also opened its first stores in Nevada in Carson City (March
1995) and Reno (March 1996), and opened larger replacement
stores for pre-existing locations in California in Visalia
(August 1995), Modesto (March 1996) and Fresno (April 1996).
Comparable store sales increased by 3.9% in the first quarter of
1996 as compared to the first quarter of 1995. This increase is
primarily due to increased sales of men's, women's and
children's spring and summer apparel as compared to the same
period of the prior year. Prior year spring and summer apparel
sales were negatively impacted by unusually cold and rainy
weather conditions in many of the Company's market areas during
the period.
During the first quarter of 1996, certain department store
locations of one of the Company's primary competitors, Broadway
Stores, Inc. ("Broadway"), were temporarily and permanently
closed in connection with Broadway's acquisition by Federated
Department Stores, Inc.
Service Charges and Other Income
Service charges and other income increased approximately
$800,000 to $3.8 million in the first quarter of 1996 as
compared to $3.0 million in the first quarter of 1995, an
increase of 26.7%. As a percent of net sales, service charges
and other income increased to 4.5% in the first quarter of 1996
as compared to 3.9% in the first quarter of 1995.
Service charges associated with the Company's customer credit
cards was unchanged at $2.7 million in the first quarters of
1996 and 1995. Credit sales as a percent of total sales
increased to 44.8% in the first quarter of 1996 as compared to
44.6% in the first quarter of 1995, primarily due to credit
solicitation activities associated with new store openings.
Other income, which includes the amortization of deferred income
and other miscellaneous income and expense items, was $1.1
million in the first quarter of 1996 as compared to $300,000 in
the first quarter of 1995, an increase of $800,000. This
increase is primarily attributable to a gain of $823,000
resulting from the termination of a lease previously accounted
for as a capital lease by the Company. (See Note 5 to the
Condensed Consolidated Financial Statements and "Liquidity and
Capital Resources".)
Cost of Sales
Cost of sales increased $3.3 million to $58.7 million in the
first quarter of 1996 as compared to $55.4 million in the first
quarter of 1995, an increase of 6.0%. The Company's gross margin
percent increased to 31.4% in the first quarter of 1996 as
compared to 28.9% in the first quarter of 1995. This increase
in gross margin percent is primarily due to increased sales of
higher gross margin spring and summer apparel merchandise, in
addition to a reduction of fall and winter clearance markdowns
as compared to the same period of the prior year. Markdowns as
a percent of net sales decreased to 37.4% in the first quarter
of 1996 as compared to 40.0% in the first quarter of 1995. The
Company's gross margin percent in the first quarter of 1995 was
negatively impacted by an increase in markdowns as a percent of
net sales taken to liquidate slow selling spring and summer
apparel merchandise and in connection with a modification of the
Company's women's apparel merchandising strategy.
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 1996 LIFO adjustment will not materially effect its fiscal 1996
results of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.8
million to $28.0 million in the first quarter of 1996 as
compared to $26.2 million in the first quarter of 1995, an
increase of 6.9%. As a percent of net sales, selling, general
and administrative expenses decreased to 32.7% in the first
quarter of 1996 as compared to 33.6% in the first quarter of
1995. This decrease as a percent of net sales is due to an
increase in sales volume, as well as from payroll reductions
implemented at the store and corporate level during the first
quarter of 1996 and a reduction of advertising costs from the
prior year. Such reductions were partially offset by higher
building and equipment rental expense as a percent of net sales
as a result of the sale and leaseback financing of the Capitola
store in fiscal 1995 and from the leasing of enhanced POS
terminal and information systems equipment. The impact of such
increases were partially offset by lower depreciation and
amortization as a result of the sale and leaseback financing.
Depreciation and Amortization
Depreciation and amortization expense, which includes the
amortization of new store pre-opening costs, remained unchanged
at $1.9 million in the first quarters of 1996 and 1995.
Excluding the amortization of new store pre-opening costs,
depreciation and amortization expense as a percent of net sales
decreased to 1.6% in the first quarter of 1996 as compared to
1.7% in the first quarter of 1995. This decrease is primarily
due to lower depreciation expense resulting from the sale and
leaseback of the Company's department store in Capitola,
California in fiscal 1995, partially offset by additional
depreciation expense resulting from capital expenditures for new
stores opened since the same period of the prior year.
Store pre-opening costs represent certain costs associated with
the opening of new stores. Such costs are deferred and amortized
generally on a straight-line basis not to exceed a twelve month
period. Management expects the amortization of new store pre-opening
to be lower in fiscal 1996 as compared to fiscal 1995
due to fewer planned new store openings.
Interest Expense
Interest expense, which includes the amortization of deferred
financing costs, increased approximately $300,000 to $2.9
million in the first quarter of 1996 as compared to $2.6 million
in the first quarter of 1995, or 11.5%. Due to the increase in
sales volume, interest expense as a percent of net sales
remained unchanged at 3.4% in the first quarters of 1996 and
1995. The dollar increase in interest expense resulted primarily
from an increase in the weighted-average interest rate charged
on outstanding borrowings under the Company's various lines of
credit (8.5% in the first quarter of 1996 as compared to 8.0% in
the first quarter of 1995), and higher average outstanding
borrowings on such lines of credit, ($45.6 million in the first
quarter of 1996 as compared to $36.9 million in the first
quarter of 1995), primarily due to increased inventory
requirements associated with new stores opened during the
period. (See "Liquidity and Capital Resources".)
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 (37.0%) for the first quarter of 1996 and (38.0%) for the
first quarter of 1995 relates to net losses incurred during
those periods and represents the Company's best estimate of the
annual effective tax rate for those fiscal years.
Liquidity and Capital Resources
As described more fully in the Company's 1995 Annual Report on
Form 10-K and Notes 2 and 4 to the accompanying financial
statements, the Company's working capital requirements are
currently met through a combination of cash, borrowings under
its revolving lines of credit and its securitization program.
(See the section entitled "Proposed Course of Action" in Part
II, Item 7, "Liquidity and Capital Resources" of the Company's
1995 Annual Report on Form 10-K for a description of factors
which could cause actual results to differ from the forward
looking statements contained herein.) The Company is in process
of implementing a variety of strategies aimed at improving the
Company's liquidity position. Such strategies include, among
other things: (i) improving the performance of certain under-performing
stores; (ii) improving gross margins; (iii) reducing
certain operating costs; (iv) enhancing service charges and
other revenues; and (v) improving cash flow by limiting capital
expenditures, maintaining tight controls over inventory levels
and reducing discretionary expenditures. Management's ability
to implement such strategies, which is expected to continue
throughout fiscal 1996, and the success of such strategies are
subject to a variety of risks and there can be no assurance that
such strategies will improve the Company's liquidity position.
Management believes the Company has adequate cash and borrowing
capacity under its various revolving lines of credit to meet its
liquidity needs through the end of fiscal 1996.
The Company's primary revolving line of credit arrangement is
with Fleet Capital Corporation ("Fleet") and provides for
borrowings of up to $66.0 million through March 1997, limited to
a restrictive borrowing base equal to 60% of eligible
merchandise inventory through the month of December 1996 and
50% of eligible inventory from January 1997 through March 1997.
Interest under the Fleet line of credit is charged at a rate
equal to LIBOR plus 3.75% (9.2% at May 4, 1996). The maximum
amount available for borrowings under the line of credit was
$47.1 million at May 4, 1996, of which $36.1 million was
outstanding as of that date.
The Company also has a revolving line of credit with Bank
Hapoalim which provides for additional borrowings of up to $15.0
million, limited to a restrictive borrowing base, through March
1997. Interest on outstanding borrowings under the line of
credit is charged at a rate equal to LIBOR plus 1.0%, (6.5% at
May 4, 1996). At May 4, 1996, $7.5 million, which was the
maximum amount available for borrowings as of that date, was
outstanding under the line of credit with Bank Hapoalim.
As described more fully in the Company's 1995 Annual Report on
Form 10-K, certain of the Company's debt agreements contain
various restrictive covenants. The Company was in compliance
with all such restrictive covenants as of May 4, 1996.
Cash flows from operating activities consists primarily of the
net loss adjusted for certain non-cash income and expense items,
including depreciation and amortization, the provision for
uncollectible accounts and changes in deferred taxes and changes
in operating assets and liabilities, including receivables,
merchandise inventory and other current and long-term assets and
liabilities. Net cash provided by operating activities was $2.7
million in the first quarter of 1996 as compared to net cash
used by operating activities of $19.0 million in the first
quarter of 1995, an increase of $21.7 million. This increase is
primarily due to: (i) the payment of approximately $7.6 million
of operating expenses related to the first quarter of 1996
during the 53rd week of fiscal 1995 as a result of the calendar
shift in fiscal 1995; (ii) the receipt of $2.8 million in the
first quarter of 1996 in connection with the filing of certain
amended income tax returns; (iii) an increase in certain accrued
expenses from year end; and (iv) a decrease in customer credit
card receivables during the period. The decrease in credit card
receivables is 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. Cash provided by these activities was
partially offset by cash used to fund the seasonal increase in
inventory levels. Net cash used in operating activities in the
first quarter of 1995 reflected increased inventory requirements
associated with new stores, higher costs associated with the
opening of those new stores during the period and the payment of
$3.0 million into an irrevocable trust in accordance with the
terms of the settlement of the previously described stockholder
litigation. Such uses of cash were partially offset by the
receipt of $4.0 million in connection with entering into a new
lease during the period (see Note 5 to the Condensed
Consolidated Financial Statements).
Net cash used in investing activities was $3.2 million in the
first quarter of 1996 as compared to $4.0 million in the first
quarter of 1995, a decrease of $800,000. Net cash used in
investing activities in the first quarters of 1996 and 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.
Net cash provided by financing activities was $201,000 in the
first quarter of 1996 as compared to $23.1 million in the first
quarter of 1995, a decrease of $22.9 million. Net cash provided
by financing activities in the first quarters of 1996 and 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. Total advances under the lines of
credit, net of repayments, were lower in the
first quarter of 1996 as compared to the first quarter of 1995
as a result of improved operating results, the payment of
approximately $7.6 million of fiscal 1996 operating expenses
during the 53rd week of fiscal 1995, the receipt of $2.8 million
from the filing of certain amended income tax returns and from a
reduction of capital and other expenditures related to new store
openings.
The Company's 1996 expansion program included the opening of one
new 125,000 square foot department store in Reno, Nevada in
March 1996 and the relocation of two existing stores in
California into larger stores in Modesto (an increase from
89,600 square feet to 163,500 square feet in the Vintage Faire
Mall in March 1996) and Fresno (an increase from 76,700 square
feet to 160,000 square feet in the Fashion Fair Mall in April
1996.) The Company currently has no further plans for expansion
in fiscal 1996.
Seasonality
The Company's business, like that of most retailers, is subject
to seasonal influences, with the major portion of net sales,
gross profit and operating results realized during the last half
of each fiscal year, which includes the back-to-school and
Christmas selling seasons. The Company's results of operations
and cash flows may also vary from quarter to quarter as a result
of, among other things, the timing and level of the Company's
sales promotions, weather, fashion trends and the overall health
of the economy in the Company's market areas.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to a lawsuit filed in 1992 by F&N
Acquisition Corporation ("F&N") under which F&N originally
claimed 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 claimed unspecified damages 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 1992. An amendment to the original
breach of contract claim contained in the F&N lawsuit was filed
on January 29, 1996 alleging, among other things, that the
Company breached the contract by deliberately delaying its
performance. In addition to breach by intentional delay and
impossibility, the plaintiffs have claimed fraud and negligent
misrepresentations by executives of the Company.
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
and the lawsuits are scheduled for trial in July 1996. Due to
the uncertainty of litigation, it is impossible to predict the
ultimate outcome of the litigation. In the event there is an
adverse outcome to the litigation, it is possible such outcome
will exceed the Company's previously recorded reserve. However,
management is continuing to vigorously defend the lawsuits and
does not believe that any additional costs that may be incurred
in connection with such lawsuits, as combined, will be material
to the operating results of the Company.
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
27 Financial Data Schedule.
(b) The Company did not file Current Reports on Form
8-K during the thirteen week period ended May 4,
1996.
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 17, 1996
S\JOSEPH W. LEVY
(Joseph W. Levy, Chairman
and Chief Executive Officer)
June 17, 1996
S\ALAN A. WEINSTEIN
(Alan A. Weinstein,
Senior Vice President and
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T
AND INCLUDES UNAUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FIRST QUARTER ENDED MAY 4, 1996.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> MAY-04-1996
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<CURRENT-ASSETS> 136,461
<PP&E> 129,360
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0
<COMMON> 104
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<TOTAL-LIABILITY-AND-EQUITY> 240,108
<SALES> 85,560
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<INCOME-PRETAX> (2,099)
<INCOME-TAX> (777)
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<NET-INCOME> (1,322)
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