UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee
Required)
For The Fiscal Year Ended February 1, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee
Required)
For the transition period from to
Commission File Number 1-09100
Gottschalks Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0159791
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code: (209)
434-8000
Securities registered pursuant to Section 12(b) of the
Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the Registrant; (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past
90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
[ X ]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 31, 1997:
Common Stock, $.01 par value: $40,353,374
On March 31, 1997 the Registrant had outstanding
10,472,915 shares of Common Stock.
Documents Incorporated By Reference: Portions of the
Registrant's definitive proxy statement with respect to
its Annual Stockholders' Meeting scheduled to be held on
June 26, 1997, which will be filed pursuant to Regulation
14A, are incorporated by reference into Part III of this
Form 10-K.
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc. is a regional department and
specialty store chain based in Fresno, California,
currently consisting of thirty-five "Gottschalks"
department stores and twenty-four "Village East"
specialty stores located primarily in non-major
metropolitan cities throughout California, and in Oregon,
Washington and Nevada. Gottschalks and Village East sales
totaled $422.2 million for the year ended February 1,
1997 (referred to herein as fiscal 1996), with
Gottschalks sales comprising 97.5% and Village East sales
comprising 2.5% of total sales.
Gottschalks department stores typically offer a
wide range of brand-name and private-label merchandise,
including men's, women's, junior's and children's
apparel; cosmetics and accessories; shoes and jewelry;
home furnishings including china, housewares, electronics
and small electric appliances; and other consumer goods.
Village East specialty stores offer apparel for larger
women. Gottschalks stores are generally anchor tenants
of regional shopping malls, with Village East specialty
stores generally located in the regional malls in which
a Gottschalks department store is located or as a
separate department within some of the Company's larger
Gottschalks stores. The Company's stores carry primarily
moderately-priced brand-name merchandise, complemented
with private-label merchandise and a mix of higher and
budget-priced merchandise. Brand-name apparel, cosmetic
and accessory lines carried by the Company include Estee
Lauder, Lancome, Dooney & Bourke, Liz Claiborne, Carole
Little, Calvin Klein, Ralph Lauren, Guess, Nautica, Karen
Kane, Tommy Hilfiger, Esprit, Evan Picone, Haggar, Koret
and Levi Strauss. Merchandise carried in the Company's
home division include brands such as Sony, Mitsubishi,
Lenox, Krups, Calphalon, Royal Velvet, KitchenAid and
Samsonite. The Company services all of its stores,
including its store locations outside California, from a
420,000 square foot distribution facility centrally
located in Madera, California.
Gottschalks and its predecessor, E. Gottschalk &
Co., have operated continuously for over 92 years since
it was founded by Emil Gottschalk in 1904. Since the
Company first offered its stock to the public in 1986, it
has added twenty-seven of its thirty-five Gottschalks
stores, opened twenty of its twenty-four Village East
specialty stores and constructed its distribution center.
Gottschalks is currently the largest independent
department store chain based in California. (See Part I,
Item I, "Business--Store Location and Growth Strategy").
Gottschalks Inc. also includes the accounts of its
wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC") and Gottschalks Credit Card Master
Trust ("GCC Trust"), (collectively, the "Company"), which
were formed in 1994 in connection with a receivables
securitization program. (See Part II, Item 7,
"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and
Capital Resources".)
_____________________
OPERATING STRATEGY
Merchandising Strategy. The Company's
merchandising strategy is directed at offering and
promoting nationally advertised, brand-name merchandise
recognized by its customers for style and value. Brand-name apparel,
cosmetic and accessory lines carried by the
Company include Estee Lauder, Lancome, Dooney & Bourke,
Liz Claiborne, Carole Little, Calvin Klein, Ralph Lauren,
Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan
Picone, Haggar, Koret and Levi Strauss. Merchandise
carried in the Company's home division include brands
such as Sony, Mitsubishi, Lenox, Krups, Calphalon, Royal
Velvet, KitchenAid and Samsonite. The Company's stores
also carry private-label merchandise purchased through
Frederick Atkins, Inc., ("Frederick Atkins"), a national
association of major retailers which provides its members
with group purchasing opportunities. The Company offers
a wide selection of fashion apparel, cosmetics and
accessories, home furnishings and other merchandise in an
extensive range of styles, sizes and colors for all
members of the family and home.
The following table sets forth for the periods
indicated a summary of the Company's total sales by
division, expressed as a percent of net sales:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Softlines:
<S> <C> <C> <C> <C> <C>
Cosmetics & Accessories.17.5% 17.2% 16.6% 16.5% 16.2%
Women's Clothing........15.9 15.5 16.1 16.5 17.1
Men's Clothing......... 14.4 14.3 13.9 13.6 13.2
Women's Dresses, Coats
& Lingerie............ 7.9 7.8 7.9 7.8 8.6
Shoes & Other Leased
Departments........... 7.8 7.4 7.1 7.4 7.1
Junior's Clothing...... 5.5 6.0 6.3 7.0 7.2
Children's Clothing..... 5.3 4.9 4.9 4.9 4.1
Village East........... 2.5 2.6 2.6 2.7 2.8
Total Softlines...... 76.8 75.7 75.4 76.4 76.3
Hardlines:
Housewares &
Stationary 10.4 11.0 10.9 10.7 11.0
Domestics & Luggage... 7.9 8.1 8.1 7.1 6.7
Electronics & Furniture 4.9 5.2 5.6 5.8 6.0
Total Hardlines...... 23.2 24.3 24.6 23.6 23.7
Total Sales.......... 100.0%100.0%100.0%100.0% 100.0%
</TABLE>
The Company's merchandising activities are
conducted from its corporate offices in Fresno,
California by its buying division consisting of an
Executive Vice President/General Merchandise Manager, 2
Vice President/General Merchandise Managers, 9 Divisional
Merchandise Managers, 46 buyers and 27 assistant buyers.
The Company also has a merchandise planning and
allocation division which works closely with the buying
division to develop merchandising plans and to link the
Company's merchandising activities with actual
performance in its stores. Management believes the
experience of its buying division, combined with the
Company's long and continuous presence in its primary
market areas, enhances its ability to evaluate and
respond quickly to emerging fashion trends and changing
consumer preferences. One of the Company's most important
sources of current information about marketing and
emerging fashion trends is derived from its membership in
Frederick Atkins.
The Company's overall merchandising strategy
includes the development of monthly, seasonal and annual
merchandising plans for each division, department and
store. Management monitors sales and gross margin
performance and inventory levels against the plan on a
daily basis. The merchandising plan is designed to be
flexible in order to allow the Company to respond quickly
to changing consumer preferences and opportunities
presented by individual item performance in the stores.
Management seeks to continuously refine its merchandise
mix with the goal of increasing sales of higher gross
margin items and increasing inventory turnover. The
Company's buying and merchandise planning and allocation
divisions meet frequently with store management to ensure
that the Company's merchandising program is executed
efficiently at the store level. Management has devoted
considerable resources towards enhancing the Company's
merchandise-related information systems as a means to
more efficiently monitor and execute its merchandising
plan. (See Part I, Item I, "Business--Information Systems
and Technology.")
Each of the Company's stores carry substantially
the same merchandise, but in different mixes according to
individual market demands. Some of the previously
described brand-name apparel merchandise may not be
currently available in all of the Company's store
locations. The mix of merchandise in a particular market
may also vary depending on the size of the facility.
Management believes that well-stocked stores and frequent
promotional sales contribute significantly to sales
volume. In connection with its efforts to increase sales
per selling square foot and improve gross margins, the
Company has continued to reallocate selling floor space
to higher profit margin items and narrow and focus its
merchandise assortments. The Company closed its clearance
center in 1993 in connection with its cost-savings
efforts and now liquidates slow-moving merchandise
through certain of its existing stores.
The Company's membership in Frederick Atkins, a
national association of major retailers, provides it with
group purchasing opportunities. In fiscal 1996, the
Company purchased approximately 5.6% of its merchandise
from Frederick Atkins. The Company also purchases
merchandise from numerous other suppliers. Excluding
purchases from Frederick Atkins, the Company's ten
largest suppliers in fiscal 1996 were Estee Lauder, Inc.,
Levi Strauss & Co., Liz Claiborne, Inc., Cosmair, Inc.
(Lancome), Haggar Apparel, Calvin Klein Cosmetics, Koret
of California, All-That-Jazz, Chaps by Ralph Lauren and
Bugle Boy Industries. Purchases from those vendors
accounted for approximately 21.0% of the Company's total
purchases in fiscal 1996. Management believes that
alternative sources of supply are available for each
category of merchandise it purchases.
Promotion Strategy. The Company commits
considerable resources to advertising, using a
combination of media types which it believes to be most
efficient and effective by market area, including
newspapers, television, radio, direct mail and catalogs.
The Company is a major purchaser of television
advertising time in its primary market areas. The
Company's promotional strategy includes seasonal
promotions, promotions directed at selected items and
frequent storewide sales events to highlight brand-name
merchandise and promotional prices. The Company also
conducts a variety of special events including fashion
shows, bridal shows and wardrobing seminars in its stores
and in the communities in which they are located to
convey fashion trends to its customers. The Company
receives reimbursement for certain of its promotional
activities from certain of its vendors.
The Company has increased its use of direct
marketing techniques to access niche markets by sending
mailings to its credit cardholders and, through its
computer database, generating specific lists of customers
who may be most responsive to specific promotional
mailings. The Company has also implemented a
telemarketing program, which, through the use of an
advanced call management system and the Company's
existing credit department personnel, the Company is able
to auto-dial potential customers within a selected market
area and deliver a personalized message regarding current
promotions and events. Management has continued to focus
on enhancing its information systems in order to increase
the effectiveness of its promotion strategy. (See Part I,
Item I, "Business--Private-Label Credit Card" and
"Business--Information Systems and Technology.")
The Company's stores experience seasonal sales and
earnings patterns typical of the retail industry. Peak
sales occur during the Christmas selling months of
November and December, and to a lesser extent, during the
Back-to-School and Easter selling seasons. The Company
generally increases its inventory levels and sales staff
for these seasons. (See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality").
Store Location and Growth Strategy. The Company's
stores are located primarily in diverse, growing, non-major
metropolitan areas. Management believes the Company
has a competitive advantage in offering brand-name
merchandise and a high level of service to customers in
secondary markets in the western United States where
there is a strong demand for nationally advertised,
brand-name merchandise and fewer competitors offering
such merchandise. Some of the Company's stores are
located in agricultural areas and cater to mature
customers with above average levels of disposable income.
Gottschalks strives to be the "hometown store" in each of
the communities it serves.
The Company generally seeks to open two new stores
per year, although more stores may be opened in any given
year if it is believed to be financially attractive to
the Company. The Company has also continued to invest in
the renovation and refixturing of its existing store
locations in order to maintain and improve market share
in those market areas. The Company sometimes receives
reimbursement for certain of its new store construction
costs and costs associated with the renovation and
refixturing of existing store locations from mall owners
and vendors.
The following table presents selected data
regarding the Company's expansion for the fiscal years
indicated:
<TABLE>
<CAPTION>
Stores open at
year-end:
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Gottschalks (1) 35 34 29 27 25
Village East 24 (2) 26 24 23 22
TOTAL 59 60 53 50 47
Gross store
square footage
(in thousands) 3,276 2,984 2,425 2,202 2,093
</TABLE>
(1) The number of stores does not include the Company's
clearance center (opened -1988, closed - 1993).
(2) The Company incorporated two Village East stores into
larger Gottschalks stores as separate departments
during fiscal 1996, reducing the total number of free-standing Village East
stores open to twenty-four as of
the end of fiscal 1996. The Company has continued to
combine sales generated by these departments with total
sales reported for Village East.
Since the Company's initial public offering in
1986, the Company has constructed or acquired twenty-seven of its thirty-five
Gottschalks department stores,
including four junior satellite stores of less than
30,000 square feet each. During this period the Company
also opened twenty of its twenty-four Village East
specialty stores. Gross store square footage added during
this period was approximately 2.5 million square feet,
resulting in approximately 3.3 million total Company
gross square feet. As of the end of fiscal 1996, the
Company's operations included thirty-one department
stores located in California, two stores in Nevada and
one store in each of Oregon and Washington.
Recent store expansion included the opening of the
Company's second Gottschalks store in Nevada in Reno
(March 1996) and the relocation of two pre-existing
stores in the Modesto, California Vintage Faire Mall
(March 1996) and Fresno, California Fashion Fair Mall
(April 1996) to larger anchor space in those malls which
were previously occupied by a major competitor of the
Company. The Company has entered into agreements to open
two new stores in the second half of fiscal 1997, to be
located in the current Macy's location in Santa Rosa,
California and the current K-Mart location in Sonora,
California.
The Company generally seeks prime locations in
regional malls as sites for new department stores, and
has historically avoided expansion into major
metropolitan areas. Although the majority of the
Company's department stores are larger than 50,000 gross
square feet, during the past several years, the Company
has, where the opportunities have been attractive,
established four junior satellite stores each with less
than 30,000 gross square feet. The Company also seeks to
open a Village East specialty store in each mall where a
Gottschalks department store is located, except when the
Company finds it more profitable to establish a Village
East department within the Gottschalks store, rather than
as a separate specialty shop. In selecting new store
locations, the Company considers the demographic
characteristics of the surrounding area, the lease terms
and other factors. The Company does not typically own its
properties, although management would consider doing so
if ownership were financially attractive. The Company has
been able to minimize capital requirements associated
with new store openings during the past several years
through the negotiation of significant contributions from
mall owners or developers of certain of the projects for
tenant improvements, construction costs and fixtures and
equipment. Such contributions have enhanced the Company's
ability to enter into attractive market areas that are
consistent with the Company's long-term expansion plans.
Customer Service. The Company attempts to build
customer loyalty by providing a high level of service and
by having well-stocked stores. Product seminars and other
training programs are frequently conducted in the
Company's stores so that sales personnel will be able to
provide useful product information to customers. In
addition to providing high levels of personal sales
assistance, the Company seeks to offer to its customers
a conveniently located and attractive shopping
environment. In Gottschalks stores, merchandise is
displayed and arranged by department, with well-known
designer and brand-names prominently displayed.
Departments open onto main aisles, and numerous visual
displays are used to maximize the exposure of merchandise
to customer traffic. Village East specialty stores
promote the image of style and fashion for larger women.
Gottschalks stores also offer a wide assortment of
merchandise for petites. The Company generally seeks to
locate its stores in regional shopping malls which are
centrally located to access a broad customer base.
Thirty of the Company's thirty-five Gottschalks stores,
and all but two of its Village East specialty stores, are
located in regional shopping malls.
The Company's policy is to employ sufficient sales
personnel to provide its customers with prompt, personal
service. Sales personnel are encouraged to keep notebooks
of customers' names, clothing sizes, birthdays, and major
purchases, and to telephone customers about promotional
sales and send thank-you notes and other greetings to
their customers during their normal working hours.
Management believes that this type of personal attention
builds customer loyalty. The Company stresses the
training of its sales personnel and offers various
financial incentives based on sales performance. The
Company also offers opportunities for promotions and
management training and leadership classes. Under its
liberal return and exchange policy, the Company will
accept a return or exchange of any merchandise that its
stores stock. When appropriate, the Company returns the
merchandise to its supplier.
Distribution of Merchandise. The Company's
distribution facility, designed and equipped to meet the
Company's long-term distribution needs, enhances its
ability to quickly respond to changing customers'
preferences. Completed in 1989, the Company receives all
of its merchandise at its 420,000 square foot
distribution center in Madera, California. Currently,
most merchandise arriving at the distribution center is
inspected, recorded by computer into inventory and tagged
with a bar-coded price label. The Company utilizes
universal product codes ("UPC") with vendors that have
also developed the technology. Merchandise purchased from
vendors that have UPC capabilities arrives at the
Company's distribution center already tagged with a bar-coded price label
that can be translated by the Company's
inventory systems, thus is ready for immediate
distribution to the stores. The Company also participates
in the "VIC's" program which has standardized hangers for
apparel merchandise. Merchandise purchased from vendors
participating in the VIC's program arrives at the
distribution center already on standardized hangers and
ready for immediate distribution to stores. The Company
generally does not warehouse apparel merchandise, but
distributes it to stores promptly. The distribution
center is centrally located to serve all of the Company's
store locations, including its store locations outside
California. Daily distribution enables the Company to
respond quickly to fashion and market trends and ensure
merchandise displays and store stockrooms are well
stocked.
As described more fully in Part I, Item I,
"Business--Information Systems and Technology", the
Company is in process of implementing new technology at
the distribution center in fiscal 1997 that is expected
to reduce certain costs associated with the purchase,
handling and distribution of merchandise. Management also
expects benefits to be realized in payroll, through the
reduction of traditionally labor-intensive tasks, and
other overhead costs of the Company as a result of the
implementation of such technology.
Private-Label Credit Card. The Company issues its
own credit card, which management believes enhances the
Company's ability to generate and retain market
acceptance and increase sales and other revenues for the
Company. The Company has one of the highest levels of
proprietary credit card sales in the retail industry,
with credit sales as a percent of total sales of 44.7%,
44.7%, 43.0%, 38.4% and 38.2% in fiscal 1996, 1995, 1994,
1993 and 1992. Service charge revenues associated with
the Company's customer credit cards were $10.5 million,
$10.9 million, $8.9 million, $8.1 million and $8.6
million in fiscal 1996, 1995, 1994, 1993 and 1992,
respectively. The Company had approximately 481,000
active credit accounts as of March 31, 1997 as compared
to approximately 461,000 as of March 31, 1996, an
increase of 4.3%. As described more fully in Part II,
Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity
and Capital Resources," the Company sold certain of its
customer credit card receivables in 1994 in connection
with an asset-backed securitization program. The Company
has continued to service and administer the receivables
pursuant to the securitization program.
The Company has implemented a variety of credit-related programs
which have resulted in enhanced customer
service and increased service charge revenues. The
Company has an "Instant Credit" program, through which
successful credit applicants receive a discount ranging
from 10% to 50% (depending on the results of the Instant
Credit scratch-off card) on the first days' purchases
made with the Company's credit card; a "55-Plus" charge
account program, which offers additional merchandise and
service discounts to customers 55 years of age and older;
and "Gold Card" and "55-Plus Gold Card" programs, which
offer special services at a discount for customers who
have a net minimum spending history on their charge
accounts of $1,000 per year. In fiscal 1997, the Company
expects to implement the "Gottschalks Reward Program"
which offers an annual rebate certificate for up to 5% of
annual credit purchases on the Company's credit card (up
to a maximum of $10,000 of annual purchases) which can be
applied towards future purchases of merchandise. Prior to
the Gottschalks Reward Program, the Company offered a 1%
annual rebate certificate to Gold Card and 55-Plus Gold
Card holders. The Company has also launched a credit card
reactivation program in an attempt to recapture credit
cardholders who have not utilized their credit card for
a specified period of time. Management believes holders
of the Company's credit card typically buy more
merchandise from the Company than other customers.
The Company's credit management software system
has automated substantially all aspects of the Company's
credit authorization, collection and billing process, and
enhances the Company's ability to provide customer
service. The credit management system also enables the
Company to access target markets with sophisticated
direct marketing techniques. This system, combined with
a credit scoring system, enables the Company to process
thousands of credit applications daily at a rate of less
than three minutes per application. The Company also has
an automated advanced call management system through
which the Company manages the process of collecting
delinquent customer accounts. As described more fully in
"Business--Promotion Strategy", the Company is also able
to utilize the advanced call management system for
telemarketing activities.
The credit authorization process is centralized at
the Company's corporate headquarters in Fresno,
California. Credit is extended to applicants based on a
scoring model. The Company's credit extension policy is
nearly identical for instant and non-instant credit
applicants. Applicants who meet pre-determined criteria
based on prior credit history, occupation, number of
months at current address, income level and geographic
location are automatically assigned an account number and
awarded a credit limit ranging from $300 to $2,000.
Credit limits may be periodically revised. The Company's
credit system also provides full on-line positive
authorization lookup capabilities at the point-of-sale.
Within seconds, each charge, credit and payment
transaction is approved or referred to the Company's
credit department for further review. Sales associates
speed-dial the credit department for an approval when a
transaction has been referred by the system.
The Company offers credit to customers under
several payment plans: the "Option Plan", under which the
Company bills customers monthly for charges without a
minimum purchase requirement; the "Time-Pay Plan", under
which customers may make monthly payments for purchases
of home furnishings, major appliances and other qualified
items of more than $100; and the "Club Plan", under which
customers may make monthly payments for purchases of fine
china, silver, crystal and collectibles of more than
$100. The Company also periodically offers special
promotions to its credit card holders through which
customers are given the opportunity to obtain discounts
on merchandise purchases or purchase merchandise under
special deferred billing and deferred interest plans.
Finance charges may be assessed on unpaid balances at an
annual percentage rate of up to 21.6%; a late charge fee
on delinquent charge accounts may be assessed at a rate
of up to $15 per late payment occurance. Such charges may
vary depending on applicable state law.
Information Systems and Technology. The Company
has continued to invest in technology and systems
improvements in its efforts to improve customer service
and reduce inventory-related costs and operating costs.
The Company's information systems include IBM mainframe
technology with capacity sufficient to meet the Company's
long-term expansion plans. In addition to the mainframe
computer, the Company runs multiple platforms with
applications on mid-range, local area network and
departmental levels. All of the Company's major
information systems are computerized, including its
sales, inventory, credit, payroll and financial reporting
systems. The Company has installed approximately 1,800
computer terminals throughout its stores, corporate
offices and distribution center. Every store processes
each sales transaction through point-of-sale ("POS")
terminals that connect on-line with the Company's
mainframe computer located at its corporate offices in
Fresno, California. This system provides detailed reports
on a real-time basis of current sales, gross margin and
inventory levels by store, department, vendor, class,
style, color, and size.
Management believes the continued enhancement of
its merchandise-related systems is essential for
merchandise cost and shrinkage control. The Company has
an automatic markdown system which has assisted in the
more timely and accurate processing of markdowns and
reduced inventory shortage resulting from paperwork
errors. The Company's price management system has
improved the Company's POS price verification
capabilities, resulting in fewer POS errors and enhanced
customer service. Combined with enhanced physical
inventory procedures and improved security systems in the
Company's stores, these systems have resulted in the
reduction of the Company's inventory shrinkage to 1.1% of
net sales in fiscal 1996, from 1.3%, 1.4%, 2.1% and 2.3%
fiscal 1995, 1994, 1993 and 1992, respectively.
Management also believes improved technology is
critical for future reductions in costs related to the
purchase, handling and distribution of merchandise,
traditionally labor-intensive tasks. The Company's
merchandise management and allocation ("MMS") system has
enhanced the Company's ability to allocate merchandise to
stores more efficiently and make prompt reordering and
pricing decisions. The MMS system also provides
merchandise-related information used by the Company's
buying division in its analysis of market trends and
specific item performance in stores. The Company has also
implemented a variety of programs with its vendors,
including an automatic replenishment inventory system for
certain basic merchandise and an electronic data
interchange ("EDI") system providing for on-line purchase
order, invoicing and charge-back entry. Such systems have
automated certain processes associated with the
purchasing and payment for merchandise.
Management expects to complete the installation of
an enhanced merchandise receiving and distribution system
at the Company's distribution center by mid-fiscal 1997.
This new system is expected to enhance the automation of
certain processes related to the receipt and distribution
of apparel and non-apparel merchandise and enable the
Company to deliver merchandise to stores more quickly.
Management believes this new system may improve the
Company's ability to sell more merchandise at its
original retail price and may result in lower
distribution center payroll. The Company is also in
process of installing a workflow and imaging system to
automate certain aspects of its merchandise and general
expense payables system. Management expects this system
to reduce certain costs associated with the payment for
merchandise.
Other systems implemented by the Company in its
efforts to control its selling, general and
administrative costs include the following: (i) a payroll
system, which has enhanced the Company's ability to
manage payroll-related costs; (ii) an advertising
management software system, which enables the Company to
measure individual item sales performance derived from a
particular advertisement; and (iii) the Company's credit
management system, described in Part I, Item I "Business--Private
Label-Credit Card".
Competition. The Company operates in a highly
competitive environment. The Company's stores compete
with national, regional, and local chain department and
specialty stores, some of which are considerably larger
than the Company and have substantially greater financial
and other resources. Competition has intensified in
recent years as new competitors, including discount
retailers and outlet malls, have entered the Company's
primary market areas. The trend towards consolidation of
competitors within the retail industry has also
intensified competition. The Company competes primarily
on the basis of current merchandise availability,
customer service, price and store location and the
availability of services, including credit and product
delivery.
The Company's larger national and regional
competitors have the ability to purchase larger
quantities of merchandise at lower prices. Management
believes its buying practices partially counteract this
competitive pressure. Such practices include: (i) the
ability to accept smaller or odd-sized orders of
merchandise from vendors than its larger competitors may
be able to accept; (ii) the ability to structure its
merchandise mix to more closely reflect the different
regional, local and ethnic needs of its customers; and
(iii) the ability to react quickly and make opportunistic
purchases of individual items. The Company's membership
in Frederick Atkins also provides it with increased
buying power in the marketplace. Management also believes
that its knowledge of its primary market areas, developed
over more than 92 years of continuous operations, and its
focus on those markets as its primary areas of
operations, give the Company an advantage that its
competitors cannot readily duplicate. Many of the
Company's competitors are national chains whose
operations are not focused specifically on non-major
metropolitan cities in the western United States. One
aspect of the Company's strategy is to differentiate
itself as a home-town, locally-oriented store versus its
more nationally focused competitors.
Leased Departments. The Company currently leases
the fine jewelry, shoe and maternity wear departments,
custom drapery, certain of its restaurants, coffee bars
and the beauty salons in its Gottschalks department
stores. The independent operators supply their own
merchandise, sales personnel and advertising and pay the
Company a percentage of gross sales as rent. Management
believes that while the cost of sales attributable to
leased department sales is generally higher than other
departments, the relative contribution of leased
department sales to earnings is comparable to that of the
Company's other departments because the lessee assumes
substantially all operating expenses of the department.
This allows the Company to reduce its level of selling,
advertising and other general and administrative expenses
associated with leased department sales. Leased
department sales as a percent of total sales were 7.8%,
7.4%, 7.1%, 7.4% and 7.1% in fiscal 1996, 1995, 1994,
1993 and 1992, respectively. Gross margin applicable to
the leased departments was 14.6%, 14.4%, 14.1%, 13.8% and
14.4% in fiscal 1996, 1995, 1994, 1993 and 1992,
respectively.
Employees. As of February 1, 1997, the Company
had 5,429 employees, of whom 1,517 were employed part-time (working less
than 20 hours a week on a regular
basis). The Company hires additional temporary employees
and increases the hours of part-time employees during
seasonal peak selling periods. None of the Company's
employees are covered by a collective bargaining
agreement. Management considers its employee relations
to be good.
To attract and retain qualified employees, the
Company offers a 25% discount on most merchandise
purchases, participation in a 401(k) Retirement Savings
Plan to which the Company may make an annual
discretionary contribution, vacation, sick and holiday
pay benefits as well as health care, accident, death,
disability, dental and vision insurance at a nominal cost
to the employee and eligible beneficiaries and
dependents. The Company also has a performance-based
incentive pay program for certain of its officers and key
employees and has stock option plans that provide for the
grant of stock options to certain officers and key
employees of the Company.
Executive Officers of the Registrant. Information
relating to the Company's executive officers is included
in Part III, Item 10 of this report and is incorporated
herein by reference.
Item 2. PROPERTIES
Corporate Offices and Distribution Center. The
Company's corporate headquarters are located in an office
building in Northeast Fresno, California, constructed in
1991 by a limited partnership of which the Company is the
sole limited partner holding a 36% share of the
partnership. The Company leases 89,000 square feet of the
176,000 square foot building under a twenty-year lease
expiring in the year 2011. The lease contains two
consecutive ten-year renewal options and the Company
receives favorable rental terms under the lease. (See
Note 1 to the Consolidated Financial Statements.) The
Company believes that its current office space is
adequate to meet its long-term office space requirements.
The Company's distribution center, completed in
1989, was constructed and equipped to meet the Company's
long-term merchandise distribution needs. The 420,000
square foot distribution facility is strategically
located in Madera, California to service economically the
Company's existing store locations in the western United
States and its projected future market areas. The Company
leases the distribution facility from an unrelated party
under a 20-year lease expiring in the year 2009, and has
six consecutive five-year renewal options.
Store Leases and Locations. The Company owns six
of its thirty-five Gottschalks stores and leases its
remaining Gottschalks and Village East stores from
unrelated parties. The store leases generally require the
Company to pay either a fixed rent, rent based on a
percentage of sales, or rent based on a percentage of
sales above a specified minimum rent amount. Certain of
the Company's leases also provide for rent abatements and
scheduled rent increases over the lease terms. The
Company is generally responsible for a pro-rata share of
promotion, common area maintenance, property tax and
insurance expenses under its store leases. On a
comparative store basis, the Company incurred an average
of $6.19, $6.29, $6.38, $6.54 and $6.09 per gross square
foot in lease expense in fiscal 1996, 1995, 1994, 1993
and 1992, respectively, not including common area
maintenance and other allocated expenses. In certain
cases, the Company has been able to add gross square feet
to certain existing store locations under favorable
rental conditions.
Thirty of the Company's thirty-five Gottschalks
stores and all but two of its twenty-four Village East
stores are located in regional shopping malls. While
there is no assurance that the Company will be able to
negotiate further extensions of any particular lease,
management believes that satisfactory extensions or
suitable alternative store locations will be available.
The following table contains specific information about
each of the Company's stores open as of the end of
fiscal 1996:
<TABLE>
<CAPTION>
Expiration
Gross(1) Selling Date of
Square Square Date Current
Feet Feet Opened Lease Renewal Options
GOTTSCHALKS
<S> <C> <C> <C> <C> <C>
Antioch............. 80,000 64,036 1989 N/A (2) N/A
Aptos............... 11,200 9,362 1988 2004 None
Auburn.............. 40,000 37,245 1995 2005 1 five yr. opt.
Bakersfield:
East Hills........ 74,900 73,069 1988 2009 6 five yr. opt.
Valley Plaza...... 69,000 57,195 1987 2017(3) 2 five yr. opt.
Capitola............105,000 89,352 1990 2015 4 five yr. opt.
Carson City, Nevada. 58,000 51,848 1995 2005 2 five yr opt.
Chico............... 85,000 75,934 1988 2017 3 ten yr. opt.
Clovis..............101,400 93,521 1988 2018 None
Eureka.............. 96,900 70,090 1989 N/A (2) N/A
Fresno:
Fashion Fair......163,000 120,000 1970 2016(7) 4 five yr opt.
Fig Garden........ 36,000 32,774 1983 2005 None
Manchester........175,600 127,243 1979 2009 1 ten yr. opt.
Hanford............. 98,800 75,382 1993 N/A (2) N/A
Klamath Falls,
Oregon............ 65,400 53,446 1992 2007 2 ten yr. opt.
Merced.............. 60,000 51,628 1983 2013 None
Modesto:
Vintage Faire.....161,500 124,100 1977 2007(7) 1 eight yr. opt.
and
5 five yr. opt.
Century Center.... 62,300 58,285 1984 2013 1 ten yr. opt.
and
1 four yr. opt.
Oakhurst............ 25,600 21,894 1994 2005 4 five yr. opt.
and
1 six yr. opt.
Palmdale............114,900 93,029 1990 N/A (2) N/A
Palm Springs........ 68,100 57,194 1991 2011 4 five yr. opt.
Reno, Nevada........138,000 110,000 1996 2016 2 ten yr. opt.
Sacramento..........194,400 138,797 1994 2014 5 five yr. opt.
San Bernardino......204,000 147,061 1995 2017 4 five yr. opt.
San Luis Obispo..... 99,300 91,155 1986 N/A (2) N/A
Santa Maria.........114,000 99,262 1976 2006 4 five yr. opt.
Scotts Valley....... 11,200 9,740 1988 2001 2 five yr. opt.
Stockton............ 90,800 74,952 1987 2009 6 five yr. opt.
Tacoma, Washington..119,300 94,054 1992 2012 4 five yr. opt.
Tracy...............113,000 88,168 1995 2015 4 five yr. opt.
Visalia.............150,000 133,930 1995 2014 3 five yr. opt.
Watsonville......... 75,000 63,449 1995 2006 4 five yr. opt.
Woodland............ 55,300 52,913 1987 2017 2 ten yr. opt.
Yuba City........... 80,000 61,944 1989 N/A(2) N/A
Redding............. 7,800 5,000 1993 60 days(4) None
Total Gottschalks
Square Footage..3,204,700 2,607,052
VILLAGE EAST
Antioch............. 2,100 1,472 1989 1999 None
Bakersfield:
East Hills........ 3,350 2,847 1988 1998 None
Valley Plaza...... 3,700 3,550 1991 2002 None
Capitola............ 2,360 2,006 1991 1999 None
Carson City, Nevada. 3,400 2,800 1995 2005 None
Chico............... 2,300 1,920 1988 2000 None
Clovis.............. 2,300 1,955 1988 1998 None
Eureka.............. 2,820 2,397 1989 2004 None
Fresno:
Fashion Fair...... 1,750 N/A N/A N/A (5) N/A
Fig Garden........ 2,800 2,521 1986 1999 None
Manchester........ 5,950 5,375 1981 2010 None
Hanford............. 2,800 2,480 1993 2008 None
Merced.............. 3,350 2,847 1976 1997(6) None
Modesto:
Vintage Faire..... 2,900 N/A N/A N/A (5) N/A
Century Center.... 2,730 2,320 1986 2005 None
Palmdale............ 2,716 2,309 1990 2000 None
Palm Springs........ 2,480 2,108 1991 2001 None
Sacramento.......... 2,700 2,470 1994 2004 None
San Luis Obispo..... 2,500 1,472 1987 2011 None
Santa Maria......... 3,000 2,720 1976 2001 None
Stockton............ 1,799 1,530 1989 1998 None
Tacoma.............. 4,000 3,220 1992 2012 None
Tracy............... 3,428 2,914 1995 2006 None
Visalia............. 3,400 2,880 1975 1999 None
Woodland............ 2,022 1,719 1987 1999 None
Yuba City........... 3,200 3,045 1990 2000 None
Total Village East
Square Footage....71,205 60,877
Total Square
Footage........3,275,905 2,667,929
__________________________
</TABLE>
(1) Reflects total store square footage,
including office space, storage, service
and other support space that is not
dedicated to direct merchandise sales.
(2) These stores are Company owned and have
been pledged as security for various debt
obligations of the Company. (See Note 3 of
the Consolidated Financial Statements.)
(3) This lease was revised and extended during
fiscal 1996 in connection with the
remodeling and 23,000 square foot expansion
of the store, expected to be completed in
fiscal 1997.
(4) This lease is automatically renewed every
60 days. Either party can terminate the
lease upon 60 days' notice.
(5) These Village East store leases were not
renewed upon their expiration as the
Company incorporated these stores into the
nearby Gottschalks store as a separate
department during fiscal 1996. The Company
does not include these locations in the
total number of free-standing Village East
stores open as of the end of fiscal 1996.
The Company does, however, include sales
applicable to these locations in total
Village East sales amounts reported.
(6) The Company reached an agreement to
terminate this lease in August 1997. The
original lease expired in the year 2001.
(7) Represents new leases entered into during
fiscal 1996. (See Note 4 to the
Consolidated Financial Statements.)
Item 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES HOLDERS
No matter was submitted to a vote of security
holders of the Company during the fourth quarter of the
fiscal year covered in this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's stock is listed for trading on both
the New York Stock Exchange ("NYSE") and the Pacific
Stock Exchange. The following table sets forth the high
and low sales prices per share of common stock as
reported on the NYSE Composite Tape under the symbol
"GOT" during the periods indicated:
<TABLE>
<CAPTION>
1996 1995
Fiscal Quarters High Low High Low
<C> <C> <C> <C> <C>
1st Quarter......... 7 3/8 5 5/8 7 7/8 6 3/4
2nd Quarter......... 7 1/4 5 3/4 7 3/8 6 1/2
3rd Quarter......... 6 1/2 5 1/8 8 3/8 6 1/2
4th Quarter......... 7 5 1/8 7 4 3/4
</TABLE>
On March 31, 1997, the Company had 1,014
stockholders of record, some of which were brokerage
firms or other nominees holding shares for multiple
stockholders. The sales price of the Company's common
stock as reported by the NYSE on March 31, 1997 was $5.75
per share.
The Company has not paid a cash dividend since its
initial public offering in 1986. The Board of Directors
has no present intention to pay cash dividends in the
foreseeable future, and will determine whether to declare
cash dividends in the future depending on the Company's
earnings, financial condition and capital requirements.
In addition, the Company's credit agreement with Congress
Financial Corporation prohibits the Company from paying
dividends without prior written consent from that lender.
There were no sales of unregistered securities by
the Company during fiscal 1996.
Item 6. SELECTED FINANCIAL DATA
The Company reports on a 52/53 week fiscal year
ending on the Saturday nearest to January 31. The fiscal
years ended February 1, 1997, February 3, 1996, January
28, 1995, January 29, 1994 and January 30, 1993 are
referred to herein as fiscal 1996, 1995, 1994, 1993 and
1992, respectively. All fiscal years noted include 52
weeks, except for fiscal 1995 which includes 53 weeks.
The selected financial data below should be read
in conjunction with Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and
Results of Operations," and the Consolidated Financial
Statements of the Company and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS:
1996 1995 1994 1993 1992
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales(1)........... $422,159 $401,041 $363,603 $342,417 $331,133
Service charges and
other income......... 13,285 11,663 9,659 8,938 9,458
435,444 412,704 373,262 351,355 340,591
Costs and expenses:
Cost of sales(2)..... 287,164 278,827 247,423 233,715 226,319
Selling, general and
administrative
expenses(3)........ 126,591 123,100 103,571 103,675 105,044
Depreciation and
amortization(4).... 6,922 8,092 5,860 5,877 6,408
Interest expense..... 11,675 11,296 10,238 8,524 6,965
Unusual items(5)..... 3,833 3,427 7,852
432,352 421,315 370,925 355,218 352,588
Income (loss) before
income tax expense
(benefit)............ 3,092 (8,611) 2,337 (3,863) (11,997)
Income tax expense
(benefit)............ 1,258 (2,972) 821 (1,190) (4,006)
Net income (loss)...... $ 1,834 $ (5,639) $ 1,516 $ (2,673) $(7,991)
Net income (loss)
per common share...... $ .18 $ (.54) $ .15 $ (.26) $ (.77)
Weighted-average number
of common shares
outstanding.......... 10,461 10,416 10,413 10,377 10,410
</TABLE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA:
1996 1995 1994 1993 1992
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Receivables, net(6).. $ 22,689 $ 27,467 $ 27,311 $ 21,460 $ 59,508
Merchandise
inventories(7)...... 89,472 87,507 80,678 60,465 58,777
Property and
equipment, net(8)... 87,370 89,250 93,809 96,396 95,933
Total assets......... 233,193 239,041 233,353 248,330 239,910
Working capital (9).. 70,231 42,904 37,900 32,147 16,827
Long-term obligations,
less current portion(9) 60,241 34,872 33,672 31,493 14,992
Stockholders' equity.... 80,139 77,917 83,577 82,118 84,529
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA:
1996 1995 1994 1993 1992
Sales growth:
<S> <C> <C> <C> <C> <C>
Total store sales(10)... 5.3% 10.3% 6.2% 3.4% 5.2%
Comparable store sales . 1.4% (3.1%) 3.3% 1.3% (1.0%)
Average net sales per
square foot of selling
space(11):
Gottschalks........... $170 $181 $196 $198 $209
Village East.......... 163 161 164 176 218
Gross margin percent:
Owned sales........... 33.4% 31.8% 33.3% 33.2% 32.7%
Leased sales.......... 14.6% 14.4% 14.1% 13.8% 14.4%
Credit sales as a %
of total sales........ 44.7% 44.7% 43.0% 38.4% 38.2%
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA:
1996 1995 1994 1993 1992
Capital expenditures,
<S> <C> <C> <C> <C> <C>
net of reimbursements.. $ 6,845 $12,773 $ 4,539 $ 5,456 $12,078
Current ratio............ 2.10:1 1.45:1 1.43:1 1.30:1 1.15:1
Inventory turnover
ratio(12).............. 2.6 2.7 2.9 2.9 2.9
Days credit sales
in receivables(13)..... 132.9 136.8 157.3 170.8 171.4
__________________
</TABLE>
(1) Includes net sales from leased departments of
$32.8 million, $29.8 million, $26.0 million,
$25.3 million and $23.4 million in fiscal 1996,
1995, 1994, 1993 and 1992, respectively. (See
Part I, Item 1, "Business--Leased Departments.")
(2) Includes cost of sales attributable to leased
departments of $28.0 million, $25.5 million,
$22.3 million, $21.8 million and $20.1 million in
fiscal 1996, 1995, 1994, 1993 and 1992,
respectively. (See Part I, Item 1, "Business--Leased Departments.")
(3) Includes provision for credit losses associated
with the Company's private-label credit card of
$2.7 million, $2.5 million, $2.1 million, $2.2
million and $2.5 million in fiscal 1996, 1995,
1994, 1993 and 1992, respectively.
(4) Includes the amortization of new store pre-opening costs of $1.3 million,
$2.5 million, $438,000, $429,000 and $1.0 million in fiscal
1996, 1995, 1994, 1993 and 1992, respectively.
(5) See the Company's 1995 Annual Report on Form 10-K
and Note 8 to the accompanying Consolidated
Financial Statements.
(6) Net receivables does not include receivables sold
($46.0 million as of the end of fiscal 1996 and
$40.0 million as of the end of both fiscal 1995 and
1994) or receivables held for securitization and
sale ($40.0 million as of the end of fiscal 1993).
(See Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for
description of receivables securitization program.)
(7) The increase in merchandise inventories is
generally attributable to new store openings. (See
Part I, Item I,"Business--Store Location and Growth
Strategy", for table of number of stores open at
each fiscal year-end.)
(8) The decreases in property and equipment from fiscal
1993 through fiscal 1996 is primarily due to
various sale and leaseback financings and, in fiscal 1996, to the
write-off of assets under terminated capital leases. (See Note 4 to
Consolidated Financial Statements.)
(9) The increases in working capital and long-term
obligations from fiscal 1995 to 1996 and from
fiscal 1992 to 1993 occurred primarily as a result
of the classification of certain debt as long-term
that was classified as current in the previous
year. (See Note 3 to the Consolidated Financial
Statements for current year discussion.)
(10) See Part I, Item I, "Business--Store Location and
Growth Strategy", for table of number of stores
open at each fiscal year-end.
(11) Average net sales per square foot of selling space
represents net sales for the period divided by the
number of square feet of selling space in use during the period.
Average net sales per square
foot is computed only for those stores in operation
for at least twelve months. "Selling space" has been determined
according to standards set by the National Retail Federation.
(12) The inventory turnover ratio excludes certain
inventory received at year-end if held for stores
opened early in the subsequent fiscal year.
(13) Days credit sales in receivables include
receivables sold ($46.0 million as of the end of
fiscal 1996 and $40.0 million as of the end of both
fiscal 1995 and 1994) and $40.0 million of
receivables held for securitization and sale as of
the end of fiscal 1993. The Company services and
administers the receivables pursuant to the
securitization program.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
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>
1996 1995 1994
<S> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0%
Service charges and other income. 3.1 2.9 2.6
103.1 102.9 102.6
Costs and expenses:
Cost of sales................. 68.0 69.5 68.0
Selling, general and
administrative expenses..... 30.0 30.7 28.5
Depreciation and amortization. 1.6 2.0 1.6
Interest expense.............. 2.8 2.8 2.8
Unusual items................. 1.1
102.4 105.0 102.0
Income (loss) before income tax
expense (benefit)............. 0.7 (2.1) 0.6
Income tax expense (benefit)..... 0.3 (0.7) 0.2
Net income (loss)................ 0.4% (1.4)% 0.4%
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Net Sales
Net sales increased by $21.2 million to
$422.2 million in fiscal 1996 as compared to $401.0
million in fiscal 1995, an increase of 5.3%. This
increase resulted from a 1.4% increase in comparable
store sales, combined with additional sales volume
generated by new store openings in fiscal 1996 and 1995.
Fiscal 1996 included 52 weeks of sales as compared to 53
weeks of sales in fiscal 1995. Excluding the 53rd week in
fiscal 1995, net sales increased by 6.4% in fiscal 1996,
with a 2.4% increase in comparable store sales.
Fiscal 1996 new store openings included one
new store in Reno, Nevada, in March 1996 and two larger
replacement stores for pre-existing stores in Modesto and
Fresno, California, in March and April 1996,
respectively. Stores operating in fiscal 1996 not open
for the entire year in fiscal 1995 included five new
stores located in California in Auburn (February 1995),
San Bernardino (April 1995), a larger replacement store
for a pre-existing store in Visalia (August 1995),
Watsonville (August 1995) and Tracy (October 1995), and
one new store opened in Nevada in Carson City (March
1995). The Company has entered into agreements to open
two additional stores in fiscal 1997, to be located in
Santa Rosa and Sonora, California. While these stores are
expected to open in the second half of fiscal 1997, there
can be no assurance that such openings will not be
delayed subject to a variety of conditions precedent or
other factors.
Service Charges and Other Income
Service charges and other income increased by
$1.6 million to $13.3 million in fiscal 1996 as compared
to $11.7 million in fiscal 1995, an increase of 13.7%. As
a percent of net sales, service charges and other income
increased to 3.1% in fiscal 1996 as compared to 2.9% in
fiscal 1995.
Service charges associated with the Company's
customer credit cards decreased by $400,000 to $10.5
million in fiscal 1996 as compared to $10.9 million in
fiscal 1995, a decrease of 3.7%. Credit sales as a
percent of total sales remained unchanged at 44.7% in
fiscal 1996 and 1995. The dollar decrease in service
charges is primarily due to the more timely payment of
customer credit card balances in fiscal 1996 as compared
to fiscal 1995. This decrease was partially offset by
additional income generated by an increase to the
interest rate charged on outstanding customer credit card
balances to an annual percentage rate of 21.6% from 19.8%
and an increase to the late charge assessed on delinquent
credit card balances, both effective in late fiscal 1996.
Other income, which includes the amortization
of deferred income and other miscellaneous income and
expense items, increased by $2.1 million to $2.8 million
in fiscal 1996 as compared to $726,000 in fiscal 1995.
Other income in fiscal 1996 includes a pre-tax gain of
$1.3 million resulting from the termination of two leases
and income related to the amortization of a lease
incentive (see Note 4 to the Consolidated Financial
Statements). Other income in fiscal 1995 was reduced by
certain general claim and valuation reserves.
Cost of Sales
Cost of sales increased by $8.4 million to
$287.2 million in fiscal 1996 as compared to $278.8
million in fiscal 1995, an increase of 3.0%. The
Company's gross margin percent increased to 32.0% in
fiscal 1996 as compared to 30.5% in fiscal 1995.
Excluding the effect of certain indirect costs related to
inventory which are reclassified to cost of sales by the
Company for financial reporting purposes, the gross
margin percent increased to 36.8% in fiscal 1996 as
compared to 35.7% in fiscal 1995. (See Note 1 to the
Consolidated Financial Statements.) This increase in
gross margin percent is primarily due to increased sales
of higher gross margin men's, women's and children's
apparel, a higher initial inventory mark-on percentage on
certain merchandise (through favorable vendor pricing),
and a reduction of seasonal clearance and storewide sale
event markdowns as compared to the prior year. The
Company's inventory shrinkage also continued to improve,
decreasing to 1.1% of net sales in fiscal 1996 as
compared to 1.3% in fiscal 1995. The Company's gross
margin percent in fiscal 1995 was negatively impacted by
(i) increased competition resulting from pricing policies
of two financially troubled retailers operating in
certain of the Company's market areas; (ii) increased
markdowns taken in an attempt to improve sales of slow-moving
apparel and in connection with a revision in the
Company's women's apparel merchandising strategy; and
(iii) increased promotional activity related to new store
openings and storewide sale events.
Management is continuing efforts to improve
its gross margin, primarily by maintaining tight controls
over inventory levels, shifting inventories into more
profitable lines of business based on current selling
trends, expanding guaranteed gross margin arrangements
with key vendors, and by continuing to focus on the
enhancement of its information systems and technology as
a means to reduce inventory-related costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased by $3.5 million to $126.6 million in fiscal
1996 as compared to $123.1 million in fiscal 1995, an
increase of 2.8%. As a percent of net sales, selling,
general and administrative expenses decreased to 30.0% in
fiscal 1996 as compared to 30.7% in fiscal 1995.
Including the effect of certain indirect costs related to
inventory which are reclassified to cost of sales,
selling, general and administrative costs as a percent of
net sales decreased to 34.7% in fiscal 1996 as compared
to 35.7% in fiscal 1995. (See Note 1 to the Consolidated
Financial Statements.) This decrease as a percent of net
sales is primarily due to the increase in sales volume.
The Company's sales increased at a faster rate than its
selling, general and administrative expenses in fiscal
1996, primarily due to ongoing Company-wide expense
control measures.
Depreciation and Amortization
Depreciation and amortization, which includes the
amortization of new store pre-opening costs, decreased by
$1.2 million to $6.9 million in fiscal 1996 as compared
to $8.1 million in fiscal 1995, a decrease of 14.8%. The
amortization of new store pre-opening costs decreased by
$1.2 million to $1.3 million in fiscal 1996 as compared
to $2.5 million in fiscal 1995 as a result of fewer new
store openings during the period. Excluding the
amortization of new store pre-opening costs, depreciation
and amortization as a percent of net sales remained
unchanged at 1.5% in fiscal 1996 and 1995. Higher
depreciation expense (in dollars) related to capital
expenditures for new stores was fully offset by lower
depreciation expense resulting from sale and leaseback
arrangements completed in fiscal 1996 and 1995, including
that of the Company's department store in Capitola,
California, and by the termination of two capital leases
in fiscal 1996. (See Note 4 to the Consolidated Financial
Statements).
Interest Expense
Interest expense increased by $400,000 to $11.7
million in fiscal 1996 as compared to $11.3 million in
fiscal 1995, an increase of 3.5%. Due to the increase in
sales volume, interest expense as a percent of net sales
remained unchanged at 2.8% in fiscal 1996 and 1995. The
increase (in dollars) resulted primarily from additional
long-term financing arrangements entered into late in
fiscal 1995 and in fiscal 1996 and higher interest costs
associated with the Company's former line of credit
facility with Fleet Capital Corporation ("Fleet"). These
increases were partially offset by a decrease in the
weighted-average interest rate charged on outstanding
borrowings under the Company's various lines of credit
(8.62% in fiscal 1996 as compared to 8.75% in fiscal
1995), which resulted from (i) a decrease in LIBOR during
the period; (ii) a higher percentage of borrowings
outstanding under more cost-effective financing
arrangements, including the line of credit with Bank
Hapoalim and the securitization program; and (iii) a
lower interest rate applicable to the new line of credit
agreement with Congress Financial Corporation
("Congress"), entered into in December 1996, which
replaced the Fleet facility. Assuming relatively stable
LIBOR rates in fiscal 1997, management expects interest
expense to be lower in fiscal 1997 as compared to fiscal
1996 as a result of the new line of credit agreement with
Congress. (See "Liquidity and Capital Resources.")
Income Taxes
The Company's effective tax rate was 40.7% in
fiscal 1996 as compared to an effective tax benefit of
(34.5%) in fiscal 1995. (See Note 5 to the Consolidated
Financial Statements.)
Net Income (Loss)
As a result of the foregoing, the Company's net
income increased by $7.5 million to net income of $1.8
million in fiscal 1996 as compared to a net loss of
($5.6) million in fiscal 1995. On a per share basis, net
income increased by $.72 per share to net income of $.18
per share in fiscal 1996 as compared to a net loss of
($.54) per share in fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994
Net Sales
Net sales increased by $37.4 million to $401.0
million in fiscal 1995 as compared to $363.6 million in
fiscal 1994, an increase of 10.3%. This increase resulted
from sales generated by the opening of the previously
described six new Gottschalks stores during fiscal 1995
and two new stores not open for the entire year in fiscal
1994, and was partially offset by a 3.1% decrease in
comparable store sales in fiscal 1995 as compared to
fiscal 1994. As described more fully in "Cost of Sales"
below, fiscal 1995 comparable store sales were negatively
impacted by unusual weather variances and temporary
competitive pressures in certain of the Company's market
areas during the period. Stores operating in fiscal 1995
not open for the entire year in fiscal 1994 include
Oakhurst (October 1994) and Sacramento, California
(November 1994).
Service Charges and Other Income
Service charges and other income increased by $2.0
million to $11.7 million in fiscal 1995 as compared to
$9.7 million in fiscal 1994, an increase of 20.6%. As a
percent of net sales, service charges and other income
increased to 2.9% in fiscal 1995 as compared to 2.6% in
fiscal 1994.
Service charges associated with the Company's
customer credit cards increased by $2.0 million to $10.9
million in fiscal 1995 as compared to $8.9 million in
fiscal 1994. This increase is primarily due to an
increase in the late charge fee assessed on delinquent
customer accounts, effective January 1995, which resulted
in a $1.2 million increase in late charge fees. In
addition, credit sales as a percent of total sales
increased to 44.7% in fiscal 1995 as compared to 43.0% in
fiscal 1994, primarily due to the success of a variety of
new credit-related programs first implemented by the
Company in fiscal 1994 and 1993, in addition to increased
marketing efforts aimed at the Company's credit
cardholders and credit solicitation activities resulting
in a higher percentage of new credit card accounts opened
in connection with new store openings. (See Part I, Item
I, Business--Private-Label Credit Card.)
Other income, which includes the amortization of
deferred income and other miscellaneous income and
expense items, was $726,000 in fiscal 1995 as compared to
$755,000 in fiscal 1994.
Cost of Sales
Cost of sales increased by $31.4 million to $278.8
million in fiscal 1995 as compared to $247.4 million in
fiscal 1994, an increase of 12.7%. The Company's gross
margin percent decreased to 30.5% in fiscal 1995 as
compared to 32.0% in fiscal 1994. Excluding the effect of
certain indirect costs related to inventory which are
reclassified to cost of sales, the gross margin percent
decreased to 35.7% in fiscal 1995 as compared to 37.3% in
fiscal 1994. (See Note 1 to the Consolidated Financial
Statements.) The Company's gross margin percent in fiscal
1995 was negatively impacted by (i) increased competition
resulting from pricing policies of two financially
troubled retailers operating in certain of the Company's
market areas; (ii) increased markdowns taken in an
attempt to improve sales of slow-moving apparel and in
connection with a revision in the Company's women's
apparel merchandising strategy; and (iii) increased
promotional activity related to new store openings and
storewide sale events. The Company's inventory shrinkage
was 1.3% of net sales in fiscal 1995 as compared to 1.4%
in fiscal 1994, partially offsetting the negative impact
of higher markdowns on the Company's gross margin.
The Company's 1994 gross margin percent was
favorably impacted by the year-end LIFO inventory
valuation adjustment, which resulted in an increase in
gross margin of $3.2 million. The Company's LIFO
inventory reserve was eliminated as a result of the
fiscal 1994 adjustment and no similar benefit was
recognized in fiscal 1995 or 1996. (See Note 1 to the
Consolidated Financial Statements). Excluding the effect
of the LIFO adjustment, the Company's gross margin
percent was 31.1% in fiscal 1994. To a lesser extent, the
Company's fiscal 1994 gross margin percent was also
favorably impacted by a reduction of inventory shrinkage
to 1.4% of net sales in fiscal 1994 as compared to 2.1%
in fiscal 1993, primarily due to improved inventory-related controls.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased by $19.5 million to $123.1 million in fiscal
1995 as compared to $103.6 million in fiscal 1994, an
increase of 18.8%. As a percent of net sales, selling,
general and administrative expenses increased to 30.7% in
fiscal 1995 as compared to 28.5% in fiscal 1994.
Including the effect of certain indirect costs related to
inventory which are reclassified to cost of sales,
selling, general and administrative costs as a percent of
net sales increased to 35.7% in fiscal 1995 as compared
to 33.7% in fiscal 1994. (See Note 1 to the Consolidated
Financial Statements.) This increase as a percent of net
sales is due to lower than expected sales volume, in
addition to higher payroll, advertising and other
selling, general and administrative costs associated with
certain of the Company's new stores opened during the
year. Certain store operating costs as a percent of net
sales are generally higher for new stores and decline as
the stores mature over a two to three year period. The
Company also experienced an increase in building and
equipment rental expense as a result of sale and
leaseback financings, including that of the Company's
department store in Capitola, California, completed
during the period. (See Note 4 to the Condensed Financial
Statements.) The higher rental expense was partially
offset by lower depreciation and amortization expense as
a result of such sales.
In fiscal 1994, the Company realized the benefit
of reductions to required workers' compensation claim
reserves resulting from favorable experience adjustments
and revisions to applicable workers' compensation laws.
Excluding the effect of such experience adjustments,
selling, general and administrative expenses were 29.1%
of net sales in fiscal 1994. The Company revised its
workers' compensation program in early fiscal 1995,
substantially eliminating the potential for future
significant favorable or unfavorable experience
adjustments.
Depreciation and Amortization
Depreciation and amortization, which includes the
amortization of new store pre-opening costs, increased by
$2.2 million to $8.1 million in fiscal 1995 as compared
to $5.9 million in fiscal 1994, an increase of 37.3%. The
amortization of new store pre-opening costs increased by
$2.1 million to $2.5 million in fiscal 1995 as compared
to $438,000 in fiscal 1994 as a result of completing and
opening two new stores in fiscal 1994 and six new stores
(including one replacement store) in fiscal 1995.
Excluding the amortization of new store pre-opening
costs, depreciation and amortization as a percent of net
sales decreased to 1.4% in fiscal 1995 as compared to
1.5% in fiscal 1994. This decrease is primarily due to
lower depreciation expense resulting from sale and
leaseback arrangements completed in fiscal 1995 and 1994,
including that of the Company's department store in
Capitola, California, and was partially offset by
additional depreciation expense resulting from capital
expenditures, net of reimbursements received for certain
of those expenditures, for new stores opened during the
year. (See Note 4 to the Consolidated Financial
Statements.)
Interest Expense
Interest expense increased by $1.1 million to
$11.3 million in fiscal 1995 as compared to $10.2 million
in fiscal 1994, an increase of 10.8%. Due to the increase
in sales volume, interest expense as a percent of net
sales remained unchanged at 2.8% in fiscal 1995 and 1994.
The increase (in dollars) resulted from an increase in
the weighted-average interest rate charged on outstanding
borrowings under the Company's various lines of credit
(8.75% in fiscal 1995 as compared to 7.13% in fiscal
1994); higher average outstanding borrowings under those
lines of credit to fund increased inventory purchases and
other costs associated with new stores and operating
losses during the year; and interest expense associated
with additional long-term borrowings entered into during
the period. These increases were partially offset by the
application of proceeds from mortgage financings and sale
and leaseback arrangements entered into during the
period. (See "Liquidity and Capital Resources".)
Provision for Unusual Items
The provision for unusual items in fiscal 1994,
totaling $3.8 million, includes a provision of $3.5
million representing costs incurred in connection with an
agreement reached to settle the stockholder litigation
previously pending against the Company and related legal
fees and other costs. The Company paid all amounts due in
connection with the settlement agreement in February
1995. No additional costs in excess of such amounts
previously accrued were incurred by the Company. (See
Note 8 to the Consolidated Financial Statements.)
Income Taxes
The Company's effective tax benefit was (34.5%) in
fiscal 1995 as compared to an effective tax rate of 35.1%
in fiscal 1994. (See Note 5 to the Consolidated
Financial Statements.)
Net Income (Loss)
As a result of the foregoing, the Company realized
a net loss of ($5.6) million in fiscal 1995 as compared
to net income of $1.5 million in fiscal 1994. On a per
share basis, the net loss was ($.54) per share in fiscal
1996 as compared to net income of $.15 per share in
fiscal 1994.
Liquidity and Capital Resources
Sources of Liquidity. As described more fully
below, the Company's working capital requirements are
currently met through a combination of cash provided by
operations, borrowings under its revolving lines of
credit and its securitization program. The Company's
liquidity improved as compared to the prior year as a
result of improved operating results and its new
revolving line of credit agreement.
Revolving Lines of Credit. On December 20, 1996,
the Company entered into a new three-and-one-quarter year
revolving line of credit arrangement with Congress
Financial Corporation ("Congress"). The new line of
credit with Congress replaced the Company's former line
of credit agreement with Fleet Capital Corporation
("Fleet") and provides the Company with an $80.0 million
working capital facility through March 30, 2000.
Borrowings under the arrangement are limited to a
restrictive borrowing base equal to 65% of eligible
merchandise inventories, increasing to 70% of such
inventories during the period of September 1 through
December 20 of each year to fund increased seasonal
inventory requirements. Interest under the facility is
charged at a rate of approximately LIBOR plus 2.5% (8.28%
at February 1, 1997), with the potential to reduce the
interest rate by 1/4% each year, up to a maximum possible
reduction of 1/2% beginning in fiscal 1998, if specified
pre-tax income levels are attained by the Company.
Initial proceeds from the arrangement were used to repay
all outstanding borrowings under the line of credit with
Fleet. The maximum amount available for borrowings under
the line of credit with Congress was $51.9 million as of
February 1, 1997, of which $31.3 million was outstanding
as of that date. Of that amount, $25.0 million has been
classified as long-term in the accompanying financial
statements as the Company does not anticipate repaying
that amount prior to one year from the balance sheet
date. The agreement contains one financial covenant,
pertaining to the maintenance of a minimum tangible net
worth, with which the Company was in compliance as of
February 1, 1997.
The Company's former facility with Fleet provided
the Company with a $66.0 million working capital
facility, limited to a restrictive borrowing base equal
to 50% of eligible merchandise inventories, increasing to
60% during certain periods for increased seasonal
requirements. Interest on outstanding borrowings under
the Fleet facility was charged at a rate of LIBOR plus
3.75%, and the arrangement contained numerous restrictive
financial covenants. Management believes the Company's
improved operating results enabled the Company to obtain
the more favorable financing arrangement with Congress,
which provides the Company with increased borrowing
capacity at a lower interest rate, and greater
flexibility due to the elimination of all but one
restrictive financial covenant.
In addition to the Congress facility, the Company
also has a revolving line of credit with Bank Hapoalim
that provides for additional borrowings of up to $15.0
million through March 1999. The Company's borrowing
capacity under the line of credit with Bank Hapoalim is
limited to a percentage of the outstanding balance of
receivables collateralizing the line, and is therefore
subject to seasonal variations that may affect the
outstanding balance of such receivables. Interest on
outstanding borrowings under the line of credit is
charged at a rate equal to LIBOR plus 1.0% (6.44% at
February 1, 1997). At February 1, 1997, $7.6 million was
outstanding under the line of credit with Bank Hapoalim,
which was the maximum amount available for borrowings as
of that date. As described more fully in the "Cash Flows
from Securitization Program" portion of this section, the
issuance of an additional $6.0 million Fixed Base
Certificate in fiscal 1996 reduced the level of
receivables available to collateralize the Variable Base
Certificate, and thus has reduced the Company's borrowing
capacity under the facility in the near-term.
Other Financings. As described more fully in Note
3 to the Consolidated Financial Statements, the Company
has four fifteen-year mortgage loans with Midland
Commercial Funding ("Midland") with outstanding balances
totaling $19.7 million at February 1, 1997. The Midland
loans, due 2010, bear interest at rates ranging from
9.23% to 9.39%. The Company also has the following other
long-term loan facilities as of February 1, 1997: (i) a
10.45% mortgage loan payable with Heller Financial, Inc.
("Heller") due 2002, with an outstanding loan balance of
$4.8 million; an additional mortgage loan payable for
$6.0 million with Heller, due March 2004, bearing
interest at a fixed rate of 9.97%; (iii) two five-year
10.0% notes payable to Federated Department Stores, Inc.,
due 2001, with outstanding balances totaling $2.4
million; and (iv) other long-term obligations with
outstanding balances totaling $2.1 million. All of the
Company-owned stores have either been mortgaged or sold
and leased back to the Company, leaving the Company with
limited capacity for future additional long-term secured
borrowing.
Cash Flows From Securitization Program. The
Company's receivables securitization program provides the
Company with an additional source of working capital
financing that is generally more cost-effective than
traditional debt financing. Accordingly, the Company
continually seeks to divert as large a percentage of
total borrowings as possible to its securitization
program.
As described more fully in Note 2 to the
Consolidated Financial Statements, $40.0 million
principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates were issued in 1994 under the receivables
securitization program (the "1994 Fixed Base
Certificates"). On October 31, 1996, an additional $6.0
million principal amount 6.79% Fixed Base Certificate
(the "1996 Fixed Base Certificate") was issued under the
program. Proceeds from the issuance of the 1996 Fixed
Base Certificate were used to reduce outstanding
borrowings under the line of credit with Bank Hapoalim
and pay certain costs associated with the transaction.
Interest on the 1994 and 1996 Fixed Base Certificates
(collectively the "Fixed Base Certificates") is earned by
the certificate holders on a monthly basis and is paid
through finance charges collected under the program. The
outstanding principal balance of the certificates are 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 issuances of the
Fixed Base Certificates have been accounted for as sales
for financial reporting purposes. Accordingly, the $46.0
million of receivables underlying those certificates and
the corresponding debt obligations have been 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 the previously
described revolving line of credit financing arrangement
with that bank. In addition to the Fixed and Variable
Base Certificates, additional series of certificates may
be issued as a source of additional working capital
financing to the Company. Management does not currently
anticipate any additional certificate issuances in fiscal
1997.
Management believes the previously described
sources of liquidity are adequate to meet the Company's
working capital, capital expenditure and debt service
requirements for fiscal 1997. Management also believes it
has sufficient sources of liquidity for its long-term
growth plans at moderate levels. The Company may engage
in other financing activities if it is deemed to be
advantageous.
Additional Cash Flow and Working Capital Analysis.
Working capital increased by $27.3 million to
$70.2 million in fiscal 1996 as compared to $42.9 million
in fiscal 1995. The Company's ratio of current assets to
current liabilities increased to 2.10:1 as of the end of
fiscal 1996 as compared to 1.45:1 as of the end of fiscal
1995. The increases from fiscal 1995 to 1996 are
primarily due to the reclassification of $25.0 million of
outstanding borrowings under the line of credit with
Congress to long-term in the accompanying financial
statements.
Cash flows from operating activities consist
primarily of net income (loss) adjusted for certain non-cash
income and expense items, including, but not limited
to, depreciation and amortization, the provision for
uncollectible accounts and changes in deferred taxes. Net
cash provided by operating activities was $8.7 million in
fiscal 1996 as compared to net cash used in operating
activities of ($18.8) million in fiscal 1995. The
increase in cash provided by operating activities is
primarily due
to (i) improved operating results; (ii) the payment of
approximately $7.6 million of operating expenses related
to fiscal 1996 during the 53rd week of fiscal 1995 as a
result of the fiscal 1995 calendar shift; (iii) the
receipt of $3.4 million in connection with the filing of
certain amended income tax returns; and (iv) lower costs
associated with new store openings. These increases were
partially offset by cash used to fund an increase in
merchandise inventories, resulting from the earlier
receipt of certain spring merchandise in fiscal 1996 as
compared to fiscal 1995, a decrease in trade accounts
payable and cash paid to settle previously pending
litigation (see Note 8 to the Consolidated Financial
Statements.)
Net cash used in investing activities was ($4.7)
million in fiscal 1996 as compared to ($1.1) million in
fiscal 1995. Net cash used in investing activities in
each of those years consisted primarily of expenditures
for tenant improvements, construction costs and
furniture, fixtures and equipment associated with new and
certain existing store locations, less reimbursements
received for certain of those expenditures. Such
expenditures were partially offset by proceeds from
various sale and sale/leaseback arrangements during those
periods.
Net cash used in financing activities was ($4.3)
million in fiscal 1996 as compared to net cash provided
by financing activities of $21.8 million in fiscal 1995.
Proceeds from financing arrangements finalized during
fiscal 1996, including the $6.0 million received from the
issuance of the 1996 Fixed Base Certificate and the
combined total of $5.6 million received from the
previously described Heller and Federated loans, were
more than fully offset by principal payments made on
various short-term and long-term obligations during the
year. Increased cash flows from operating activities
enabled the Company to reduce net borrowings under its
lines of credit during the year. Net cash provided by
financing activities of $21.8 million in fiscal 1995
consisted primarily of net borrowings under the Company's
lines of credit. The $20.0 million provided by the
Midland financing was fully applied against previously
outstanding obligations.
The Company has entered into agreements to open
two new department stores in fiscal 1997, to be located
in the current Macy's location in Santa Rosa, California
and the current K-Mart location in Sonora, California.
The Company has also commenced the remodel and 23,000
square foot expansion of its existing store located in
the Valley Plaza Mall in Bakersfield, California. The
estimated cost to complete these projects, consisting
primarily of tenant improvements, fixtures and equipment,
net of amounts to be contributed by a mall owner, is $8.7
million. Management expects to complete these projects
during the second half of fiscal 1997, however, there can
be no assurance that the completion of such projects will
not be delayed subject to a variety of conditions
precedent or other factors.
Inflation
Although inflation has not been a material factor
to the Company's operations during the past several
years, the Company does experience some increases in the
cost of certain of its merchandise, salaries, employee
benefits and other general and administrative costs. The
Company is generally able to offset these increase by
adjusting its selling prices or modifying its operations.
The Company's ability to adjust selling prices is limited
by competitive pressures in its market areas.
The Company accounts for its merchandise
inventories on the retail method using last-in, first-out
(LIFO) cost using the department store price indexes
published by the Bureau of Labor Statistics. Under this
method, the cost of products sold reported in the
financial statements approximates current costs and thus
reduces the impact of inflation in reported income due to
increasing costs.
Seasonality
The Company's business, like that of most
retailers, is subject to seasonal influences, with the
major portion of net sales, gross profit and operating
results realized during the Christmas selling months of
November and December of each year, and to a lesser
extent, during the Easter and Back-to-School selling
seasons. The Company's results may also vary from quarter
to quarter as a result of, among other things, the timing
and level of the Company's sales promotions, weather,
fashion trends and the overall health of the economy,
both nationally and in the Company's market areas.
Working capital requirements also fluctuate during the
year, increasing substantially prior to the Christmas
selling season when the Company must carry significantly
higher inventory levels.
The following table sets forth unaudited quarterly
results of operations for fiscal 1996 and 1995 (in
thousands, except per share data). (See Note 10 to the
Consolidated Financial Statements.)
<TABLE>
<CAPTION>
1996
Quarter Ended May 4 August 3 November 2 February 1
<S> <C> <C> <C> <C>
Net sales $85,560 $95,675 $95,675 $145,249
Gross profit 26,830 30,392 30,719 47,054
Income (loss) before
income tax expense
(benefit) (2,099) (1,245) (2,430) 8,866
Net income (loss) (1,322) ( 785) (1,530) 5,471
Net income (loss)
per common share (.13) (.07) (.15) .52
1995
Quarter ended April 29 July 29 October 28 February 3
Net sales $77,934 $91,884 $86,066 $145,157
Gross profit 22,553 27,490 27,432 44,739
Income (loss) before
income tax expense
(benefit) (5,100) (3,155) (5,101) 4,745
Net income (loss) (3,162) (1,955) (3,164) 2,642
Income (loss) per
common share (.30) (.19) (.30) .25
</TABLE>
Recently Issued Accounting Standards
In addition to the recently issued accounting
standards described in Note 1 to the Consolidated
Financial Statements, the Financial Accounting Standards
Board recently issued Statement of Accounting Standards
No. 128, "Earnings Per Share" which is effective for
financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure
of basic and diluted earnings per share and changes the
method in which earnings per share is determined.
Adoption of this statement by the Company is not expected
to have a material impact on earnings per share.
Safe Harbor Statement
The preceding sections including Part I, Item I,
"Business" and Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of
Operations" contain certain forward-looking statements
within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors
created thereby. These forward-looking statements include
the plans and objectives of management for future
operations and the future economic performance of the
Company, and such forward-looking statements can be
identified by words including, but not limited to:
believes, anticipates, expects, intends and seeks.
The forward-looking statements are qualified by
important factors that could cause actual results to
differ materially from those in those identified in such
forward-looking statements, including, without
limitation, the following: (i) the ability of the Company
to guage fashion trends and preferences of its customers;
(ii) the level of demand for the merchandise offered by
the Company; (iii) the ability of the Company to locate
and obtain favorable store sites, negotiate acceptable
lease terms, and hire and train employees; (iv) the
ability of management to manage the planned expansion;
(v) the continued ability to obtain adequate credit from
factors and vendors and the timely availability of
branded and other merchandise; (vi) the effect of
economic conditions, both nationally and in the Company's
specific market areas; (vii) the effect of severe weather
or natural disasters; and (viii) the effect of
competitive pressures from other retailers. Results
actually achieved thus may differ materially from
expected results in these statements as a result of the
foregoing factors or other factors affecting the Company.
_________________________________
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under
Part IV, Item 14, included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE COMPANY
The information required by Item 10 of Form 10-K,
other than the following information required by
Paragraph (b) of Item 401 of Regulation S-K, is
incorporated by reference from the Company's definitive
proxy statement with respect to the Annual Stockholders'
Meeting scheduled to be held on June 26, 1997, to be
filed pursuant to Regulation 14A.
The following table lists the executive officers
of the Company:
<TABLE>
<CAPTION>
Name Age(1) Position
<S> <C> <S>
Joseph W. Levy 65 Chairman and
Chief Executive
Officer
James R. Famalette 44 President and
Chief Operating
Officer
Gary L. Gladding 57 Executive Vice
President/General
Merchandise
Manager
Alan A. Weinstein 52 Senior Vice
President and
Chief Financial
Officer
Michael J. Schmidt 55 Senior Vice
President/
Director of Stores
__________________________
</TABLE>
(1) As of March 31, 1997
Joseph W. Levy became Chairman and Chief Executive
Officer of the Company's predecessor and former
subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk")
in April 1982 and of the Company in March 1986. Mr. Levy
was Executive Vice President from 1972 to April 1982 and
first joined E. Gottschalk in 1956. He also serves on the
Board of Directors of the National Retail Federation, the
Executive Committee of Frederick Atkins, Inc, and the
Board of Directors of Air 21, a regional airline based in
Fresno, California, which filed for protection under
federal bankruptcy laws in January 1997 and is currently
being liquidated. Mr. Levy was formerly Chairman of the
California Transportation Commission, a former member of
the Board of Directors of Community Hospitals of Central
California, and has also served on numerous other state
and local commissions and public service agencies.
James R. Famalette became the President and Chief
Operating Officer of the Company on April 14, 1997. Prior
to joining the Company, Mr. Famalette was President and
Chief Executive Officer of Liberty House, a department
and specialty store chain based in Honolulu, Hawaii, from
March 1993 through April 1997, and served in a variety of
other positions with Liberty House from 1987 through
1993, including Vice President, Stores and Vice
President, General Merchandise Manager. From 1982
through 1987, he served as Vice President, General
Merchandise Manager and later President of Village
Fashions/Cameo Stores in Philadelphia, Pennsylvania, and
from 1975 to 1982 served as a Divisional Merchandise
Manager for Colonies, a specialty store chain, based in
Allentown, Pennsylvania. Mr. Famalette serves on the
Board of Directors of the National Retail Federation and
Frederick Atkins.
Gary L. Gladding has been Executive Vice President
of the Company since May 1987, and joined E. Gottschalk
as Vice President/General Merchandise Manager in February
1983. From 1980 to February 1983, he was Vice President
and General Merchandise Manager for Lazarus Department
Stores, a division of Federated Department Stores, Inc.,
and he previously held merchandising manager positions
with the May Department Stores Co.
Alan A. Weinstein became Senior Vice President and
Chief Financial Officer of the Company in June 1993.
Prior to joining the Company, Mr. Weinstein, a Certified
Public Accountant, was the Chief Financial Officer of The
Wet Seal, Inc. based in Irvine, California for three
years. From 1987 to 1989 he was Vice President and Chief
Financial Officer of Wildlife Enterprises, Inc. Aside
from his position with The Wet Seal, he has served
general and specialty retailers in California, New York
and Texas for over twenty-five years. Mr. Weinstein
serves on the Board of Directors of the American Heart
Association of Fresno and Combined Health Appeal and is
a member of the Fig Garden Rotary in Fresno and of the
Community Relations Action Committee of the Central
California Blood Center.
Michael J. Schmidt became Senior Vice
President/Director of Stores of E. Gottschalk in February
1985. From October 1983 through February 1985, he was
Manager of the Gottschalks Fashion Fair store. Prior to
joining the Company, he was General Manager of the
Liberty House store in Fresno from January 1981 to
October 1983, and before 1981, held management positions
with Allied Corporation and R.H. Macy & Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is
incorporated by reference from the Company's definitive
proxy statement with respect to the Annual Stockholders'
Meeting scheduled to be held on June 26, 1997, to be
filed pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is
incorporated by reference from the Company's definitive
proxy statement with respect to the Annual Stockholders'
Meeting scheduled to be held on June 26, 1997, to be
filed pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information required by this item is
incorporated by reference from the Company's definitive
proxy statement with respect to the Annual Stockholders'
Meeting scheduled to be held on June 26, 1997, to be
filed pursuant to Regulation 14A.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements
of Gottschalks Inc. and Subsidiaries are included
in Item 8:
Consolidated balance sheets -- February 1, 1997
and February 3, 1996
Consolidated statements of operations -- Fiscal
years ended February 1, 1997, February 3, 1996
and January 28, 1995
Consolidated statements of stockholders' equity --
Fiscal years ended February 1, 1997, February
3, 1996 and January 28, 1995
Consolidated statements of cash flows -- Fiscal
years ended February 1, 1997, February 3, 1996
and January 28, 1995
Notes to consolidated financial statements --
Three years ended February 1, 1997
Independent auditors' report
(a)(2) The following financial statement schedule of
Gottschalks Inc. and Subsidiaries is included in
Item 14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are included in the consolidated
financial statements, are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(a)(3) The following exhibits are required by Item 601 of
the Regulation S-K and Item 14(c):
Exhibit
No. Description
3.1 Certificate of Incorporation of the Registrant,
as amended.(1)
3.2 By-Laws of the Registrant, as amended.(10)
10.1 Agreement of Limited Partnership dated March 16,
1990, by and between River Park Properties I and
Gottschalks Inc. relating to the Company's
corporate headquarters.(2)
10.2 1986 Employee Nonqualified Stock Option Plan with
form of stock option agreement thereunder.(3)(4)
10.3 Gottschalks Inc. Retirement Savings Plan.(3)(16)
10.4 Participation Agreement dated as of December 1,
1988 among Gottschalks Inc., General Foods Credit
Investors No. 2 Corporation and Manufacturers
Hanover Trust Company of California relating to
the sale-leaseback of the Stockton and
Bakersfield Gottschalks department stores and the
Madera distribution facility.(1)
10.5 Lease Agreement dated December 1, 1988 by and
between Manufacturers Hanover Trust Company of
California and Gottschalks Inc. relating to the
sale-leaseback of department stores in Stockton
and Bakersfield, California and the Madera
distribution facility.(1)
10.6 Ground Lease dated December 1, 1988 by and
between Gottschalks Inc., and Manufacturers
Hanover Trust Company of California relating to
the sale-leaseback of the Bakersfield department
store.(1)
10.7 Memorandum of Lease and Lease Supplement dated
July 1, 1989 by and between Manufactures Hanover
Trust Company of California and Gottschalks Inc.
relating to the sale-leaseback of the Stockton
department store.(1)
10.8 Ground Lease dated August 17, 1989 by and between
Gottschalks Inc. and Manufacturers Hanover Trust
Company of California relating to the sale-leaseback
of the Madera distribution facility.(1)
10.9 Lease Supplement dated as of August 17, 1989 by
and between Manufacturers Hanover Trust Company
of California and Gottschalks Inc. relating to
the sale-leaseback of the Madera distribution
facility.(1)
10.10 Tax Indemnification Agreement dated as of August
1, 1989 by and between Gottschalks Inc. and
General Foods Credit Investors No. 2 Corporation
relating to the sale-leaseback of the Stockton
and Bakersfield department stores and the Madera
distribution facility.(1)
10.11 Lease Agreement dated as of March 16, 1990 by and
between Gottschalks Inc. and River Park
Properties I relating to the Company's corporate
headquarters.(5)
10.12 Receivables Purchase Agreement dated as of March
30, 1994 by and between Gottschalks Credit
Receivables Corporation and Gottschalks Inc.(6)
10.13 Pooling and Servicing Agreement dated as of March
30, 1994 by and among Gottschalks Credit
Receivables Corporation, Gottschalks Inc. and
Bankers Trust Company. (6)
10.14 Amendment No. 1 to Pooling and Servicing
Agreement dated as of September 16, 1994 by and
among Gottschalks Credit Receivables Corporation,
Gottschalks Inc. and Bankers Trust Company.(7)
10.15 Amended and Restated Series 1994-1 Supplement to
Pooling and Servicing Agreement dated as of
September 16, 1994, by and among Gottschalks
Credit Receivables Corporation, Gottschalks Inc.
and Bankers Trust Company.(7)
10.16 Waiver Agreement dated November 23, 1994, by and
among Gottschalks Credit Receivables Corporation,
Gottschalks Inc. and Bankers Trust Company.(7)
10.17 Consulting Agreement dated June 1, 1994 by and
between Gottschalks Inc. and Gerald H.
Blum.(4)(8)
10.18 Form of Severance Agreement dated March 31, 1995
by and between Gottschalks Inc. and the following
senior executives of the Company: Joseph W. Levy,
Stephen J. Furst, Gary L. Gladding, Michael J.
Schmidt and Alan A. Weinstein.(4)(10)
10.19 1994 Key Employee Incentive Stock Option
Plan.(4)(9)
10.20 1994 Director Nonqualified Stock Option
Plan.(4)(9)
10.21 1994 Executive Bonus Plan.(4)(10)
10.22 Promissory Note and Security Agreement dated
December 16, 1994 by and between Gottschalks Inc.
and Heller Financial, Inc.(10)
10.23 Agreement of Sale dated June 27, 1995, by and
between Gottschalks Inc. and Jack Baskin relating
to the sale and leaseback of the Capitola,
California property.(11)
10.24 Lease and Agreement dated June 27, 1995, by and
between Jack Baskin and Gottschalks Inc. relating
to the sale and leaseback of the Capitola,
California property.(11)
10.25 Promissory Notes and Security Agreements dated
October 4, 1995 and October 10, 1995 by and
between Gottschalks Inc. and Midland Commercial
Funding.(12)
10.26 Waiver Agreement dated April 22, 1996 by and
between Gottschalks Inc. and Heller Financial,
Inc.(13)
10.27 Amended and Restated Series 1994-1 Supplement to
Pooling and Servicing Agreement, dated October
31, 1996, by and among Gottschalks Credit
Receivables Corporation, Gottschalks Inc. and
Bankers Trust Company.(14)
10.28 Series 1996-1 Supplement to Pooling and Servicing
Agreement dated as of November 1, 1996, by and
among Gottschalks Credit Receivables Corporation,
Gottschalks Inc. and Bankers Trust Company.(14)
10.29 Promissory Note and Security Agreement dated
October 2, 1996, by and between Gottschalks Inc.
and Heller Financial, Inc.(14)
10.30 Promissory Notes dated March 28, 1996 and
September 11, 1996, by and between Gottschalks
Inc. and Broadway Stores, Inc., a wholly-owned
division of Federated Department Stores, Inc.(16)
10.31 Loan and Security Agreement dated December 29,
1996, by and between Gottschalks Inc. and
Congress Financial Corporation. (15)
10.32 Employment Agreement dated March 14, 1997 by and
between Gottschalks Inc. and James R.
Famalette.(4)(15)
21. Subsidiaries of the Registrant.(10)
23. Consent of Deloitte & Touche LLP.(15)
27. Financial Data Schedule.(15)
_______________________
(1) Filed as an exhibit to the Annual Report on Form
10-K for the year ended January 29, 1994 (File
No. 1-09100), and incorporated herein by
reference.
(2) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 2, 1991 (File
No. 1-09100), and incorporated herein by
reference.
(3) Filed as an exhibit to Registration Statement on
Form S-1, (File No. 33-3949), and incorporated
herein by reference.
(4) Management contract, compensatory plan or
arrangement.
(5) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 1, 1992 (File
No. 1-09100), and incorporated herein by
reference.
(6) Filed as an exhibit to the Current Report on Form
8-K dated March 30, 1994 (File No. 1-09100), and
incorporated herein by reference.
(7) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended October 29, 1994
(File No. 1-09100), and incorporated herein by
reference.
(8) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended April 30, 1994
(File No. 1-09100), and incorporated herein by
reference.
(9) Filed as exhibits to Registration Statements on
Form S-8, (Files #33-54783 and #33-54789), and
incorporated herein by reference.
(10) Filed as an exhibit to the Annual Report on Form
10-K for the year ended January 28, 1995 (File
No. 1-09100), and incorporated herein by
reference.
(11) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended July 29, 1995
(File No. 1-09100), and incorporated herein by
reference.
(12) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended October 28, 1995
(File No. 1-09100), and incorporated herein by
reference.
(13) Filed as an exhibit to the Annual Report on Form
10-K for the year ended February 3, 1996 (File
No. 1-09100), and incorporated herein by
reference.
(14) Filed as an exhibit to the Quarterly Report on
Form 10-Q for the quarter ended November 2, 1997
(File No. 1-09100), and incorporated herein by
reference.
(15) Filed herein as an exhibit to this Annual Report
on Form 10-K for the year ended February 1, 1997
(File No. 1-09100).
(16) Filed as an exhibit to the Registration Statement
on Form S-8 (File #33-00061), and incorporated
herein by reference.
___________________
(b) Reports on Form 8-K--The Company did
not file any Reports on Form 8-K
during the fourth quarter of fiscal
1996.
(c) Exhibits--The response to this
portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedule--The
response to this portion of Item 14
is submitted as a separate section of
this report.
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) and (2), (c) and (d)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 1, 1997
GOTTSCHALKS INC. AND SUBSIDIARIES
FRESNO, CALIFORNIA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Gottschalks Inc.
Fresno, California
We have audited the accompanying consolidated balance
sheets of Gottschalks Inc. and Subsidiaries as of
February 1, 1997 and February 3, 1996, and the related
consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the
period ended February 1, 1997. Our audits also included
the financial statement schedule listed in the Index at
Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of Gottschalks Inc. and Subsidiaries as of
February 1, 1997 and February 3, 1996, and the results of
their operations and their cash flows for each of the
three years in the period ended February 1, 1997, in
conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule,
when considered in relation to the basic financial
statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
\s\Deloitte & Touche LLP
Fresno, California
February 27, 1997 (March 13, 1997 as to the fourth
paragraph of Note 3)
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
February 1, February 3,
ASSETS 1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,764 $ 5,113
Cash held by GCC Trust 1,895 2,280
Receivables:
Trade accounts, less allowances of
$1,322 in 1996 and $1,262 in 1995 (Note 2) 22,689 27,467
Vendor claims, less allowances of $80
in 1996 and $90 in 1995 2,818 5,776
25,507 33,243
Merchandise inventories 89,472 87,507
Refundable income taxes (Note 5) 1,437
Other 12,593 9,478
Total current assets 134,231 139,058
PROPERTY AND EQUIPMENT (Note 4):
Land and land improvements 15,074 16,064
Buildings and leasehold improvements 46,925 43,696
Furniture, fixtures and equipment 57,648 53,443
Buildings and equipment under capital leases 7,302 14,398
Construction in progress 309 1,948
127,258 129,549
Less accumulated depreciation and
amortization 39,888 40,299
87,370 89,250
OTHER ASSETS:
Goodwill, less accumulated amortization
of $1,146 in 1996 and $1,030 in 1995 1,252 1,369
Other 10,340 9,364
11,592 10,733
$233,193 $239,041
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
February 1, February 3,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
<S> <C> <C>
Revolving lines of credit (Note 3) $ 13,904 $ 45,164
Cash management liability 1,504 5,096
Trade accounts payable 19,906 22,298
Accrued expenses 10,714 10,633
Taxes, other than income taxes 8,202 2,346
Accrued payroll and related liabilities 5,208 5,112
Current portion of
long-term obligations (Notes 3 and 4) 2,408 2,094
Short-term obligation (paid 1996) 2,743
Deferred income taxes (Note 5) 2,154 668
Total current liabilities 64,000 96,154
LONG-TERM OBLIGATIONS, less current portion
(Notes 3 and 4):
Line of credit 25,000
Notes and mortgage loans payable 29,861 25,654
Capitalized lease obligations 5,380 9,218
60,241 34,872
DEFERRED INCOME (Note 4) 19,580 20,265
DEFERRED LEASE PAYMENTS AND OTHER (Note 4) 6,369 5,902
DEFERRED INCOME TAXES (Note 5) 2,864 3,931
COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 9)
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.10 per share;
2,000,000 shares authorized; none issued
Common stock, par value of $.01 per share;
30,000,000 shares authorized; 10,472,915 and
10,416,520 issued
Common stock 105 104
Additional paid-in capital 56,332 55,945
Retained earnings 23,704 21,870
80,141 77,919
Less common stock in treasury at cost,
338 shares (2) (2)
80,139 77,917
$233,193 $239,041
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
1996 1995 1994
<S> <C> <C> <C>
Net sales $422,159 $401,041 $363,603
Service charges and other income (Note 4) 13,285 11,663 9,659
435,444 412,704 373,262
Costs and expenses:
Cost of sales 287,164 278,827 247,423
Selling, general and
administrative expenses
(Notes 4, 6 and 7) 126,591 123,100 103,571
Depreciation and amortization 6,922 8,092 5,860
Interest expense (Note 3) 11,675 11,296 10,238
Provision for unusual items (Note 8) 3,833
432,352 421,315 370,925
Income (loss) before income tax
expense (benefit) 3,092 (8,611) 2,337
Income tax expense (benefit)(Note 5) 1,258 (2,972) 821
Net income (loss) $ 1,834 $ (5,639) $ 1,516
Net income (loss) per common share $ .18 $ (.54) $ .15
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars, except share data)
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
BALANCE,
<S> <C> <C> <C> <C> <C> <C>
JANUARY 30, 1994 10,411,332 $104 $56,021 $25,993 $ 0 $82,118
Net income 1,516 1,516
Shares issued under
stock option
plan 13,500 94 94
Shares purchased
and retired (8,312) (98) (98)
Net compensation
expense related
to stock option
plan 24 24
Purchase of 43,976
shares of treasury
stock (303) (303)
Contribution of 21,976
shares of treasury
stock to Retirement
Savings Plan 71 155 226
BALANCE,
JANUARY 28, 1995 10,416,520 104 56,112 27,509 (148) 83,577
Net loss (5,639) (5,639)
Net compensation
benefit related
to stock option
plan (170) (170)
Purchase of 12,500
shares of treasury
stock (94) (94)
Contribution of 34,164
shares of
treasury stock to
Retirement Savings Plan 3 240 243
BALANCE,
FEBRUARY 3, 1996 10,416,520 104 55,945 21,870 (2) 77,917
Net income 1,834 1,834
Issuance of
56,395 shares
to Retirement
Savings Plan 56,395 1 387 388
BALANCE,
FEBRUARY 1, 1997 10,472,915 $105 $56,332 $23,704 $ (2) $80,139
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1996 1995 1994
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,834 $ (5,639) $ 1,516
Adjustments:
Depreciation and amortization 6,922 8,096 5,849
Deferred income taxes 419 (1,296) 876
Deferred lease payments and other 467 870 734
Deferred income (767) (609) (493)
Net compensation (benefit) expense
related to stock option plan (170) 24
Provision for credit losses 2,724 2,754 2,052
LIFO benefit (3,202)
Equity in the income of limited
partnership (133) (64) (160)
Net (gain) loss from sale of assets (344) 7
Net gain from termination of
capital leases (Note 4) (1,344)
Loss on securitization and sale of
receivables 20 305
Litigation settlements (Notes 8 and 9) (2,400) (3,000)
Lease incentive (Note 4) 4,000
Changes in operating assets and liabilities:
Receivables (excluding receivables
sold - Note 2) (988) (5,261) (6,952)
Merchandise inventories (1,370) (6,215) (16,384)
Other current and long-term assets (3,017) (1,711) (35)
Other current and long-term
liabilities 6,310 (10,210) 14,629
Net cash provided by (used in) operating
activities 8,677 (18,799) (1,234)
INVESTING ACTIVITIES:
Purchases of property and equipment,
net of reimbursements received (6,845) (12,773) (4,539)
Proceeds from sale/leaseback arrangements
and other property and equipment sales 2,026 11,606 1,881
Distribution from limited partnership 112 86 153
Net cash used in investing activities (4,707) (1,081) (2,505)
FINANCING ACTIVITIES:
Net (payments) borrowings under lines
of credit (6,260) 27,320 (31,856)
Proceeds from short-term and
long-term obligations 3,878 23,993 12,650
Principal payments on short-term and
long-term obligations (4,850) (24,710) (16,668)
Proceeds from securitization and sale of
receivables (Note 2) 6,000 40,000
Changes in cash management liability (3,472) (4,757) 4,228
Changes in cash held by GCC Trust 385 85 (2,365)
Payments to acquire treasury stock (94) (303)
Issuance of common stock pursuant to
stock option plan 94
Shares purchased and retired (98)
Net cash (used in) provided by financing
activities (4,319) 21,837 5,682
INCREASE (DECREASE) IN CASH (349) 1,957 1,943
CASH AT BEGINNING OF YEAR 5,113 3,156 1,213
CASH AT END OF YEAR $ 4,764 $ 5,113 $ 3,156
See notes to consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT
ACCOUNTING POLICIES
Gottschalks Inc. is a regional department and
specialty store chain based in Fresno,
California, currently consisting of thirty-five
"Gottschalks" department stores and twenty-four
"Village East" specialty stores located primarily
in non-major metropolitan cities throughout
California and in Oregon, Washington and Nevada.
Gottschalks department stores typically offer a
wide range of brand-name and private-label
merchandise, including men's, women's, junior's
and children's apparel, cosmetics and
accessories, home furnishings and other consumer
goods. Village East specialty stores offer
apparel for larger women.
Use of Estimates - The preparation of the
financial statements in conformity with
generally accepted accounting principles
requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting
periods. Such estimates and assumptions are
subject to inherent uncertainties which may result
in actual results differing from reported
amounts.
Consolidation - The accompanying financial
statements include the accounts of Gottschalks
Inc., its wholly-owned subsidiary, Gottschalks
Credit Receivables Corporation ("GCRC"), and
Gottschalks Credit Card Master Trust ("GCC Trust")
(collectively, the "Company"). (See Note
2.) All significant intercompany transactions and
balances have been eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on
the Saturday nearest January 31. Fiscal years
1996, 1995 and 1994 ended on February 1, 1997,
February 3, 1996 and January 28, 1995,
respectively. Fiscal years 1996 and 1994 each
contained 52 weeks; fiscal year 1995 contained 53
weeks. The Company's fiscal 1995 results of
operations were not materially affected by
results applicable to the 53rd week.
Cash Held by GCC Trust - Cash held by GCC Trust
relates to the receivable securitization program
(Note 2) and includes $1,616,000 and $2,035,000
at February 1, 1997 and February 3, 1996,
respectively, designated under the prepayment
option to reduce outstanding borrowings under the
line of credit collateralized by the Variable
Base Certificate subsequent to year end in each
of those years. Cash held by GCC Trust also
includes $279,000 and $245,000 at February 1,
1997 and February 3, 1996, respectively, for the
payment of monthly interest to the holders of the
Fixed Base Certificates.
Cash Management Liability - Under the Company's
cash management program, checks issued by the
Company and not yet presented for payment
frequently result in overdraft balances for
accounting purposes. Such amounts represent
interest-free, short-term borrowings to the
Company.
Receivables - Receivables, excluding receivables
sold as of February 1, 1997 and February 3,
1996, consist primarily of customer credit card
receivables and represent the Company's retained
interest in receivables sold in connection with
the receivables securitization program,
receivables underlying the Variable Base
Certificate and certain other receivables (Note
2). Such amounts include revolving charge
accounts with terms which, in some cases,
provide for payments exceeding one year. In
accordance with usual industry practice such
receivables are included in current assets.
Service charge revenues associated with the
Company's customer credit card receivables were
$10,493,000 in 1996, $10,937,000 in 1995 and
$8,904,000 in 1994.
The Company maintains reserves for possible
credit losses based on the expected
collectibility of all receivables, including
receivables sold, and such losses have
consistently been within management's
expectations.
Concentrations of Credit Risk - The Company
extends credit to individual customers based on
their credit worthiness and generally requires no
collateral from such customers. Concentrations of
credit risk with respect to the Company's credit
card receivables are limited due to the large
number of customers comprising the Company's
customer base.
Merchandise Inventories - Inventories, which
consist of merchandise held for resale, are
valued by the retail method and are stated at
last-in, first-out (LIFO) cost, which is not in
excess of market. Current cost, which
approximates replacement cost, under the first-in,
first-out (FIFO) method was equal to the LIFO
value of inventories at February 1, 1997 and
February 3, 1996.
The Company includes in inventory the
capitalization of certain indirect purchasing,
merchandise handling and inventory storage costs
to better match sales with these related costs.
Store Pre-Opening Costs - Store pre-opening costs
represent certain expenditures incurred prior to
the opening of new stores that are deferred and
amortized generally on a straight-line basis not
to exceed a twelve month period commencing with
the store opening. Store pre-opening costs, net
of accumulated amortization, of $136,000 at
February 1, 1997 and $652,000 at February 3, 1996
are included in other current assets. The
amortization of new store pre-opening costs,
totaling $1,337,000, $2,524,000 and $438,000 in
1996, 1995 and 1994, respectively, is included in
depreciation and amortization in the
accompanying statements of operations.
Property and Equipment - Property and equipment
is stated on the basis of cost or appraised value
as to certain contributed land. Depreciation and
amortization is computed by the straight-line
method for financial reporting purposes over the
estimated useful lives of the assets, which range
from 20 to 40 years for buildings, land
improvements and leasehold improvements and 3 to
15 years for furniture, fixtures and equipment.
Reimbursements received for certain capital
expenditures are reported as reductions to the
original cost of the related assets. Amortization
of buildings and equipment under capital leases
is computed by the straight-line method over the
life of the lease and is combined with
depreciation in the accompanying statements of
operations.
Investment in Limited Partnership - The Company
is the limited partner in a partnership that was
formed for the purpose of acquiring the land and
constructing and maintaining the building in
which the Company's corporate headquarters are
located. The Company made an initial capital
contribution of $5,000,000 to acquire a 36%
ownership interest in the partnership and
receives favorable rental terms for the space
occupied in the building. Of the initial
$5,000,000 capital contribution, $3,212,000 was
allocated to the investment in limited
partnership based on the estimated fair market
value of the land and building and the remaining
$1,788,000 was allocated to prepaid rent and is
being amortized to rent expense over the 20 year
lease term.
The Company accounts for its investment in the
limited partnership on the equity method of
accounting. As of February 1, 1997 and February
3, 1996, the investment was $2,766,000 and
$2,745,000, respectively, and prepaid rent, net
of accumulated amortization, was $911,000 and
$1,054,000, respectively. Such amounts are
included in other long-term assets. The Company's
equity in the income of the partnership, totaling
$133,000 in 1996, $64,000 in 1995 and $160,000 in
1994, is included in service charges and other
income.
Goodwill - The excess of acquisition costs over
the fair value of the net assets acquired is
amortized on a straight-line basis over 20 years.
The Company periodically analyzes the value of
net assets acquired to determine whether any
impairment in the value of such assets has
occurred. The primary indicators of
recoverability used by the Company are current or
forecasted profitability of the related acquired
assets as compared to their carrying values.
Deferred Income - Deferred income consists
primarily of donated land and cash incentives
received to construct a new store and enter into
a new lease arrangement. Land contributed to the
Company is included in land and recorded at
appraised fair market values. Donated income is
amortized to operations over the average
depreciable life of the related fixed assets
built on the land with respect to locations that
are owned by the Company, and over the minimum
lease periods of the related building leases with
respect to locations that are leased by the
Company, ranging from 10 to 70 years.
Leased Department Sales - Net sales include
leased department sales of $32,781,000,
$29,766,000 and $25,985,000 in 1996, 1995 and
1994, respectively. Cost of sales include related
costs of $28,006,000, $25,494,000 and $22,326,000
in 1996, 1995 and 1994, respectively.
Income Taxes - The Company accounts for income
taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS No. 109
generally requires recognition of deferred tax
assets and liabilities for the expected future
tax consequences of events that have been
included in the financial statements or tax returns.
Under this method, deferred tax assets
and liabilities are determined based on the
differences between the financial statement
and tax basis of assets and liabilities and net
operating loss and tax credit carryforwards,
using enacted tax rates in effect when the differences
are expected to reverse.
Net Income (Loss) Per Common Share - Net income
(loss) per common share is computed based on the
weighted average number of common shares and
common stock equivalents outstanding (if
dilutive) which were 10,461,424, 10,416,520 and
10,413,339 in 1996, 1995 and 1994, respectively.
The effect of common stock equivalents under the
stock option plans were antidilutive in 1996,
1995 and 1994, and therefore not included.
Non-Cash Transactions - The Company acquired
fixtures and equipment under long-term debt
obligations totaling $2,650,000 in 1996. In 1994,
the Company entered into a capital lease
obligation of $683,000 for leased equipment. The
Company issued or contributed common stock to the
Retirement Savings Plan with a value of $388,000,
$243,000 and $226,000 in 1996, 1995 and 1994,
respectively.
Fair Value of Financial Instruments - Financial
Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires
disclosure of the estimated fair value of
financial instruments. The carrying value of the
Company's cash (including cash held by GCC Trust
and cash management liability), receivables,
trade payables and other accrued expenses,
revolving lines of credit, short-term borrowings
and stand-by letters of credit approximate their
estimated fair values because of the short
maturities or variable interest rates underlying
those instruments. The following methods and
assumptions were used to estimate the fair value
for each remaining class of financial
instruments:
Long-term Obligations - The fair values of
the Company's notes and mortgage loans payable
are estimated using discounted cash flow
analysis, based on the Company's current
incremental borrowing rates for similar
types of borrowing arrangements. The aggregate
estimated fair values of such obligations with
aggregate carrying values of $31,933,000 and
$27,015,000 at February 1, 1997 and February 3,
1996, respectively, is $32,024,000 and
$28,186,000, respectively.
Off-Balance Sheet Financial Instruments -
The Company's off-balance sheet financial
instruments consist primarily of the Fixed Base
Certificates (Note 2). The aggregate estimated
fair values of the Fixed Base Certificates, based
on similar issues of certificates at current
rates for the same remaining maturities, with
aggregate face values of $46,000,000 and
$40,000,000 at February 1, 1997 and February 3,
1996, respectively, is $44,249,000 and $38,606,000,
respectively.
Stock-based Compensation - The Company accounts
for stock-based awards to employees using the
intrinsic value method in accordance with APB No.
25, "Accounting for Stock Issued to Employees".
Long-lived Assets - Statement of Financial
Accounting Standard No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of" requires that
long-lived assets and certain identifiable
intangibles to be held and used or disposed of by
an entity be reviewed for impairment whenever
events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. During fiscal 1996, the Company
adopted this statement and determined that no
impairment loss need be recognized for applicable
assets.
Recently Issued Accounting Standards - Statement
of Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" is effective for
transfers of financial assets, including those
with continuing involvement by the transferor,
after December 31, 1996. In December 1996, SFAS
No. 127 was issued and defers, for one year, the
effective date of the implementation of SFAS No.
125 for certain transactions. Management does not
believe the effect of adoption of these standards
will be material.
Reclassifications - Certain amounts in the
accompanying 1995 and 1994 consolidated financial
statements have been reclassified to conform with
the 1996 presentation.
2. SECURITIZATION AND SALE OF RECEIVABLES
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 were subsequently conveyed
to a trust, Gottschalks Credit Card Master Trust ("GCC
Trust"), to be used as collateral for securities issued
to investors. The Company services and administers the
receivables in return for a monthly servicing fee. The
followingsecurities have been issued under the
securitization program:
Fixed Base Certificates.
In 1994, fractional undivided ownership interests
in certain of the receivables were sold through
the issuance of $40,000,000 principal amount
7.35% Fixed Base Class A-1 Credit Card
Certificates (the "1994 Fixed Base Certificates")
to third-party investors. On October 31, 1996, an
additional $6,000,000 principal amount 6.79%
Fixed Base Class A-1 Credit Card Certificate (the
"1996 Fixed Base Certificate") was issued under
the program. Proceeds from the issuance of the
1996 Fixed Base Certificate were used to reduce
outstanding borrowings under the line of credit
with Bank Hapoalim (Note 3) and pay certain costs
associated with the transaction. Interest on the
1994 and 1996 Fixed Base Certificates
(collectively the "Fixed Based Certificates") is
earned by the certificate holders on a monthly
basis and the outstanding principal balances of
such certificates are to be repaid in equal
monthly installments commencing September 15,
1998 through September 15, 1999, through the
application of the principal portion of credit
card collections during that period. The
issuances of the Fixed Base Certificates have
been accounted for as sales for financial
reporting purposes. Accordingly, the $46,000,000
of receivables underlying the Fixed Base
Certificates in fiscal 1996 ($40,000,000 in
fiscal 1995) and the corresponding debt
obligations have been excluded from amounts
reported in the accompanying financial
statements.
Variable Base Certificate.
In 1994, GCC Trust also issued a Variable Base
Class A-2 Credit Card Certificate ("Variable Base
Certificate") in the principal amount of up to
$15,000,000 to Bank Hapoalim. The Variable Base
Certificate, representing a fractional undivided
ownership interest in certain receivables held by
GCC Trust, excluding receivables underlying the
Fixed Base Certificates and GCRC's retained
interest, was issued as collateral for a
revolving line of credit financing arrangement
with Bank Hapoalim (Note 3). The Variable Base
Certificate contains a prepayment option which
enables the Company, at any time within three
days notice, to prepay the full amount, or a
portion of outstanding borrowings under the line
of credit collateralized by the Variable Base
Certificate. Accordingly, the issuance of the
Variable Base Certificate was accounted for as a
financing in the accompanying financial
statements and the receivables underlying the
Variable Base Certificate, totaling $9,048,000 at
February 1, 1997 and $17,857,000 at February 3,
1996, are included in receivables reported in the
accompanying financial statements.
Receivables reported in the accompanying
financial statements also include GCRC's retained
interest in receivables sold, represented by
Subordinated and Exchangeable Certificates issued
to GCRC by GCC Trust. The outstanding principal
balances of such certificates totaled $11,824,000
at February 1, 1997 and $8,035,000 at February
3,1996. Receivables also include accrued finance
charges on all receivables, including receivables
sold, and receivables that did not meet certain
eligibility requirements of the program, totaling
$3,139,000 at February 1, 1997 and $2,837,000 at
February 3, 1996. In addition to the Fixed and
Variable Base Certificates, GCRC may, upon the
satisfaction of certain conditions, offer
additional series of certificates to be issued by
GCC Trust. Management is not contemplating any
such issuance in fiscal 1997.
Under the program, the Company is required, among
other things, to maintain certain portfolio
performance standards which include the
maintenance of a minimum portfolio yield, maximum
levels of delinquencies and write-offs of
customer credit card receivables and minimum
levels of credit card collection rates. The
Company was in compliance with all applicable
requirements of the program at February 1, 1997.
3. DEBT OBLIGATIONS:
Revolving Lines of Credit.
On December 20, 1996, the Company entered into a
new three-and-one-quarter year revolving line of
credit arrangement with Congress Financial
Corporation ("Congress"). The new line of credit
with Congress replaced the Company's former line
of credit agreement with Fleet Capital
Corporation and provides the Company with an
$80,000,000 working capital facility through
March 30, 2000. Borrowings under the arrangement
are limited to a restrictive borrowing base equal
to 65% of eligible merchandise inventories,
increasing to 70% of such inventories during the
period of September 1 through December 20 of each
year to fund increased seasonal inventory
requirements. Interest under the facility is
charged at a rate of approximately LIBOR plus
2.5% (8.28% at February 1, 1997). Under the
agreement, the Company also has the potential of
reducing the interest rate by 1/4% each year, up
to a maximum possible reduction of 1/2% beginning
in fiscal 1998, if specified pre-tax income
levels are attained by the Company. The maximum
amount available for borrowings under the line of
credit was $51,900,000 as of February 1, 1997, of
which $31,304,000 was outstanding as of that
date. Of that amount, $25,000,000 has been
classified as long-term in the accompanying
financial statements as the Company does not
anticipate repaying that amount prior to one year
from the balance sheet date. The agreement
contains one financial covenant, pertaining to
the maintenance of a minimum tangible net worth,
with which the Company was in compliance as of
February 1, 1997.
The Company also has a revolving line of credit
arrangement with Bank Hapoalim (Note 2) which
provides for additional borrowings of up to
$15,000,000 through March 30, 1999. Borrowings
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 with Bank Hapoalim 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%, not to
exceed a maximum of 12.0% (6.44% at February 1,
1997). At February 1, 1997, $7,600,000 was
outstanding under the line of credit with Bank
Hapoalim, which was the maximum amount available
for borrowings as of that date.
<TABLE>
<CAPTION>
Short-Term and Long-Term Obligations.
Notes and mortgage loans payable consist of the
following:
February 1, February 3,
(In thousands of dollars) 1997 1996
Mortgage loans payable to financial
institution, payable in monthly
principal installments of $173
including interest at 9.23% and
9.39%, principal due and
payable October 1, 2010 and
November 1, 2010; collateralized
by certain real property, assets
<S> <C> <C>
and certain property and equipment $19,738 $19,953
Mortgage loan payable to financial
institution, payable in monthly
principal installments of $79 plus
interest at 10.45%, principal due
and payable January 1, 2002;
collateralized by certain real
property, assets and certain property
and equipment 4,750 5,700
Mortgage loan payable to financial
institution (see terms below) 3,000
Notes payable to Federated
Department Stores, Inc., payable in
quarterly principal installments of
$169 plus interest at 10.0%,
principal due and payable
March 2001 and July 2001 2,351
Fixture loans and other 2,094 1,362
31,933 27,015
Less current portion 2,072 1,361
$29,861 $25,654
</TABLE>
The mortgage loan payable to financial
institution with an outstanding balance of
$3,000,000 at February 1, 1997 consists of
amounts advanced to the Company under a seven-year
financing arrangement with Heller Financial,
Inc. ("Heller") entered into on October 2, 1996,
providing for the mortgage of its department
store in San Luis Obispo, California. The Company
received $3,000,000 of the total $6,000,000
arrangement in October 1996, and received the
remaining $3,000,000 in March 1997. Interest was
charged on the first $3,000,000 received at a
variable rate equal to LIBOR plus 3.0% (8.44% at
February 1, 1997) during the period of October
1996 through March 1997, and will be charged at a
fixed rate of 9.97% on the entire $6,000,000
beginning in April 1997.
Federated Department Stores, Inc. financed the
Company's acquisition of certain fixtures and
equipment located in the Broadway store locations
that were assumed by the Company during fiscal
1996. (See Note 4).
The scheduled annual principal maturities on
notes payable and mortgage loans are $2,072,000,
$2,249,000, $2,381,000, $2,476,000 and $2,105,000
for 1997 through 2001, respectively.
Debt issuance costs related to the Company's
various financing arrangements are included in
other current and long-term assets and are
deferred and charged to operations as additional
interest expense on a straight-line basis over
the life of the related indebtedness. Deferred
debt issuance costs, net of accumulated
amortization, amounted to $2,260,000 at February
1, 1997 and $1,995,000 at February 3, 1996.
Interest paid, net of amounts capitalized, was
$11,059,000, $10,927,000 and $8,608,000 in 1996,
1995 and 1994, respectively. Capitalized interest
expense was $37,000, $278,000 and $68,000 in
1996, 1995 and 1994, respectively. The weighted-average
interest rate charged on the Company's
various revolving line of credit arrangements was
8.62% in 1996, 8.75% in 1995 and 7.13% in 1994.
One of the Company's long-term financing
arrangements includes various restrictive
covenants. The Company was in compliance with
such covenants as of February 1, 1997.
4. LEASES
The Company leases certain retail department
stores under capital leases that expire in
various years through 2020. The Company also
leases certain retail department stores,
specialty stores, land, furniture, fixtures and
equipment under noncancellable operating leases
that expire in various years through 2021.
Certain of the leases provide for the payment of
additional contingent rentals based on a
percentage of sales in excess of specified
minimum levels, require the payment of property
taxes, insurance and maintenance costs and have
renewal options for one or more periods ranging
from five to twenty years.
Certain of the Company's operating leases also
provide for rent abatements and scheduled rent
increases during the lease terms. The Company
recognizes rental expense for such leases on a
straight-line basis over the lease term and
records the difference between expense charged to
operations and amounts payable under the leases
as deferred lease payments. Deferred lease
payments totaled $6,157,000 at February 1, 1997
and $5,584,000 at February 3, 1996.
Future minimum lease payments, by year and in the
aggregate, under capital leases and
noncancellable operating leases with initial or
remaining terms of one year or more consist of
the following at February 1, 1997:
<TABLE>
<CAPTION>
Capital Operating
(In thousands of dollars) Leases Leases
<C> <C> <C>
1997 $ 922 $ 15,930
1998 752 15,176
1999 752 15,618
2000 752 13,527
2001 752 12,969
Thereafter 7,646 131,442
Total minimum
lease payments 11,576 $204,662
Amount representing
interest (5,860)
Present value of
minimum lease
payments 5,716
Less current portion (336)
$ 5,380
</TABLE>
<TABLE>
<CAPTION>
Rental expense consists of the following:
(In thousands of dollars) 1996 1995 1994
Operating leases:
Buildings:
<S> <C> <C> <C>
Minimum rentals $11,897 $ 9,796 $ 7,804
Contingent rentals 2,166 1,969 1,142
Fixtures and equipment 5,439 4,679 3,177
19,502 16,444 12,123
Contingent rentals on
capital leases 47 346 605
$19,549 $16,790 $12,728
</TABLE>
One of the Company's lease agreements contains a
restrictive covenant pertaining to the debt to
tangible net worth ratio with which the Company
was in compliance at February 1, 1997.
During 1996, the Company finalized agreements
with Broadway Stores, Inc. ("Broadway"), a
wholly-owned subsidiary of Federated Department
Stores, Inc., and the landlord, whereby the
Company vacated its original 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 also vacated its original
location in the Fresno, California Fashion Fair
Mall and reopened a store in that mall under a
new 20-year lease in the former Broadway store
location. The Company recognized a pre-tax gain
of $1,344,000 upon the termination of the
original leases, which were accounted for as
capital leases by the Company, representing the
difference between the capital lease obligations
and the net book value of the related assets
recorded under the capital leases. The gain is
included in service charges and other income for
the year ended February 1, 1997. The new leases
have been accounted for as operating leases for
financial reporting purposes.
Lease Incentive.
The Company received $4,000,000 in 1995 as an
incentive to enter into a lease in connection
with one of the fiscal 1995 new store openings.
The lease 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. In the event
the lease is terminated at that time by either
party, the Company would be required to repay the
$4,000,000 to the lessor. The $4,000,000 received
has been deferred for financial reporting
purposes and is being amortized into operations
over the ten-year minimum lease period. At
February 1, 1997, the deferred lease incentive,
net of accumulated amortization, amounted to
$3,731,000. Management believes the likelihood
the lease will be terminated by either party
after the fifth year of the lease is remote.
Sale and Leaseback Arrangement.
In 1995, the Company sold the land,
building and leasehold improvements comprising
its department store in Capitola, California and
subsequently leased the department store back
under a twenty-year lease with four five-year
renewal options. The lease has been accounted for
as an operating lease for financial reporting
purposes. The $11,600,000 proceeds received from
the sale were used to reduce previously
outstanding borrowings and the gain associated
with the sale, totaling $508,000, has been deferred
for financial reporting purposes and is
being amortized on a straight-line basis over the
twenty-year lease term.
5. INCOME TAXES
<TABLE>
<CAPTION>
The components of income tax expense (benefit)
are as follows:
(In thousands of dollars) 1996 1995 1994
Current:
<S> <C> <C> <C>
Federal $ 375 $(1,678) $ (19)
State 464 2 (36)
839 (1,676) (55)
Deferred:
Federal 704 (857) 555
State (285) (439) 321
419 (1,296) 876
$1,258 $(2,972) $ 821
</TABLE>
The principal components of deferred tax assets and
liabilities (in thousands of dollars) are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
Current:
Accrued litigation
<S> <C> <C> <C> <C>
costs $ 75 $ 1,461
Vacation accrual and
employee vacation
benefits 467 588
Credit losses 566 546
Accrued employee
benefits 257 260
State income taxes 124 174
LIFO inventory reserve $ (2,841) $ (2,548)
Workers' compensation 17 235
Supplies inventory (951) (1,044)
Other items, net 800 (668) 562 (902)
2,306 (4,460) 3,826 (4,494)
Long-Term:
Net operating loss
carryforwards 4,674 4,327
General business
credits 1,985 1,768
Alternative minimum
tax 510 597
Depreciation expense (8,143) (8,074)
Accounting for leases 915 (3,433) 811 (3,481)
Deferred income 1,988 (1,746) 2,122 (1,550)
Installment sales (186)
Other items, net 697 (311) 726 (991)
10,769 (13,633) 10,351 (14,282)
$13,075 $(18,093) $14,177 $(18,776)
</TABLE>
Income tax expense (benefit) varies from the
amount computed by applying the statutory federal
income tax rate to the income (loss) before income
taxes. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory rate 35.0% (35.0)% 35.0%
State income taxes,
net of federal income
tax benefit 5.7 (2.7) 7.3
Adjustments to previously
filed amended returns 7.3
Amortization of goodwill 1.3 .5 1.7
Targeted jobs tax credit .5 (12.5)
Nondeductible penalties .3
Other items, net (1.3) 1.9 (3.7)
Effective rate 40.7% (34.5)% 35.1%
</TABLE>
The Company received income tax refunds, net of
payments, of $3,399,000 in 1996 and $1,522,000 in
1995. There were no income tax refunds receivable
at February 1, 1997. Income tax refunds
receivable were $1,437,000 at February 3, 1996.
At February 1, 1997, the Company has, for federal
tax purposes, net operating loss carryforwards of
$11,135,000 which expire in the years 2010 and
2011, general business credits of $897,000 which
expire in the years 2007 through 2010, and
alternative minimum tax credits of $510,000 which
may be used for an indefinite period. At February
1, 1997, the Company has, for state tax purposes,
net operating loss carryforwards of $10,048,000
which expire in the years 1997 through 2001,
enterprise zone credits of $948,000 which expire
in the years 2004 through 2011, and alternative
minimum tax credits of $140,000 which may be used
for an indefinite period. These carryforwards are
available to offset future taxable income and are
expected to be fully utilized.
6. STOCK OPTION PLANS
The Company's stock option plans consist of the
following:
The 1986 Plans:
The 1986 Employee Incentive Stock Option Plan
(the "1986 ISO Plan") provided for the grant of
options to three key officers of the Company to
purchase up to 160,000 shares of the Company's
common stock at a price equal to 100% or 110% of
the market value of the common stock on the date
of grant. All options under the 1986 ISO Plan
were to have been exercised within five years of
the date of the grant. All unexercised options
under the 1986 ISO Plan expired as of the year
ended February 3, 1996.
The 1986 Employee Nonqualified Stock Option Plan
(the "1986 Nonqualified Plan") provided for the
grant of options to purchase up to 510,000 shares
of the Company's common stock to certain officers
and key employees of the Company. Options granted
under this plan generally become exercisable at a
rate of 25% per year beginning on or one year
after the grant date. The options are exercisable
on a cumulative basis and expire no later than
four or five years from the date of grant. The
Company recognized compensation (benefit) expense
related to this plan of ($170,000) in 1995 and
$24,000 in 1994. No compensation expense related
to this plan was required to be recognized in
1996. The benefit resulted from the reversal of
previously recognized compensation expense upon
the forfeiture or expiration of unexercised
options.
The 1994 Plans:
The 1994 Key Employee Incentive Stock Option Plan
(the "1994 ISO Plan") provides for the grant of
options to purchase up to 500,000 shares of the
Company's common stock to certain officers and
key employees of the Company. Options granted
under this plan may not be granted at less than
100% of the fair market value of such shares on
the date the option is granted and become
exercisable at a rate of 25% per year beginning
one year after the date of the grant. The options
are exercisable on a cumulative basis and expire
no later than ten years after the date of the
grant.
The 1994 Director Nonqualified Stock Option Plan
(the "1994 Director Nonqualified Plan") provides
for the grant of options to purchase up to 50,000
shares of the Company's common stock to certain
directors of the Company. Options granted under
this plan shall be granted at the fair market
value of such shares on the date the option is
granted and become exercisable at a rate of 25%
per year beginning one year after the date of the
grant. The options are exercisable on a
cumulative basis and expire no later than ten
years after the date of the grant.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
<S> <C> <C>
Outstanding, January 29, 1994 230,246 $12.00
Granted 449,000 9.94
Exercised (13,500) 7.00
Canceled (22,000) 9.95
Outstanding, January 28, 1995
(179,746 exercisable at a weighted-
average price of $12.81) 643,746 10.74
Granted (weighted-average fair value
of $4.25) 28,000 6.63
Canceled (191,746) 12.63
Outstanding, February 3, 1996
(133,000 exercisable at a weighted-
average price of $9.93) 480,000 9.74
Granted (weighted-average fair value
of $3.69) 45,000 5.75
Canceled (34,000) 9.88
Outstanding, February 1, 1997
(236,000 exercisable at a weighted-
average price of $9.84) 491,000 $ 9.37
</TABLE>
<TABLE>
<CAPTION>
Additional information regarding options
outstanding as of February 1, 1997 is as follows:
Options Outstanding Options Exercisable
Weighted-Avg.
Remaining
Range of Number Contractual Weighted-Avg. Number Exercise
Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price
<C> <C> <C> <C> <C> <C> <C>
$5.75 to $10.87 491,000 7.1 yrs. $9.37 236,000 $9.84
</TABLE>
At February 1, 1997, 49,000 and 30,000 shares were
available for future grants under the 1994 ISO Plan and
the 1994 Director Nonqualified Plan, respectively.
Additional Stock Plan Information.
As described in Note 1, the Company continues to
account for its stock-based awards using the
intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees", and its related
interpretations. Accordingly, with the exception
of compensation (benefit) expense recognized in
connection with the Company's 1986 Plan, no
compensation expense has been recognized in the
financial statements for employee stock
arrangements.
Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation,"
requires the disclosure of pro-forma net income
(loss) and earnings (loss) per share had the
Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the
fair value of stock-based awards to employees is
calculated through the use of option pricing
models, even though such models were developed to
estimate the fair value of freely tradable, fully
transferable options without vesting
restrictions, which significantly differ from the
Company's stock option awards. These models also
require subjective assumptions, including future
stock price volatility and expected time to
exercise, which greatly affect the calculated
values. The Company's calculations were made
using the Black-Scholes option pricing model with
the following weighted-average assumptions:
expected life, 5 years; stock volatility, 41.85%
in 1996 and 1995; risk-free interest rates, 6.30%
in 1996 and 1995; and no dividends during the
expected term. The Company's calculations are
based on a multiple option valuation approach and
forfeitures are recognized as they occur. The
impact on pro-forma net income (loss) and
earnings (loss) per share, had the computed fair
values of the 1996 and 1995 awards been amortized
to expense over the vesting period of the awards,
was insignificant in 1996 and 1995. The impact of
outstanding non-vested stock options granted
prior to 1995 has been excluded from the pro-forma
calculation; accordingly, the 1996 and 1995
pro-forma adjustments are not indicative of
future period pro-forma adjustments, when the
calculation will apply to all applicable stock
options.
7. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Savings Plan
("Plan") which qualifies as an employee
retirement plan under Section 401(k) of the
Internal Revenue Code. Full-time employees
meeting certain requirements are eligible to
participate in the Plan. Under the Plan,
employees may currently elect to have up to 15%
of their annual eligible compensation, subject to
certain limitations, deferred and deposited with
a qualified trustee. The Company, at the
discretion of the Board of Directors, may elect
to make an annual discretionary contribution to
the Plan of up to 2% of each participant's annual
eligible compensation, subject to certain
limitations. Participants are immediately vested
in their voluntary contributions to the Plan and
are 100% vested (25% per year) in the Company's
matching contribution to the Plan after four
years of continuous service. The Company
recognized $275,000, $500,000 and $250,000 in
expense representing the Company's annual
discretionary contribution to the Plan in 1996,
1995 and 1994, respectively.
A Voluntary Employee Beneficiary Association
("VEBA") trust has been established by the
Company for the purpose of funding employee
vacation benefits.
8. PROVISION FOR UNUSUAL ITEMS
The provision for unusual items included in the
Company's 1994 statement of operations, totaling
$3,833,000, represents the cost to settle three
civil stockholder lawsuits and related legal fees
and other costs. Pursuant to the terms of the
settlement agreement, the Company funded
$3,000,000 into an irrevocable trust on February
1, 1995, and such amount is included in the
Company's 1995 statement of cash flows.
9. COMMITMENTS AND CONTINGENCIES
The Company was party to a lawsuit filed in 1992
by F&N Acquisition Corporation ("F&N") under
which, among other things, 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. The
Company was also party to a related lawsuit filed
by Sabey Corporation ("Sabey"), the owner of the
mall in which the Frederick and Nelson store was
located. On July 16, 1996, the Company reached
agreements with F&N and Sabey to settle the
lawsuits. The combined total of the settlements
(paid in July 1996), including legal fees and
other costs, were not materially different from
the Company's previously recorded reserves.
In addition to the matters described above, the
Company is party to legal proceedings and claims
which arise during the ordinary course of
business. In the opinion of management, the
ultimate outcome of such litigation and claims
will not have a material adverse effect on the
Company's financial position or results of its
operations.
The Company arranges for the issuance of letters
of credit in the ordinary course of business
pursuant to certain factor and vendor contracts.
As of February 1, 1997, the Company had outstanding
letters of credit amounting to
$2,000,000. Management believes the likelihood of
non-performance under such contracts is remote.
The Company has entered into agreements to open
two new department stores in fiscal 1997 and is
in process of remodeling one existing store
location. These projects are expected to be fully
complete in fiscal 1997. The estimated cost to
complete such projects is $8,700,000.
10. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following is a summary of the unaudited
quarterly results of operations for 1996 and 1995
(in thousands, except per share data):
<TABLE>
<CAPTION>
1996
Quarter Ended May 4 August 3 November 2 February 1
<S> <C> <C> <C> <C>
Net sales $85,560 $95,675 $95,675 $145,249
Gross profit 26,830 30,392 30,719 47,054
Income (loss)
before income
tax expense
(benefit) (2,099) (1,245) (2,430) 8,866
Net income (loss) (1,322) ( 785) (1,530) 5,471
Net income (loss)
per common share (.13) (.07) (.15) .52
1995
Quarter Ended April 29 July 29 October 28 February 3
Net sales $77,934 $91,884 $86,066 $145,157
Gross profit 22,553 27,490 27,432 44,739
Income (loss)
before income
tax expense
(benefit) (5,100) (3,155) (5,101) 4,745
Net income (loss) (3,162) (1,955) (3,164) 2,642
Net income (loss)
per common share (.30) (.19) (.30) .25
</TABLE>
The Company's quarterly results of operations for
the three month periods ended February 1, 1997
and February 3, 1996 include adjustments to the
inventory shrinkage reserve resulting in an
increase to the gross margin of $795,000 and
$634,000, respectively.
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC. AND SUBSIDIARIES
________________________________________________________________________
COL. A COL. B COL. C COL. D COL. E COL. F
________________________________________________________________________
ADDITIONS
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
DESCRIPTION of Period Expenses Describe Describe Period
Year ended February 1, 1997:
Deducted from asset
accounts:
Allowance for
doubtful
<S> <C> <C> <C> <C>
accounts... $1,261,983 $2,730,502 (1) 2,670,378(2) $1,322,107
Allowance for
vendor claims
receivable. $ 90,000 $ (10,000)(4) $ 80,000
Allowance for
notes
receivable. $ 282,767 $ (282,767)(5) $
Year ended February 3, 1996:
Deducted from asset
accounts:
Allowance for
doubtful
accounts... $1,297,231 $2,462,504 (1) $2,497,752(2) $1,261,983
Allowance for
vendor
claims
receivable. $ 98,000 $ (80,000)(4) $ 90,000
Allowance for
notes
receivable..$ 150,000 $ 132,767 (3) $ 282,767
Year ended January 28, 1995:
Deducted from asset
accounts:
Allowance for
doubtful
accounts... $1,248,421 $2,054,562 (1) $2,005,752(2) $1,297,231
Allowance for
vendor
claims
receivable.. $ 300,000 $ (202,000)(4) $ 98,000
Allowance for
notes
receivable...$ 50,000 100,000 (3) $ 150,000
</TABLE>
Notes:
(1) Provision for loss on credit sales.
(2) Uncollectible accounts written off, net of
recoveries.
(3) Provision for uncollectible portion of note
receivable.
(4) Reduction in provision for uncollectible vendor
claims receivable.
(5) Reversal of uncollectible portion of note
receivable recorded in connection with
transferring related asset to a held for sale
classification during the year ended February 1,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
Dated: April 14, 1997 GOTTSCHALKS INC.
By: \s\Joseph W. Levy
Joseph W. Levy
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
Chairman and Chief
Executive Officer
(principal executive
\s\ Joseph W. Levy officer) April 14, 1997
Joseph W. Levy
Vice Chairman of
\s\ Gerald H. Blum the Board April 14, 1997
Gerald H. Blum
Senior Vice President
and Chief Financial
\s\ Alan A. Weinstein Officer (principal April 14, 1997
Alan A. Weinstein financial and
accounting officer)
\s\ O. James Woodward III Director April 14, 1997
O. James Woodward III
\s\ Bret W. Levy Director April 14, 1997
Bret W. Levy
\s\ Sharon Levy Director April 14, 1997
Sharon Levy
\s\ Joseph J. Penbera Director April 14, 1997
Joseph J. Penbera
\s\ Fred Ruiz Director April 14, 1997
Fred Ruiz
\s\ Max Gutmann Director April 14, 1997
Max Gutmann
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
GOTTSCHALKS INC.
as Borrower
Dated: December 20, 1996
TABLE OF CONTENTS
PAGE(S)
SECTION 1. DEFINITIONS . . . . . . 1
SECTION 2. CREDIT FACILITIES . . . 10
2.1 Revolving Loans . . . . 10
2.2 Letter of Credit
Accommodations 11
SECTION 3. INTEREST AND FEES . . . 13
3.1 Interest. . . . . . . . 13
3.2 Closing Fee . . . . . . 15
3.3 Loan Servicing and Audit Fee 15
3.4 Changes in Laws and Increased Costs
of Loans . . . . . . . . . . . . 15
3.5 Compensation Adjustment 16
SECTION 4. CONDITIONS PRECEDENT. . 17
4.1 Conditions Precedent to Initial
Loans and the Letter of Credit
Accommodations. . . . . 17
4.2 Conditions Precedent to All Loans
and Letter of Credit Accommodations 19
SECTION 5. GRANT OF SECURITY INTEREST 20
SECTION 6. COLLECTION AND ADMINISTRATION 21
6.1 Borrower's Loan Account 21
6.2 Statements. . . . . . . 21
6.3 Collection of Accounts. 21
6.4 Payments. . . . . . . . 23
6.5 Authorization to Make Loans 24
6.6 Use of Proceeds . . . . 24
SECTION 7. COLLATERAL REPORTING AND COVENANTS 24
7.1 Collateral Reporting. . 24
7.2 Accounts Covenants. . . 25
7.3 Inventory Covenants . . 26
7.4 Equipment Covenants . . 27
7.5 Power of Attorney . . . 27
7.6 Right to Cure . . . . . 28
7.7 Access to Premises. . . 28
SECTION 8. REPRESENTATIONS AND WARRANTIES 29
8.1 Corporate Existence, Power and
Authority; Subsidiaries. . . . . 29
8.2 Financial Statements; No Material
Adverse Change.. . . . . . . . . 29
8.3 Chief Executive Office; Collateral
Locations. . . . . . . . . . . . 29
8.4 Priority of Liens; Title to
Properties . . . . . . . . . . . 30
8.5 Tax Returns . . . . . . 30
8.6 Litigation. . . . . . . 30
8.7 Compliance with Other Agreements and
Applicable Laws. . . . . . . . . 30
8.8 Environmental Compliance 30
8.9 Employee Benefits . . . 31
8.10 Accuracy and Completeness of
Information. . . . . . . . . . . 32
8.11 Survival of Warranties; Cumulative 32
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 32
9.1 Maintenance of Existence 32
9.2 New Collateral Locations 32
9.3 Compliance with Laws, Regulations,
Etc. . . . . . . . . . . . . . . 33
9.4 Payment of Taxes and Claims 33
9.5 Insurance . . . . . . . 34
9.6 Financial Statements and Other
Information. . . . . . . . . . . 34
9.7 Sale of Assets, Consolidation,
Merger, Dissolution, Etc . . . . 35
9.8 Encumbrances. . . . . . 36
9.9 Indebtedness. . . . . . 36
9.10 Revolving Loans, Investments,
Guarantees, Etc. . . . . . . . . 37
9.11 Dividends and Redemptions 37
9.12 Transactions with Affiliates 37
9.13 Compliance with ERISA . 38
9.14 Adjusted Net Worth. . . 38
9.15 Costs and Expenses. . . 38
9.16 Securitization Facility 39
9.17 Amendment of Securitization Facility 39
9.18 Renewal of Securitization Facility 39
9.19 No Defaults . . . . . . 39
9.20 Use of Private Label Card 39
9.21 GCRC Receivables Collections 40
9.22 Purchase Price for GCRC Receivables 40
9.23 Further Assurances. . . 40
SECTION 10. EVENTS OF DEFAULT AND REMEDIES 40
10.1 Events of Default . . . 40
10.2 Remedies. . . . . . . . 42
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND
CONSENTS; GOVERNING LAW 44
11.1 Governing Law; Choice of Forum;
Service of Process; Jury Trial
Waiver. . . . . . . . . 44
11.2 Waiver of Notices . . . 45
11.3 Amendments and Waivers. 45
11.4 Waiver of Counterclaims 45
11.5 Indemnification . . . . 45
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 46
12.1 Term. . . . . . . . . . 46
12.2 Notices . . . . . . . . 48
12.3 Partial Invalidity. . . 48
12.4 Successors. . . . . . . 48
12.5 Entire Agreement. . . . 48
12.6 Publicity . . . . . . . 49
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Schedule 6.3 Deposit Accounts
Schedule 7.3(i) Consignment Inventory
Schedule 8.4 Other Liens
Schedule 8.8 Environmental
Disclosures
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated December
20, 1996 is entered into by and between Congress
Financial Corporation (Western), a California
corporation ("Lender"), and Gottschalks Inc., a
Delaware corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender
enter into certain financing arrangements with Borrower
pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans
and provide such financial accommodations on the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual
conditions and agreements set forth herein, and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in
Article 1 or Article 9 of the California Uniform
Commercial Code shall have the respective meanings
given therein unless otherwise defined in this
Agreement. All references to the plural herein shall
also mean the singular and to the singular shall also
mean the plural. All references to Borrower and Lender
pursuant to the definitions set forth in the recitals
hereto, or to any other person herein, shall include
their respective successors and assigns. The words
"hereof", "herein", "hereunder", "this Agreement" and
words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not any
particular provision of this Agreement and as this
Agreement now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or
replaced. An Event of Default shall exist or continue
or be continuing until such Event of Default is waived
in accordance with Section 11.3. Any accounting term
used herein unless otherwise defined in this Agreement
shall have the meaning customarily given to such term
in accordance with GAAP. For purposes of this
Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Accounts" shall mean all present and future
rights of Borrower to payment for goods sold or leased
or for services rendered, which are not evidenced by
instruments or chattel paper, and whether or not earned
by performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with
respect to each Interest Period for any Eurodollar Rate
Loan, the rate per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one
percent (1%), determined by dividing (a) the Eurodollar
Rate for such Interest Period by (b) a percentage equal
to: (i) one (1) minus (ii) the Reserve Percentage. For
purposes hereof, "Reserve Percentage" shall mean the
reserve percentage, expressed as a decimal, prescribed
by any United States or foreign banking authority for
determining the reserve requirement which is or would
be applicable to deposits of United States dollars in a
non-United States or an international banking office of
Reference Bank used to fund a Eurodollar Rate Loan or
any Eurodollar Rate Loan made with the proceeds of such
deposit, whether or not the Reference Bank actually
holds or has made any such deposits or loans. The
Adjusted Eurodollar Rate shall be adjusted on and as of
the effective day of any change in the Reserve
Percentage.
1.3 "Adjusted Net Worth" shall mean as to any
Person, at any time, in accordance with GAAP (except as
otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries
(if any), the amount equal to: (a) the difference
between: (i) the aggregate net book value of all
assets of such Person and its subsidiaries, calculating
the book value of inventory for this purpose on a
first-in-first-out basis, at the lower of cost or
market, utilizing the retail method of accounting,
after deducting from such book values all appropriate
reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence,
depreciation and amortization) and (ii) the aggregate
amount of the indebtedness and other liabilities of
such Person and its subsidiaries (including income tax
expense or benefit and other related accruals, but
excluding adjustments to deferred income tax accounts)
plus (b) indebtedness of such Person and its
subsidiaries which is subordinated in right of payment
to the full and final payment of all of the Obligations
on terms and conditions acceptable to Lender.
1.4 "Appraised Value" shall mean, with respect
to Eligible Inventory, the appraised value of such
Eligible Inventory, expressed as a percentage of either
the Value or the Retail Sales Price, as required by
Lender, determined on a "going out of business sale"
basis, net of all estimated liquidation expenses,
shrinkage and markdowns, pursuant to an appraisal
conducted, at Borrower's expense, by an independent
appraisal firm acceptable to Lender in its sole and
absolute discretion.
1.5 "Availability Reserves" shall mean, as of
any date of determination, such amounts as Lender may
from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letter of
Credit Accommodations which would otherwise be
available to Borrower under the lending formula(s)
provided for herein: (a) to reflect events, conditions, contingencies or
risks which, as determined by Lender in good faith, do
or may affect either (i) the Collateral or any other
property which is security for the Obligations or its
value, (ii) the assets or business of Borrower or any
Obligor or (iii) the security interests and other
rights of Lender in the Collateral (including the
enforceability, perfection and priority thereof) or (b)
to reflect Lender's good faith belief that any
collateral report or financial information furnished by
or on behalf of Borrower to Lender is or may have been
incomplete, inaccurate or misleading in any material
respect or (c) to reflect any state of facts which
Lender determines in good faith constitutes an Event of
Default. Without limiting the generality of the
foregoing, Lender (i) shall establish on the date
hereof and maintain throughout the term of this
Agreement and throughout any renewal term an
Availability Reserve in an amount equal to two (2)
months gross rent for Borrower's Distribution Facility
and for each of the Borrower's retail locations in
States other than California and Nevada for which
Lender has not received a landlord waiver and consent
in form and substance satisfactory to Lender, and (ii)
may establish and maintain an additional Availability
Reserve from time to time to compensate for any
increase in the percentage of Inventory not otherwise
deemed ineligible represented by slow moving Inventory
(defined as Inventory held for longer than one (1)
year), and (iii) may establish and maintain throughout
the term of this Agreement and any renewal term an
additional Availability Reserve in an amount equal to
the Value of consigned Inventory located at any one
time at Borrower's Distribution Facility or retail
stores in excess of One Million Dollars ($1,000,000),
and (iv) may establish and maintain throughout the term
of this Agreement and any renewal term an additional
Availability Reserve in an amount equal to one hundred
percent (100%) of the total sales of Concession
Inventory during the same month of the preceding fiscal
year as the month during which determination of this
Availability Reserve is to be made, less any amounts to
be retained by Borrower as a percentage rental payment
or similar charge, and this Availability Reserve shall
be subject to increase, in such amount as Lender shall
determine, to cover any payments of sale proceeds due
to concessionaires for the sale of Concession Inventory
that are not made within thirty (30) days of the date
of sale.
1.6 "Blocked Account" shall have the meaning set
forth in Section 6.3 hereof.
1.7 "Business Day" shall mean (a) for the Prime
Rate Loans, any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or
required to close under the laws of the State of New
York or the Commonwealth of Pennsylvania, and a day on
which the Reference Bank and Lender are open for the
transaction of business, and (b) for all Eurodollar
Rate Loans, any such day as described in (a) above in
this definition of Business Day, excluding any day on
which banks are closed for dealings in dollar deposits
in the London interbank market or other applicable
Eurodollar Rate market.
1.8 "Code" shall mean the Internal Revenue Code
of 1986, as the same now exists or may from time to
time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.9 "Collateral" shall have the meaning set
forth in Section 5 hereof.
1.10 "Concession Inventory" shall mean any goods
of a concessionaire located at Borrower's Distribution
Facility or retail stores, (which goods would otherwise
be considered Inventory if the property of the
Borrower, but as to which Borrower has no right, title
or interest), held for sale by the concessionaire,
which goods are not accounted for in Borrower's
inventory system but the proceeds of sale thereof are
collected through Borrower's deposit account
arrangements.
1.11 "Credit Card Agreements" shall mean all
agreements now or hereafter entered into by Borrower or
GCRC with any Credit Card Issuer or Credit Card
Processor, with the exception of Borrower, as the same
may now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.12 "Credit Card Issuer" shall mean any person
(excluding the Borrower with respect to its private
label credit card program) who issues or whose members
issue credit cards used by customers of the Borrower to
purchase goods, including, without limitation,
MasterCard or VISA bank credit or debit cards or other
bank credit or debit cards, and American Express,
Discover, Diners Club, Carte Blanche, and other non-bank
credit or debit cards.
1.13 "Credit Card Processor" shall mean any
servicing or processing agent or any factor or
financial intermediary who facilities, services,
processes or manages the credit authorization, billing
transfer and/or payment from a Credit Card Issuer or
Credit Card Processor and other procedures with respect
to any sales transactions of the Borrower involving
credit card or debit card purchases by customers using
credit cards or debit cards issued by any Credit Card
Issuer, but excluding the Borrower with respect to its
private label credit card program.
1.14 "Credit Card Receivables" shall mean all
Accounts consisting of the present and future rights of
Borrower, but excluding GCRC Receivables, to payment by
Credit Card Issuers or Credit Card Processors for
merchandise sold and delivered to customers of Borrower
who have purchased such goods using a credit card or a
debit card issued by a Credit Card Issuer.
1.15 "Distribution Facility" means Borrower's
distribution facility at 2900 Airport Drive, Madera,
California 93637.
1.16 "Eligible Domestic In-Transit Inventory"
shall mean those items of Inventory which are not
located at one of the Borrower's retail stores or at
Borrower's Distribution Facility but: (i) are currently
in-transit from a location within the continental
United States of America to one of Borrower's retail
stores or to Borrower's Distribution Facility via a
third party carrier, (ii) are insured against type of
loss, damage, hazards, and risks, and in amounts,
satisfactory to Lender, (iii) title to which items has
been transferred to Borrower, (iv) documentation and
monitoring regarding such items are acceptable to
Lender, (v) such items strictly comply with all of
Borrower's representations and warranties to Lender,
including, but not limited to, Lender's first priority
security interest in such Inventory, and (vi) if such
items have been acquired pursuant to a Letter of Credit
Accommodation, the Letter of Credit Accommodation must
have been drawn upon.
1.17 "Eligible Inventory" shall mean Inventory
consisting of finished goods held for resale in the
ordinary course of the business of Borrower which are
located either at one of Borrower's retail stores or at
Borrower's Distribution Facility, or which qualify as
Eligible Domestic In-Transit Inventory, and which are
acceptable to Lender based on the criteria set forth
below. In general, Eligible Inventory shall not include (a) raw
materials, (b) work-in-process as defined by GAAP; (c)
components which are not part of finished goods; (d)
spare parts for equipment; (e) packaging and shipping
materials; (f) supplies used or consumed in Borrower's
business; (g) Inventory at premises not owned or
controlled by Borrower, except if Lender shall have
received an agreement in writing from the person in
possession of such Inventory and/or the owner or
operator of such premises in form and substance
satisfactory to Lender acknowledging Lender's first
priority security interest in the Inventory, waiving
security interests and claims by such person against
the Inventory and permitting Lender access to, and the
right to remain on, the premises so as to exercise
Lender's rights and remedies and otherwise deal with
the Collateral; (h) Inventory in transit except for
Eligible Domestic In-Transit Inventory; (i) Inventory
subject to a security interest or lien in favor of any
person other than Lender except those permitted in this
Agreement; (j) unserviceable Inventory; (k) Inventory
which is not subject to the first priority, valid and
perfected security interest of Lender; (l) damaged
and/or defective Inventory; (m) Inventory held for
return to vendors; (n) Inventory returned by customers
and not held for resale; (o) Inventory consisting of
samples; (p) display Inventory (currently designated at
Location 80); (q) that portion of the Value of
Inventory attributable to markdowns not posted to the
Inventory retail system due to month-end cut-off, or to
unearned discounts; (r) that portion of the Value of
Inventory attributable to capitalized warehousing,
packing and freight cost from the Distribution Facility
to one of the Borrower's retail stores (UNICAP); and
(s) Inventory purchased or sold on consignment.
General criteria for Eligible Inventory may be
established and revised from time to time by Lender in
its reasonable credit judgment. Any Inventory which is
not Eligible Inventory shall nevertheless be part of
the Collateral.
1.18 "Environmental Laws" shall mean all federal,
state, district, local and foreign laws, rules,
regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and
environmental matters, as now or at any time hereafter
in effect, applicable to Borrower's business and
facilities (whether or not owned by it), including laws
relating to emissions, discharges, releases or
threatened releases of pollutants, contamination,
chemicals, or hazardous, toxic or dangerous substances,
materials or wastes into the environment (including,
without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing,
distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances,
materials or wastes.
1.19 "Equipment" shall mean all of Borrower's now
owned and hereafter acquired equipment, machinery,
computers and computer hardware and software (whether
owned or licensed), vehicles, tools, furniture,
fixtures, all attachments, accessions and property now
or hereafter affixed thereto or used in connection
therewith, and substitutions and replacements thereof,
wherever located.
1.20 "ERISA" shall mean the United States
Employee Retirement Income Security Act of 1974, as the
same now exists or may hereafter from time to time be
amended, modified, recodified or supplemented, together
with all rules, regulations and interpretations
thereunder or related thereto.
1.21 "ERISA Affiliate" shall mean any person
required to be aggregated with Borrower or any of its
affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
1.22 "Eurodollar Rate Loans" shall mean any Loans
or portion thereof on which interest is payable based
on the Adjusted Eurodollar Rate in accordance with the
terms hereof.
1.23 "Eurodollar Rate" shall mean with respect to
the Interest Period for a Eurodollar Rate Loan, the
interest rate per annum equal to the arithmetic average
of the rate of interest per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one
percent (1%)) at which Reference Bank is offered
deposits of United States dollars in the London
interbank market (or other Eurodollar Rate market
selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days
prior to the commencement of such Interest Period in
amounts substantially equal to the principal amount of
the Eurodollar Rate Loans requested by and available to
Borrower in accordance with this Agreement, with a
maturity of comparable duration to the Interest Period
selected by Borrower.
1.24 "Event of Default" shall mean the occurrence
or existence of any event or condition described in
Section 10.1 hereof.
1.25 "Excess Availability" shall mean the amount,
as determined by Lender, calculated at any time, equal
to:
(a) the lesser of (i) the amount of
the Revolving Loans available to
Borrower as of such time (based on
the applicable advance rate set forth
in Section 2.1(a)(i) hereof
multiplied by the Value, Retail Sales
Price or Appraised Value of Eligible
Inventory, as applicable, as
determined by Lender), subject to the
sublimits and Availability Reserves
from time to time established by
Lender hereunder and (ii) the Maximum
Credit,
minus (b) the sum of: (i)( the amount
of all then outstanding and unpaid
Obligations, (ii) the aggregate
amount of all trade payables of
Borrower which are more than sixty
(60) days past due as of such time
and which are not disputed in good
faith, and (iii) the aggregate amount
of Borrower's book overdrafts.
1.26 "Financing Agreements" shall mean, colle-
ctively, this Agreement and all notes, guarantees,
security agreements and other agreements, documents and
instruments now or at any time hereafter executed
and/or delivered by Borrower in connection with this
Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed,
restated or replaced.
1.27 "Fixed Base Certificates" shall mean,
collectively, (i) the $40,000,000 7.35% Fixed Base
Class A-1 Credit Card Certificates, Series 1994-1, and
(ii) the $6,000,000 6.79% Fixed Base Class A-1 Credit
Card Certificates, Series 1996-1, issued by the
Gottschalks Credit Card Master Trust pursuant to the
Securitization Facility.
1.28 "GAAP" shall mean generally accepted
accounting principles in the United States of America
as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting
Principles Board and the American Institute of
Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards
Boards which are applicable to the circumstances as of
the date of determination consistently applied, except
that, for purposes of Section 9.14 hereof, GAAP shall
be determined on the basis of such principles in effect
on the date hereof and consistent with those used in
the preparation of the audited financial statements
delivered to Lender prior to the date hereof.
1.29 "GCRC" shall mean Gottschalks Credit
Receivables Corp., a Delaware corporation, and a wholly
owned subsidiary of the Borrower.
1.30 "GCRC Receivables" shall mean those Accounts
and other indebtedness owed to Borrower arising under
Borrower's private label credit card program and sold
by Borrower to GCRC pursuant to the Receivables
Purchase Agreement.
1.31 "Hazardous Materials" shall mean any
hazardous, toxic or dangerous substances, materials and
wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum
and hydrocarbons), flammable explosives, asbestos, urea
formaldehyde insulation, radioactive materials,
biological substances, polychlorinated biphenyls,
pesticides, herbicides and any other kind and/or type
of pollutants or contaminants (including, without
limitation, materials which include hazardous
constituents), sewage, sludge, industrial slag,
solvents and/or any other similar substances,
materials, or wastes and including any other
substances, materials or wastes that are or become
regulated under any Environmental Law (including,
without limitation any that are or become classified as
hazardous or toxic under any Environmental Law).
1.32 "Information Certificate" shall mean the
Information Certificate of Borrower constituting
Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided
by or on behalf of Borrower to Lender in connection
with the preparation of this Agreement and the other
Financing Agreements and the financing arrangements
provided for herein.
1.33 "Interest Period" shall mean for any
Eurodollar Rate Loan, a period of approximately one
(1), two (2) or three (3) months duration as Borrower
may elect, the exact duration to be determined in
accordance with the customary practice in the
applicable Eurodollar Rate market; provided, that,
Borrower may not elect an Interest Period which will
end after the last day of the then-current term of this
Agreement.
1.34 "Interest Rate" shall mean, as to Prime Rate
Loans, a rate of one quarter of one (.25) percentage
point per annum in excess of the Prime Rate and, as to
Eurodollar Rate Loans, a rate of two and one-half
(2.50) percentage points per annum in excess of the
Adjusted Eurodollar Rate (based on the Eurodollar Rate
applicable for the Interest Period selected by Borrower
as in effect three (3) Business Days after the date of
receipt by Lender of the request of Borrower for such
Eurodollar Rate Loans in accordance with the terms
hereof, whether such rate is higher or lower than any
rate previously quoted to Borrower); provided, however,
that in the event Borrower's pretax income for any
given fiscal year (excluding extraordinary gains and
non-cash losses) exceeds Two Million Dollars
($2,000,000), the applicable Interest Rate provided for
in the preceding clause of this Section 1.34 shall be
reduced by one-quarter of one (.25) percentage point,
such reduction in the applicable Interest Rate to be
effective as of the first day of the month immediately
following the date of receipt by Lender of Borrower's
audited annual financial statements, as provided by
Borrower to Lender pursuant to Section 9.6(a)(iii)
hereof, indicating the required pretax income; and
provided further, however, that in the event Borrower's
pretax income for its fiscal year immediately following
the fiscal year for which the Interest Rate has been
reduced, as provided for in the first proviso of this
Section 1.34, again exceeds Two Million Dollars
($2,000,000) excluding extraordinary gains and non-cash
losses, then the applicable Interest Rate shall be
further reduced by an additional one-quarter of one
(.25) percentage point, such reduction in the
applicable Interest Rate to be effective as of the
first day of the month immediately following the date
of receipt by Lender of Borrower's audited annual
financial statements, as provided by Borrower to Lender
pursuant to Section 9.6(a)(iii) hereof, indicating the
required pretax income; and provided further, however,
the Interest Rate shall mean the rate of two and one-quarter
(2.25) percentage points per annum in excess of
the Prime Rate as to Prime Rate Loans and the rate of
four and one-half (4.50) percentage points percent per
annum in excess of the Adjusted Eurodollar Rate as to
Eurodollar Rate Loans, at Lender's option, without
notice, (a) for the period on and after the date of
termination or non-renewal hereof, or the date of the
occurrence of any Event of Default or event which with
notice or passage of time or both would constitute an
Event of Default, and for so long as such Event of
Default or other event is continuing as determined by
Lender and until such time as all Obligations are
indefeasibly paid in full (notwithstanding entry of any
judgment against Borrower) and (b) on the Revolving
Loans at any time outstanding in excess of the amounts
available to Borrower under Section 2 (whether or not
such excess(es) arise or are made with or without
Lender's knowledge or consent and whether made before
or after an Event of Default).
1.35 "Inventory" shall mean all of Borrower's now
owned and hereafter existing or acquired raw materials,
work in process, finished goods and all other inventory
of whatsoever kind or nature, wherever located.
1.36 "Inventory Advance Rate" shall mean the
advance rate applicable to Eligible Inventory as
determined in accordance with subsections 2.1(a)(i).
1.37 "Letter of Credit Accommodations" shall mean
the letters of credit, merchandise purchase or other
guaranties which are from time to time either (a)
issued or opened by Lender for the account of Borrower
or any Obligor or (b) with respect to which Lender has
agreed to indemnify the issuer or guaranteed to the
issuer the performance by Borrower of its obligations
to such issuer.
1.38 "Loans" shall mean the Revolving Loans.
1.39 "Maximum Credit" shall mean, with reference
to the Revolving Loans and the Letter of Credit
Accommodations, the amount of Eighty Million Dollars
($80,000,000).
1.40 "Obligations" shall mean any and all
Revolving Loans, the Letter of Credit Accommodations
and all other obligations, liabilities and indebtedness
of every kind, nature and description owing by Borrower
to Lender and/or its affiliates, including principal,
interest, charges, fees, costs and expenses, however
evidenced, whether as principal, surety, endorser,
guarantor or otherwise, whether arising under this
Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or
after the initial or any renewal term of this Agreement
or after the commencement of any case with respect to
Borrower under the United States Bankruptcy Code or any
similar statute (including, without limitation, the
payment of interest and other amounts which would
accrue and become due but for the commencement of such
case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Lender.
1.41 "Obligor" shall mean any guarantor,
endorser, acceptor, surety or other person liable on or
with respect to the Obligations or who is the owner of
any property which is security for the Obligations,
other than Borrower.
1.42 "Participant" shall mean any person which at
any time participates with Lender in respect of the
Loans, the Letter of Credit Accommodations or other
Obligations or any portion thereof.
1.43 "Payment Account" shall have the meaning set
forth in Section 6.3 hereof.
1.44 "Person" or "person" shall mean any
individual, sole proprietorship, partnership,
corporation (including, without limitation, any
corporation which elects subchapter S status under the
Internal Revenue Code of 1986, as amended), business
trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or
any government or any agency or instrumentality or
political subdivision thereof.
1.45 "Pooling Agreement" shall mean that certain
Pooling and Servicing Agreement, dated as of March 30,
1994, among GCRC, as depositor, Borrower, as servicer,
and Bankers Trust Company, as trustee.
1.46 "Prime Rate" shall mean the rate from time
to time publicly announced by CoreStates Bank, N.A., or
its successors, at its office in Philadelphia,
Pennsylvania, as its prime rate, whether or not such
announced rate is the best rate available at such bank.
1.47 "Prime Rate Loans" shall mean any Loans or
portion thereof on which interest is payable based on
the Prime Rate in accordance with the terms thereof.
1.48 "Receivables Purchase Agreement" shall mean
that certain Receivables Purchase Agreement for the
purchase of GCRC Receivables, dated as of March 30,
1994, between Borrower, as seller, and GCRC, as
purchaser.
1.49 "Records" shall mean all of Borrower's
present and future books of account of every kind or
nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and
other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file
cabinets or containers in or on which the foregoing are
stored (including any rights of Borrower with respect
to the foregoing maintained with or by any other
person).
1.50 "Reference Bank" shall mean CoreStates Bank,
N.A., or such other bank as Lender may from time to
time designate.
1.51 "Renewal Date" shall have the meaning set
forth in Section 12.1(a) hereof.
1.52 "Retail Sales Price" shall mean the current
ticketed sales price in the Borrower's retail stores,
net of markdowns from the original retail sales price
with respect thereto, for the types, categories and
styles of inventory included in the Eligible Inventory
of Borrower.
1.54 "Revolving Loans" shall mean the loans now
or hereafter made by Lender to or for the benefit of
Borrower on a revolving basis (involving advances,
repayments and readvances) as set forth in Section 2.1
hereof.
1.55 "Seasonal Period" shall mean the period from
September 1 through December 20 of each calendar year.
1.56 "Securitization Facility" shall mean (i) the
securitization facility in effect as of the date hereof
with respect to certain of Borrower's Accounts and
other indebtedness owed to Borrower arising out of
Borrower's private label credit card program, as
evidenced by the Receivables Purchase Agreement, the
Pooling Agreement, and all other agreements, documents
and instruments executed in connection therewith,
including all supplemental financings thereunder; and
(ii) such other securitization facility with respect to
the Accounts as may be acceptable to Lender in its
reasonable credit judgment.
1.57 "Variable Base Certificates" shall mean the
$15,000,000 Variable Base Class A-2 Credit Card
Certificates, Series 1994-1 issued by the Gottschalks
Credit Card Master Trust pursuant to the Securitization
Facility.
1.58 "Value" shall mean, as determined by Lender in
good faith, with respect to Inventory, the lower of (a)
cost as determined by the retail method of accounting
or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to, and upon the terms and
conditions contained herein, Lender agrees to make
Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal
to:
(i) the lesser of: (A) sixty-five percent (65%) (seventy percent
(70%) during the Seasonal Period) of the
Value of the Eligible Inventory, or (B)
thirty-three percent (33%) (thirty-five
percent (35%) during the Seasonal
Period) of the Retail Sales Price of the
Eligible Inventory; provided, however,
that advances against Eligible Domestic
In-Transit Inventory shall not, at any
one time, exceed Five Million Dollars
($5,000,000); minus
(ii) the then undrawn amounts
of outstanding Letter of Credit Accommodations
multiplied by the applicable percentages as
provided for in Section 2.2(c) hereof; and minus
(iii) any Availability
Reserves.
(b) Lender may, in its reasonable credit
judgment, from time to time, upon not less than ten
(10) days prior notice to Borrower, reduce the lending
formula(s) with respect to Eligible Inventory to the
extent that Lender determines that: (A) the number of
days of the turnover of such Inventory for any period
has changed in any materially adverse respect or (B)
the Appraised Value of the Eligible Inventory, or any
category thereof, has decreased in any material
respect, or (C) the nature and quality of the Inventory
has deteriorated in any material respect. In
determining whether to reduce the lending formula(s),
Lender may consider events, conditions, contingencies
or risks which are also considered in determining
Eligible Inventory or in establishing Availability
Reserves.
(c) Except in Lender's discretion, the
aggregate amount of the Loans, the Letter of Credit
Accommodations and other Obligations outstanding at any
time shall not exceed the Maximum Credit. In the event
that the outstanding amount of any component of the
Loans and Letter of Credit Accommodations or the
aggregate amount of the outstanding Loans and Letter of
Credit Accommodations exceeds the amounts available
under the lending formulas set forth in Section 2.1(a)
hereof, the sublimits for Letter of Credit
Accommodations set forth in Section 2.2(c), or the
Maximum Credit, as applicable, such event shall not
limit, waive or otherwise affect any rights of Lender
in that circumstance or on any future occasions and
Borrower shall, upon demand by Lender, which may be
made at any time or from time to time, immediately
repay to Lender the entire amount of any such
excess(es) for which payment is demanded.
2.2 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and
conditions contained herein, at the request of
Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of
Borrower containing terms and conditions acceptable to
Lender in its reasonable credit judgment and the issuer
thereof. Any payments made by Lender to any issuer
thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute
additional Revolving Loans to Borrower pursuant to this
Section 2.
(b) In addition to any normal, reasonable
and customary charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit
Accommodations, Borrower shall pay to Lender a letter
of credit fee at a rate equal to one percent (1%) per
annum on the daily outstanding balance of the Letter of
Credit Accommodations for the immediately preceding
month (or part thereof), payable in arrears as of the
first day of each succeeding month; provided, however,
that such letter of credit fee shall be increased, at
Lender's option without notice, to three percent (3%)
per annum for the period on or after the date of
termination or non-renewal of this Agreement, or the
date of the occurrence of an Event of Default and
during the continuation thereof. Such letter of credit
fee shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed and the
obligation of Borrower to pay such fee shall survive
the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations
shall be available unless on the date of the proposed
issuance of any Letter of Credit Accommodations, the
Revolving Loans available to Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal
to or greater than: (i) if the proposed Letter of
Credit Accommodation is for the purpose of purchasing
Eligible Inventory, the sum of (A) the product of the
Value of such Eligible Inventory multiplied by one
minus the Inventory Advance Rate under Section
2.1(a)(i)(A) hereof, plus (B) freight, taxes, duty and
other amounts which Lender estimates, in its reasonable
credit judgment, must be paid in connection with such
Inventory upon arrival and for delivery to one of
Borrower's locations for Eligible Inventory within the
United States of America and (ii) if the proposed
Letter of Credit Accommodation is for standby letters
of credit guaranteeing the purchase of Eligible
Inventory or for any other purpose, an amount equal to
one hundred percent (100%) of the face amount thereof
and all other commitments and obligations made or
incurred by Lender with respect thereto. Effective on
the issuance of each Letter of Credit Accommodation,
the amount of Revolving Loans which might otherwise be
available to Borrower shall be reduced by the
applicable amount set forth in Section 2.2(c)(i) or
Section 2.2(c)(ii).
(d) Except in Lender's discretion, the
amount of all outstanding Letter of Credit
Accommodations and all other commitments and
obligations made or incurred by Lender in connection
therewith shall not at any time exceed Twenty Million
Dollars ($20,000,000). At any time an Event of Default
exists or has occurred and is continuing, upon Lender's
request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer
in connection with any Letter of Credit Accommodations
or furnish cash collateral to Lender for the Letter of
Credit Accommodations, and in either case, the
Revolving Loans otherwise available to Borrower shall
not be reduced as provided in Section 2.2(c) to the
extent of such cash collateral.
(e) Borrower shall indemnify and hold
Lender harmless from and against any and all losses,
claims, damages, liabilities, costs and expenses which
Lender may suffer or incur in connection with any
Letter of Credit Accommodations and any documents,
drafts or acceptances relating thereto, including, but
not limited to, any losses, claims, damages,
liabilities, costs and expenses due to any action taken
by any issuer or correspondent with respect to any
Letter of Credit Accommodation. Borrower assumes all
risks with respect to the acts or omissions of the
drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or
beneficiary shall be deemed Borrower's agent. Borrower
assumes all risks for, and agrees to pay, all foreign,
Federal, State and local taxes, duties and levies
relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances
thereunder. Borrower hereby releases and holds Lender
harmless from and against any acts, waivers, errors,
delays or omissions, whether caused by Borrower, by any
issuer or correspondent or otherwise, unless caused by
the gross negligence or willful misconduct of Lender,
with respect to or relating to any Letter of Credit
Accommodation. The provisions of this Section 2.2(e)
shall survive the payment of Obligations and the
termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be
deemed or construed to grant Borrower any right or
authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect
to any Letter of Credit Accommodation provided by an
issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application
or a guarantee or indemnification in writing with
respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in
good faith by Lender, or any other issuer or
correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or
acceptances thereunder, notwithstanding that such
interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole
and exclusive right and authority to, and Borrower
shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or
resolve any questions of non-compliance of documents,
(B) give any instructions as to acceptance or rejection
of any documents or goods or (C) execute any and all
applications for steamship or airway guaranties,
indemnities or delivery orders, and (ii) at all times,
(A) grant any extensions of the maturity of, time of
payment for, or time of presentation of, any drafts,
acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications,
changes or cancellations of any of the terms or
conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances
thereunder or any letters of credit included in the
Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or
obligations granted or undertaken by Borrower to any
issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement
in favor of any issuer or correspondent relating to any
Letter of Credit Accommodation, shall be deemed to have
been granted or undertaken by Borrower to Lender. Any
duties or obligations undertaken by Lender to any
issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement
by Lender in favor of any issuer or correspondent
relating to any Letter of Credit Accommodation, shall
be deemed to have been undertaken by Borrower to Lender
and to apply in all respects to Borrower.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest
on the outstanding principal amount of the non-contingent
Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of
any Event of Default or termination or non-renewal
hereof shall be payable on demand.
(b) Borrower may from time to time
request that Prime Rate Loans be converted to
Eurodollar Rate Loans or that any existing Eurodollar
Rate Loans continue for an additional Interest Period.
Such request from Borrower shall specify the amount of
the Prime Rate Loans which will constitute Eurodollar
Rate Loans (subject to the limits set forth below) and
the Interest Period to be applicable to such Eurodollar
Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt
by Lender of such a request from Borrower, such Prime
Rate Loans shall be converted to Eurodollar Rate Loans
or such Eurodollar Rate Loans shall continue, as the
case may be, provided, that, (i) no Event of Default,
or event of which with notice or passage of time or
both would constitute an Event of Default exists or has
occurred and is continuing, (ii) no party hereto shall
have sent any notice of termination or non-renewal of
this Agreement, (iii) Borrower shall have complied with
such customary and reasonable procedures as are
established by Lender and specified by Lender to
Borrower from time to time for requests by Borrower for
Eurodollar Rate Loans, (iv) no more than four (4)
Interest Periods may be in effect at any one time, (v)
the aggregate amount of the Eurodollar Rate Loans must
be in an amount not less than $5,000,000 or an integral
multiple of $1,000,000 in excess thereof; (vi) the
maximum amount of the Eurodollar Rate Loans at any time
requested by Borrower shall not exceed the amount equal
to ninety percent (90%) of the daily average of the
principal amount of the Revolving Loans which it is
anticipated will be outstanding during the applicable
Interest Period, in each case as determined by Lender
(but with no obligation of Lender to make such
Revolving Loans) and (vii) Lender shall have determined
that the Interest Period or Adjusted Eurodollar Rate is
available to Lender through the Reference Bank and can
be readily determined as of the date of the request for
such Eurodollar Rate Loan by Borrower. Any request by
Borrower to convert Prime Rate Loans to Eurodollar Rate
Loans or to continue any existing Eurodollar Rate Loans
shall be irrevocable. Notwithstanding anything to the
contrary contained herein, Lender and Reference Bank
shall not be required to purchase United States Dollar
deposits in the London interbank market or other
applicable Eurodollar Rate market to fund any
Eurodollar Rate Loans, but the provisions hereof shall
be deemed to apply as if Lender and Reference Bank had
purchased such deposits to fund the Eurodollar Rate
Loans.
(c) Any Eurodollar Rate Loans shall
automatically convert to Prime Rate Loans upon the last
day of the applicable Interest Period, unless Lender
has received and approved a request to continue such
Eurodollar Rate Loan at least three (3) Business Days
prior to such last day in accordance with the terms
hereof. Any Eurodollar Rate Loans shall, at Lender's
option, upon notice by Lender to Borrower, convert to
Prime Rate Loans in the event that (i) this Agreement
shall terminate or not be renewed, or (ii) the
aggregate principal amount of the Prime Rate Loans
which have previously been converted to Eurodollar Rate
Loans or existing Eurodollar Rate Loans continued, as
the case may be, at the beginning of an Interest Period
shall at any time during such Interest Period exceed
either (A) the aggregate principal amount of the Loans
then outstanding, or (B) Revolving Loans then available
to Borrower under Section 2 hereof. Borrower shall pay
to Lender, upon demand by Lender (or Lender may, at its
option, charge any loan account of Borrower) any
amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any actual loss
(including loss of anticipated profits), cost or
expense incurred by such person, as a result of the
conversion of Eurodollar Rate Loans to Prime Rate Loans
pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower
to Lender monthly in arrears not later than the first
day of each calendar month and shall be calculated on
the basis of a three hundred sixty (360) day year and
actual days elapsed. The interest rate on non-contingent
Obligations (other than Eurodollar Rate
Loans) shall increase or decrease by an amount equal to
each increase or decrease in the Prime Rate effective
on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such
change occurs. In no event shall charges constituting
interest payable by Borrower to Lender exceed the
maximum amount or the rate permitted under any
applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any
such law or regulation, such part or provision shall be
deemed amended to conform thereto.
3.2 Closing Fee. Borrower shall pay to Lender
as a closing fee (inclusive of any commitment fees paid
to Lender by Borrower) of Five Hundred Ninety Thousand
Dollars ($590,000), which fee shall be fully earned as
of and payable on the date hereof. The commitment fee
of One Hundred Fifty Thousand Dollars ($150,000)
previously paid by Borrower to Lender shall be applied
to the closing fee. Lender shall pay the early
termination fee charged by Fleet Business Credit, Inc.
provided that such early termination fee does not
exceed One Hundred Ninety Thousand Dollars ($190,000).
3.3 Loan Servicing and Audit Fee. Borrower
shall pay to Lender monthly in advance a loan servicing
and audit fee in an amount equal to Four Thousand
Dollars ($4,000), plus out-of-pocket costs and
expenses, in respect of Lender's services for each
month (or part thereof) while this Agreement remains in
effect and for so long thereafter as any of the
Obligations are outstanding, which fee shall be fully
earned as of and payable in advance on the date hereof
and on the first day of each month hereafter.
3.4 Changes in Laws and Increased Costs of
Loans.
(a) Notwithstanding anything to the
contrary contained herein, all Eurodollar Rate Loans
shall, upon notice by Lender to Borrower, convert to
Prime Rate Loans in the event that (i) any change in
applicable law or regulation (or the interpretation or
administration thereof) shall either (A) make it
unlawful for Lender, Reference Bank or any Participant
to make or maintain Eurodollar Rate Loans or to comply
with the terms hereof in connection with the Eurodollar
Rate Loans, by an amount deemed by Lender to be
material, or (B) shall result in the increase in the
costs to Lender, Reference Bank or any Participant of
making or maintaining any Eurodollar Rate Loans or (C)
reduce the amounts received or receivable by Lender or
any Participant in respect thereof, by an amount deemed
by Lender to be material or (ii) the cost to Lender,
Reference Bank or any Participant of making or
maintaining any Eurodollar Rate Loans shall otherwise
increase by an amount deemed by Lender to be material.
Borrower shall pay to Lender, upon demand by Lender (or
Lender may, at its option, charge any loan account of
Borrower) any amounts required to compensate Lender,
the Reference Bank or any participant with Lender for
any loss (including loss of anticipated profits), cost
or expense incurred by such person as a result of the
foregoing, including, without limitation, any such
loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds
acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A
certificate of Lender setting forth the basis for the
determination of such amount necessary to compensate
Lender as aforesaid shall be delivered to Borrower and
shall be conclusive, absent manifest error.
(b) If any payments or prepayments in
respect of the Eurodollar Rate Loans are received by
Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon
maturity or otherwise), including any payments pursuant
to the application of collections under Section 6.3 or
any other payments made with the proceeds of
Collateral, Borrower shall pay to Lender upon demand by
Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate
Lender, the Reference Bank or any Participant with
Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such
person as a result of such prepayment or payment,
including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by
such person to make or maintain such Eurodollar Rate
Loans or any portion thereof.
3.5 Compensation Adjustment
(a) If after the date of this Agreement
the introduction of, or any change in, any law or any
governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or
any interpretation thereof, or compliance by Lender or
any Participant therewith:
(i) subjects Lender to any tax,
duty, charge or withholding on or from payments due
from Borrower (excluding franchise taxes imposed upon,
and taxation of the overall net income of, Lender or
any Participant), or changes the basis of taxation of
payments, in either case in respect of amounts due it
hereunder, or
(ii) imposes or increases or deems
applicable any reserve requirement or other reserve,
assessment, insurance charge, special deposit or
similar requirement against assets of, deposits with or
for the account of, or credit extended by Lender or any
Participant, or
(iii) imposes any other condition
the result of which is to increase the cost to Lender
or any Participant of making, funding or maintaining
the Revolving Loans or Letter of Credit Accommodations
or reduces any amount receivable by Lender or any
Participant in connection with the Loans or Letter of
Credit Accommodations, or requires Lender or any
Participant to make payment calculated by references to
the amount of loans held or interest received by it, by
an amount deemed material by Lender or any Participant,
or
(iv) imposes or increases any
capital requirement or affects the amount of capital
required or expected to be maintained by Lender or any
Participant or any corporation controlling Lender or
any Participant, and Lender or any Participant
determines that such imposition or increase in capital
requirements or increase in the amount of capital
expected to be maintained is based upon the existence
of this Agreement or the Loans or Letter of Credit
Accommodations hereunder, all of which may be
determined by Lender's reasonable allocation of the
aggregate of its impositions or increases in capital
required or expected to be maintained, and the result
of any of the foregoing is to increase the cost to
Lender or any Participant of making, renewing or
maintaining the Loans or Letter of Credit
Accommodations, or to reduce the rate of return to
Lender or any Participant on the Loans or Letter of
Credit Accommodations, then upon demand by Lender,
Borrower shall pay to Lender, and continue to make
periodic payments to Lender or any Participant, such
additional amounts as may be necessary to compensate
Lender or any Participant for any such additional cost
incurred or reduced rate of return realized.
(b) A certificate of Lender claiming
entitlement to compensation as set forth above will be
conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence
giving rise to such compensation, the additional amount
or amounts to be paid and the compensation and the
method by which such amounts were determined. In
determining any additional amounts due from Borrower
under this Section 3.5, Lender shall act reasonably and
in good faith and will, to the extent that the
increased costs, reductions, or amounts received or
receivable relate to the Lender's or a Participant's
loans or commitments generally and are not specifically
attributable to the Loans and commitments hereunder,
use averaging and attribution methods which are
reasonable and equitable and which cover all loans and
commitments under this Agreement by the Lender or such
Participant, as the case may be, whether or not the
loan documentation for such other loans and commitments
permits the Lender or such Participant to receive
compensation costs of the type described in this
Section 3.5.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and
the Letter of Credit Accommodations. Each of the
following is a condition precedent to Lender making the
initial Loans and the initial Letter of Credit
Accommodations hereunder:
(a) Lender shall have received, in form
and substance satisfactory to Lender, all releases,
terminations and such other documents as Lender may
request to evidence and effectuate the termination by
the existing lender or lenders to Borrower of their
respective financing arrangements with Borrower and the
termination and release by it or them, as the case may
be, of any interest in and to any assets and properties
of Borrower, duly authorized, executed and delivered by
it or each of them, including, but not limited to, UCC
termination statements for all UCC financing statements
previously filed by it or any of them or their
predecessors, as secured party and Borrower, as debtor
in form acceptable for recording or filing in the
appropriate government office, and Lender shall have
satisfied itself that it has valid, perfected and first
priority security interests in and liens upon the
Collateral and any other property which is intended as
security for the Obligations, subject only to the
security interests and liens permitted herein or in the
other Financing Agreements;
(b) all requisite corporate action and
proceedings in connection with this Agreement and the
other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have
received all information and copies of all documents,
including, without limitation, records of requisite
corporate action and proceedings which Lender may have
requested in connection therewith, such documents where
requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental
authorities;
(c) no material adverse change shall have
occurred in the assets, business or prospects of
Borrower since the date of Lender's latest field
examination and no change or event shall have occurred
which would impair the ability of Borrower to perform
its obligations hereunder or under any of the other
Financing Agreements to which it is a party or of
Lender to enforce the Obligations or realize upon the
Collateral;
(d) Lender shall have completed a field
review of the Records and such other information with
respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to
Borrower, the results of which shall be satisfactory to
Lender; and Lender shall have received current
perpetual Inventory records and/or rollforwards of
Inventory through the date hereof, together with all
supporting documentation and such other documents and
information as Lender shall request in its reasonable
credit judgment to enable Lender to accurately identify
and verify the Eligible Inventory at or before the date
hereof in a manner satisfactory to Lender, including,
but not limited to, Inventory in transit;
(e) Lender shall have received, in form
and substance satisfactory to Lender, all consents,
waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or
desirable in order to permit, protect and perfect its
security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this
Agreement and the other Financing Agreements,
including, without limitation, but subject to
Borrower's best efforts to obtain such waivers for
Borrower's retail locations, acknowledgements by
lessors of Lender's security interests in the
Collateral, waivers by such persons of any security
interests, liens or other claims by such persons to the
Collateral and agreements by such persons permitting
Lender access to, and the right to remain on, the
premises to exercise its rights and remedies and
otherwise deal with the Collateral; provided, however,
that the foregoing shall not limit the right of Lender
to establish an Availability Reserve to cover two (2)
months gross rent, in a manner consistent with the
Availability Reserve established to cover rent as
defined in Section 1.5 hereof, in the event Lender does
not receive an acceptable waiver from the owner of any
location at which the Borrower maintains Inventory.
(f) all Credit Card Issuers and Credit
Card Processors shall have been irrevocably directed by
the parties to Credit Card Agreements, and such Credit
Card Companies and Credit Card Processors shall agree,
that all proceeds of Credit Card Receivables shall be
remitted to the Blocked Account;
(g) Lender shall have received evidence
of insurance and loss payee endorsements required
hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and
certificates of insurance policies and/or endorsements
naming Lender as loss payee;
(h) Lender shall have received, in form
and substance satisfactory to Lender, such opinion
letters of counsel to Borrower with respect to the
Financing Agreements and such other matters as Lender
may request;
(i) the Excess Availability as determined
by Lender as of the date hereof, shall be not less than
Ten Million Dollars ($10,000,000) after giving effect
to the initial Loans made or to be made hereunder and
the payment of all fees and expenses payable upon the
consummation of the initial transactions contemplated
by this Agreement;
(j) Lender shall have received the
negative pledge by Borrower of the issued and
outstanding capital stock of GCRC, as additional
collateral security for the Obligations, through the
deposit by Borrower of such stock into an escrow
arrangement for the sole benefit of Lender, in form and
substance, and with an escrow holder, acceptable to
Lender and its counsel;
(k) Lender shall have received, in form
and substance satisfactory to Lender and its counsel,
an irrevocable payment instruction from Borrower and
GCRC to Bankers Trust Company, as Trustee under the
Pooling Agreement, directing that all amounts otherwise
payable to Borrower or GCRC under the Pooling Agreement
shall be paid to Lender, and such payment instruction
shall have been acknowledged and agreed to by Bankers
Trust Company;
(l) Lender shall have received, in form
and substance satisfactory to Lender and its counsel,
the assignment of all of Borrower's rights in
registered patents, trademarks, service marks and
copyrights, as Collateral hereunder, on Lender's
standard forms of Collateral Assignments;
(m) Lender shall have received, each in
form and substance satisfactory to Lender and its
counsel, copies of all agreements in connection with
the Securitization Facility, including the Receivables
Purchase Agreement and the Pooling Agreement;
(n) Lender shall have received, in form
and substance satisfactory to Lender and its counsel,
copies of all of Borrower's agreements with financial
institutions regarding the collection of receipts from
purchases made by customers on credit or charge cards
other than Borrower's private label credit card;
(o) each of the depository banks used by
Borrower's retail store locations for the deposit of
receipts from the sale of merchandise or for the
deposit of other proceeds of Collateral and other
property which is security for the Obligations shall
have been notified of Lender's security interested
therein and shall have been irrevocably authorized and
directed to send all funds on deposit with such banks
only to the Blocked Account or as Lender otherwise
directs;
(p) Lender shall have received, in form
and substance satisfactory to Lender, an executed copy
of a Blocked Account Agreement, pursuant to Section
6.3(ii) hereof, among Lender, Borrower and Wells Fargo
Bank, N.A.; and
(q) the other Financing Agreements and
all instruments and documents hereunder and thereunder
shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender;
4.2 Conditions Precedent to All Loans and
Letter of Credit Accommodations. Each of the following
is an additional condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations
to Borrower, including the initial Loans and Letter of
Credit Accommodations and any future Loans and Letter
of Credit Accommodations:
(a) all representations and warranties
contained herein and in the other Financing Agreements
shall be true and correct in all material respects with
the same effect as though such representations and
warranties had been made on and as of the date of the
making of each such Revolving Loan or providing each
such Letter of Credit Accommodation and after giving
effect thereto;
(b) no Event of Default and no event or
condition which, with notice or passage of time or
both, would constitute an Event of Default, shall exist
or have occurred and be continuing on and as of the
date of the making of such Loan or providing each such
Letter of Credit Accommodation and after giving effect
thereto; and
(c) the Securitization Facility shall not
have expired or been terminated, and no default or
event of default with respect to the Securitization
Facility, or under any agreements between Borrower and
any other Person evidencing or relating to the
Securitization Facility shall have occurred and be
continuing.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all
Obligations, Borrower hereby grants to Lender a
continuing security interest in, a lien upon, and a
right of set off against, and hereby assigns to Lender
as security, the following property and interests in
property, whether now owned or hereafter acquired or
existing, and wherever located (collectively, the
"Collateral"):
5.1 Accounts, Credit Card Receivables and other
indebtedness owed to the Borrower; provided, however,
that Lender's security interest in Accounts or other
indebtedness owed to the Borrower arising out of
Borrower's private label credit card program, and the
collections and proceeds thereof in whatever form
(including any related "instruments," "documents" and
"chattel paper," each as defined in the California
Uniform Commercial Code), all deposit accounts
associated therewith, and all books and records related
thereto, shall automatically terminate (but not
Lender's security interest in the proceeds thereof
consisting of any amounts paid to Borrower by GCRC
pursuant to the Receivables Purchase Agreement) upon
the sale of any such Accounts or other indebtedness
owed to the Borrower by the Borrower to GCRC;
5.2 all present and future contract rights,
general intangibles (including, but not limited to, tax
and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee,
choses in action and other claims and existing and
future leasehold interests in equipment, real estate
and fixtures), chattel paper, documents, instruments,
securities, letters of credit, bankers' acceptances and
guaranties;
5.3 all present and future monies, securities,
credit balances, deposits, deposit accounts and other
property of Borrower now or hereafter held or received
by or in transit to Lender or its affiliates or at any
other depository or other institution from or for the
account of Borrower, whether for safekeeping, pledge,
custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights,
remedies, title and interest in, to and in respect of
Accounts, Credit Card Receivables, and other
Collateral, including, without limitation, (a) rights
and remedies under or relating to guaranties, contracts
of suretyship, letters of credit and credit and other
insurance related to the Collateral, (b) rights of
stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid
vendor, lienor or secured party, (c) goods described in
invoices, documents, contracts or instruments with
respect to, or otherwise representing or evidencing,
Accounts, Credit Card Receivables, or other Collateral,
including, without limitation, returned, repossessed
and reclaimed goods, and (d) deposits by and property
of account debtors or other persons securing the
obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 All products and proceeds of the foregoing,
in any form, including, without limitation, insurance
proceeds and all claims against third parties for loss
or damage to or destruction of any or all of the
foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall
maintain one or more loan account(s) on its books in
which shall be recorded (a) all Loans, all Letter of
Credit Accommodations and all other Obligations and the
Collateral, (b) all payments made by or on behalf of
Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including,
without limitation, fees, charges, costs, expenses and
interest. All entries in the loan account(s) shall be
made in accordance with Lender's customary practices as
in effect from time to time.
6.2 Statements. Lender shall render to
Borrower each month a statement setting forth the
balance in the Borrower's loan account(s) maintained by
Lender for Borrower pursuant to the provisions of this
Agreement, including principal, interest, fees, costs
and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent
manifest errors or omissions, be considered correct and
deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent
that Lender receives a written notice from Borrower of
any specific exceptions of Borrower thereto within
sixty (60) days after the date such statement has been
mailed by Lender. Until such time as Lender shall have
rendered to Borrower a written statement as provided
above, the balance in Borrower's loan account(s) shall
be presumptive evidence of the amounts due and owing to
Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain,
at its expense, deposit account arrangements and
merchant payment arrangements with the banks set forth
on Schedule 6.3 and after prior written notice to
Lender, such other banks as Borrower may hereafter
select as are acceptable to Lender. The banks set
forth on Schedule 6.3 constitute all of the banks with
whom Borrower has deposit account arrangements and
merchant payment arrangements as of the date hereof and
identifies each of the deposit accounts at such banks
to a retail store location of Borrower or otherwise
describes the nature of the use of such deposit account
by Borrower.
(i) Borrower shall deposit all
proceeds from sales of Inventory in every form
(including, without limitation, cash, checks, credit
card sales drafts, credit card sales or charge slip or
receipts and other forms of daily store receipts, but
excluding GCRC Receivables, and the collections and
proceeds thereof in whatever form upon the sale of such
Accounts by Borrower to GCRC, but including any amounts
paid to Borrower by GCRC pursuant to the Receivables
Purchase Agreement, from each retail store location of
Borrower, and all other proceeds of Collateral, on each
business day into the deposit accounts of Borrower used
solely for such purpose and identified to each retail
store location as set forth on Schedule 6.3. Borrower
shall irrevocably authorize and direct in writing, in
form and substance satisfactory to Lender, each of the
banks into which proceeds from sales of Inventory from
each retail store location of Borrower and any and all
other proceeds of Collateral are at any time deposited
as provided above to send by wire transfer on a daily
basis all funds deposited in such account, and shall
irrevocably authorize and direct in writing its account
debtors, Credit Card Issuers and Credit Card Processors
to directly remit payments on its Accounts, Credit Card
Receivables and all other payments constituting
proceeds of Inventory to the Blocked Accounts described
in Section 6.3(a)(ii) below. Borrower shall
irrevocably direct and shall also cause GCRC to
irrevocably direct, in writing, Bankers Trust Company
to directly remit to the Blocked Account, by same day
wire transfer, any amounts payable to Borrower or GCRC
under the Pooling Agreement. Such authorizations and
directions shall not be rescinded, revoked or modified
without the prior written consent of Lender.
(ii) Borrower shall establish and
maintain, at its expense, pursuant to an agreement
described in the following sentence, a blocked account
with such bank or banks as are acceptable to Lender
(each a "Blocked Account" and collectively the "Blocked
Accounts"). Each bank at which a Blocked Account is
established shall enter into an agreement, in form and
substance satisfactory to Lender, providing (unless
otherwise agreed to by Lender) that all items received
or deposited in such Blocked Account are the Collateral
of Lender, that the depository bank has no lien upon,
or right to setoff against, the Blocked Accounts, the
items received for deposit therein, or the funds from
time to time on deposit therein, and that the
depository bank will wire, or otherwise transfer, in
immediately available funds, on a daily basis, all
funds received or deposited into such Blocked Account
to such bank account of Lender as Lender may from time
to time designate for such purpose (the "Payment
Account"). Borrower agrees that all amounts deposited
in the Blocked Account(s) or other funds received and
collected by Lender, whether as proceeds of Inventory,
the collection of Accounts or other Collateral or
otherwise shall be the Collateral of Lender.
(b) For purposes of calculating interest
on the Obligations, such payments or other funds
received will be applied (conditional upon final
collection) to the Obligations (i) immediately upon
receipt of immediately available funds by Lender in the
Payment Account if such funds are received by Lender
prior to 10 a.m. (Los Angeles time), or (ii) one (1)
business day following the date of receipt of
immediately available funds by Lender in the Payment
Account if such funds are received by Lender on or
after 10 a.m. (Los Angeles time), or (iii) three (3)
business days following the date of receipt of funds
that are not immediately available to Lender in the
Payment Account, as applicable. For purposes of
calculating the amount of the Revolving Loans available
to Borrower such payments will be applied (conditional
upon final collection) to the Obligations on the
business day of receipt by Lender in the Payment
Account, if such payments are received within
sufficient time (in accordance with Lender's usual and
customary practices as in effect from time to time) to
credit Borrower's loan account on such day, and if not,
then on the next business day.
(c) Borrower and all of its affiliates,
subsidiaries, partners, employees or agents shall,
acting as trustee for Lender, receive, as the property
of Lender, any cash, checks, credit card sales drafts,
credit card sales or charge slips or receipts, notes,
drafts and all forms of daily store receipts or any
other payment relating to and/or proceeds from sales of
Inventory or other Collateral which come into their
possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts, or remit the same or
cause the same to be remitted, in kind, to Lender,
[with the exception of Accounts arising out of
Borrower's private label credit card program, including
the collections and proceeds thereof in whatever form,
if and when such Accounts are sold by Borrower to GCRC,
but including any amounts paid to Borrower by GCRC
pursuant to the Receivables Purchase Agreement]. In no
event shall any such monies, checks, credit card sales
drafts, credit card sales or charge slips or receipts,
notes, drafts or other payments be commingled with
Borrower's own funds. Borrower agrees to reimburse
Lender on demand for any amounts owed or paid to any
bank at which a Blocked Account is established or any
other bank or person involved in the transfer of funds
to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person,
unless such payment or indemnification obligation of
Lender was a result of Lender's gross negligence or
wilful misconduct. The obligation of Borrower to
reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable
to the Payment Account as provided in Section 6.3 or
such other place as Lender may designate from time to
time. Lender may apply payments received or collected
from Borrower or for the account of Borrower
(including, without limitation, the monetary proceeds
of collections or of realization upon any Collateral)
to such of the Obligations, whether or not then due, in
such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs,
expenses and other charges provided for in this
Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower.
Borrower shall make all payments to Lender on the
Obligations free and clear of, and without deduction or
withholding for or on account of, any setoff,
counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any
payment of, or proceeds of Collateral applied to the
payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any
Person for any reason, then the Obligations intended to
be satisfied by such payment or proceeds shall be
reinstated and continue and this Agreement shall
continue in full force and effect as if such payment or
proceeds had not been received by Lender. Borrower
shall be liable to pay to Lender, and does hereby
indemnify and hold Lender harmless for the amount of
any payments or proceeds surrendered or returned. This
Section 6.4 shall remain effective notwithstanding any
contrary action which may be taken by Lender in
reliance upon such payment or proceeds. This Section
6.4 shall survive the payment of the Obligations and
the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is
authorized to make the Loans and provide Letter of
Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an
officer of Borrower or other authorized person or, at
the discretion of Lender, if such Loans are necessary
to satisfy any Obligations. All requests for Loans or
Letter of Credit Accommodations hereunder shall specify
the date on which the requested advance is to be made
or Letter of Credit Accommodations established (which
day shall be a business day) and the amount of the
requested Loan. Requests received after 10:30 a.m.
(Los Angeles time) on any day shall be deemed to have
been made as of the opening of business on the
immediately following business day. All Loans and
Letter of Credit Accommodations under this Agreement
shall be conclusively presumed to have been made to,
and at the request of and for the benefit of, Borrower
when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the
instructions of Borrower or in accordance with the
terms and conditions of this Agreement.
6.6 Use of Proceeds. Borrower shall use the
initial proceeds of the Loans provided by Lender to
Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter
furnished by Borrower to Lender on or about the date
hereof and (b) costs, expenses and fees in connection
with the preparation, negotiation, execution and
delivery of this Agreement and the other Financing
Agreements. All other Loans made or Letter of Credit
Accommodations provided by Lender to Borrower pursuant
to the provisions hereof shall be used by Borrower only
for general operating, working capital and other proper
corporate purposes of Borrower not otherwise prohibited
by the terms hereof. None of the proceeds will be
used, directly or indirectly, for the purpose of
purchasing or carrying any margin security or for the
purposes of reducing or retiring any indebtedness which
was originally incurred to purchase or carry any margin
security or for any other purpose which might cause any
of the Loans to be considered a "purpose credit" within
the meaning of Regulation G of the Board of Governors
of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Borrower shall
provide Lender with the following documents in a form
satisfactory to Lender: (a) on Tuesday of each week for
the immediately preceding week ending on the close of
business on Saturday of that week, or more frequently
as Lender may request, (i) a schedule of Inventory at
Borrower's retail stores and Distribution Center,
setting forth the aggregate cost and Retail Sales Price
of such Inventory (including markdowns from the
original sales price or ticketed sales price with
respect thereto); (ii) a report of the amount of
Eligible Domestic In-Transit Inventory, and such
additional details Lender may reasonably require, (iii)
a summary of Borrower's deposits into the Blocked
Account, and (iv) a summary of Borrower's sales of
Concession Inventory; (b) once each fiscal month, on or
before the twentieth (20th) Business Day of each such
fiscal month for the immediately preceding fiscal month
or more frequently as Lender may request, (i) a summary
of Borrower's sales of Concession Inventory, and
evidence, in such manner as Lender shall reasonably
request, demonstrating that Borrower has remitted the
net sales revenue to concessionaires for the
immediately preceding fiscal month and that no amounts
are due concessionaires for any period with the
exception of sales of Concession Inventory made during
the current fiscal month; (ii) the Monthly Servicing
Report prepared by Borrower, as Servicer, under the
Pooling Agreement, (iii) the aggregate amount of all
sales of Inventory for all Borrower's retail stores,
and (iv) a schedule of Inventory at Borrower's retail
stores and Distribution Center (by division) setting
forth the aggregate cost and Retail Sales Price of such
Inventory (including markdowns from the original sales
price or ticketed sales price with respect thereto),
(c) once each fiscal quarter, on or before the
twentieth (20th) Business Day of such fiscal quarter
for the immediately preceding fiscal quarter or more
frequently as Lender may request, (i) a merchandise
accounts payable trial balance and a summary of lease
payables and other payables, (ii) a schedule of
Accounts, Credit Card Receivables, GCRC Receivables,
and other indebtedness owed to Borrower, (iii) a report
of Inventory to be sold by each department (the Gross
Margin Report by department), (iv) a schedule of
Inventory located at the Distribution Facility and
Eligible Domestic In-Transit Inventory, and (v) a
certificate from an authorized officer of Borrower
representing that Borrower has made payment of sales
and use taxes during such quarter, or at Lender's
request, other evidence of such payment, and (d) such
other reports as to the Collateral and other property
which is security for the Obligations as Lender shall
reasonably request from time to time. If any of
Borrower's or any other Obligor's records or reports of
the Collateral or other property which is security for
the Obligations are prepared or maintained by an
accounting service, contractor, shipper or agent,
Borrower hereby irrevocably authorizes such service,
contractor, shipper or agent to deliver such records,
reports, and related documents to Lender and to follow
Lender's instructions with respect to further services
at any time that an Event of Default exists or has
occurred and is continuing.
7.2 Accounts Covenants.
(a) So long as no Event of Default exists
or has occurred and is continuing, Borrower shall
settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At
any time that an Event of Default exists or has
occurred and is continuing, Lender shall, at its
option, have the exclusive right to settle, adjust or
compromise any claim, offset, counterclaim or dispute
with account debtors or grant any credits, discounts or
allowances other than with respect to GCRC Receivables.
(b) In the event any account debtor
returns Inventory when an Event of Default exists or
has occurred and is continuing, Borrower shall, upon
Lender's request, (i) hold the returned Inventory in
trust for Lender, (ii) segregate all returned Inventory
from all of its other property, (iii) dispose of the
returned Inventory solely according to Lender's
instructions, and (iv) not issue any credits, discounts
or allowances with respect thereto without Lender's
prior written consent.
(c) With respect to each Account, Credit
Card Receivable and GCRC Receivable: (i) the amounts
shown on any invoice delivered to Lender or schedule
thereof delivered to Lender shall be true and complete,
(ii) no payments shall be made thereon except payments
made pursuant to the terms of this Agreement, (iii)
there shall be no setoffs, deductions, contras,
defenses, counterclaims or disputes existing or
asserted with respect thereto except as reported to
Lender in accordance with the terms of this Agreement
or as provided herein, (iv) none of the transactions
giving rise thereto will violate any applicable State
or Federal laws or regulations, all documentation will
be legally enforceable in accordance with its terms,
and (v) there shall be compliance with the provisions
of Section 4.1(f) hereof as to each Credit Card Issuer
obligated on any Credit Card Receivables.
(d) Lender shall have the right at any
time or times, in Lender's name or in the name of a
nominee of Lender, to verify the validity, amount or
any other matter relating to any Account, Credit Card
Receivable, or other Collateral or property which is
security for the Obligations, by mail, telephone
facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be
delivered to Lender, with appropriate endorsement and
assignment, with full recourse to Borrower, all chattel
paper and instruments which Borrower now owns or may at
any time acquire immediately upon Borrower's receipt
thereof, except as Lender may otherwise agree.
(f) Lender may, at any time or times that
an Event of Default exists or has occurred and is
continuing, (i) notify any or all account debtors that
the Accounts, Credit Card Receivables and other
obligations included in the Collateral have been
assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all
accounts debtors to make payment of Accounts directly
to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return
of merchandise or otherwise, and upon any terms or
conditions, any and all Accounts, Credit Card
Receivables or other obligations included in the
Collateral and thereby discharge or release the account
debtor or any other party or parties in any way liable
for payment thereof without affecting any of the
Obligations, (iii) demand, collect or enforce payment
of any Accounts, Credit Card Receivables or such other
obligations, but without any duty to do so, and Lender
shall not be liable for its failure to collect or
enforce the payment thereof nor for the negligence of
its agents or attorneys with respect thereto and (iv)
take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any
time that an Event of Default exists or has occurred
and is continuing, at Lender's request, all invoices
and statements sent to any account debtor shall state
that the Accounts, Credit Card Receivables and such
other obligations have been assigned to Lender and are
payable directly and only to Lender and Borrower shall
deliver to Lender such originals of documents
evidencing the sale and delivery of goods or the
performance of services giving rise to any Accounts as
Lender may require.
7.3 Inventory Covenants. With respect to the
Inventory: (a) Borrower shall at all times maintain
inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and
describing the kind, type, quality and quantity of
Inventory, Borrower's cost therefor, the Retail Sales
Price thereof (including markdowns with respect
thereto) and daily withdrawals therefrom and additions
thereto; (b) Borrower shall conduct a complete physical
count of the Inventory at a minimum of once every
twelve (12) months but at any time as Lender may
request upon the occurrence and during the continuance
an Event of Default, and promptly following such
physical count shall supply Lender with a report in the
form and with such specificity as may be reasonably
satisfactory to Lender concerning such physical count;
(c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein in excess of
Two Hundred Fifty Thousand Dollars ($250,000) during
any twelve month period, without the prior written
consent of Lender, except for sales of Inventory in the
ordinary course of Borrower's business and except to
move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon
Lender's request, Borrower shall, at its expense, no
more than once in any twelve (12) month period, but at
any time or times as Lender may request upon the
occurrence and during the continuance of an Event of
Default, deliver or cause to be delivered to Lender
written reports or appraisals as to the Inventory in
form, scope and methodology acceptable to Lender by
Gordon Brothers Partners, Inc. or by any other
appraiser acceptable to Lender, addressed to Lender or
upon which Lender is expressly permitted to rely (with
the understanding that Lender may revise the definition
of "Eligible Inventory" hereunder or establish
Availability Reserves as Lender may deem advisable in
its sole discretion based upon the results of such
updated appraisals); (e) Borrower shall produce, use,
store and maintain the Inventory, with all reasonable
care and caution and in accordance with applicable
standards of any insurance and in conformity with
applicable laws (including, but not limited to, the
requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders
related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating
to the production, use, sale or other disposition of
the Inventory; (g) Borrower shall not sell Inventory to
any customer on approval, or any other basis which
entitles the customer to return or may obligate
Borrower to repurchase such Inventory with the
exception of Inventory sold in the ordinary course of
Borrower's business subject to Borrower's normal and
customary return policy; (h) Borrower shall keep the
Inventory in good and marketable condition; and (i)
Borrower shall not, without prior written notice to
Lender, acquire or accept any Inventory on consignment
or approval except as set forth on Schedule 7.3(i)
hereto.
7.4 Equipment Covenants. With respect to the
Equipment: (a) upon Lender's request, Borrower shall,
at its expense, at any time or times as Lender may
request on or after an Event of Default, deliver or
cause to be delivered to Lender written reports as to
the Equipment in form, scope and methodology acceptable
to Lender; (b) Borrower shall keep the Equipment in
good order, repair, running and marketable condition
(ordinary wear and tear excepted); (c) Borrower shall
use the Equipment with all reasonable care and caution
and in accordance with applicable standards of any
insurance and in conformity with all applicable laws;
(d) the Equipment is and shall be used in Borrower's
business and not for personal, family, household or
farming use; (e) Borrower shall not remove any
Equipment from the locations set forth or permitted
herein, except to the extent necessary to have any
Equipment repaired or maintained in the ordinary course
of the business of Borrower or to move Equipment
directly from one such location set forth or permitted
herein to another such location and except for the
movement of motor vehicles used by or for the benefit
of Borrower in the ordinary course of business; (f) the
Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or
become a part of or affixed to real property; and (g)
Borrower assumes all responsibility and liability
arising from the use of the Equipment.
7.5 Power of Attorney. Borrower hereby
irrevocably designates and appoints Lender (and all
persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in
Borrower's or Lender's name, to: (a) at any time an
Event of Default exists (i) demand payment on Accounts
or other proceeds of Inventory or other Collateral,
(ii) enforce payment of Accounts, Credit Card
Receivables or other obligations included in the
Collateral by legal proceedings or otherwise, (iii)
exercise all of Borrower's rights and remedies to
collect any Account, Credit Card Receivables or other
proceeds of Inventory or other Collateral, (iv) sell or
assign any Account upon such terms, for such amount and
at such time or times as the Lender deems advisable,
(v) settle, adjust, compromise, extend or renew an
Account, (vi) discharge and release any Account, Credit
Card Receivables or other obligations included in the
Collateral, (vii) prepare, file and sign Borrower's
name on any proof of claim in bankruptcy or other
similar document against an account debtor, (viii)
notify the post office authorities to change the
address for delivery of Borrower's mail to an address
designated by Lender, and open and dispose of all mail
addressed to Borrower, and (ix) do all acts and things
which are necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement and
the other Financing Agreements and (b) at any time,
subject to the terms of the agreement(s) relating to
the Blocked Account(s), to (i) take control in any
manner of any item of payment or proceeds thereof, (ii)
have access to any lockbox or postal box into which
Borrower's mail is deposited, (iii) endorse Borrower's
name upon any items of payment or proceeds thereof and
deposit the same in the Lender's account for
application to the Obligations, (iv) endorse Borrower's
name upon any chattel paper, document, instrument,
invoice, or similar document or agreement relating to
any Account or Credit Card Receivables or any goods
pertaining thereto or any other Collateral, (v) sign
Borrower's name on any verification of Accounts or
Credit Card Receivables and notices thereof to account
debtors and (vi) execute in Borrower's name and file
any UCC financing statements or amendments thereto.
Borrower hereby releases Lender and its officers,
employees and designees from any liabilities arising
from any act or acts under this power of attorney and
in furtherance thereof, whether of omission or
commission, except as a result of Lender's own gross
negligence or wilful misconduct as determined pursuant
to a final non-appealable order of a court of competent
jurisdiction.
7.6 Right to Cure. Lender may, at its option,
(a) cure any default by Borrower under any agreement
with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes,
liens, security interests or other encumbrances at any
time levied on or existing with respect to the
Collateral and (c) pay any amount, incur any expense or
perform any act which, in Lender's reasonable judgment,
is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of
Lender with respect thereto. Lender may add any
amounts so expended to the Obligations and charge
Borrower's account therefor, such amounts to be
repayable by Borrower on demand. Lender shall be under
no obligation to effect such cure, payment or bonding
and shall not, by doing so, be deemed to have assumed
any obligation or liability of Borrower. Any payment
made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an
Event of Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as
requested by Lender, at the cost and expense of
Borrower, (a) Lender or its designee shall have access
to Borrower's premises during normal business hours and
after notice to Borrower, or at any time and without
notice to Borrower if an Event of Default exists or has
occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and
all of Borrower's books and records, including, without
limitation, the Records, and (b) Borrower shall
promptly furnish to Lender such copies of such books
and records or extracts therefrom as Lender may
request, and (c) use during normal business hours such
of Borrower's personnel, equipment, supplies and
premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has
occurred and is continuing for the collection of
Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender
the following (which shall survive the execution and
delivery of this Agreement), the truth and accuracy of
which are a continuing condition of the making of Loans
and the providing of Letter of Credit Accommodations by
Lender to Borrower:
8.1 Corporate Existence, Power and Authority;
Subsidiaries. Borrower is a corporation duly organized
and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign
corporation and in good standing in all states or other
jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets
makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would
not have a material adverse effect on Borrower's
financial condition, results of operation or business
or the rights of Lender in or to any of the Collateral.
The execution, delivery and performance of this
Agreement, the other Financing Agreements and the
transactions contemplated hereunder and thereunder are
all within Borrower's corporate powers, have been duly
authorized and are not in contravention of law or the
terms of Borrower's certificate of incorporation, by-laws,
or other organizational documentation, or any
indenture, agreement or undertaking to which Borrower
is a party or by which Borrower or its property are
bound. This Agreement and the other Financing
Agreements constitute legal, valid and binding
obligations of Borrower enforceable in accordance with
their respective terms. Borrower does not have any
subsidiaries except as set forth on the Information
Certificate.
8.2 Financial Statements; No Material Adverse
Change. All financial statements relating to Borrower
which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance
with GAAP and fairly present the financial condition
and the results of operations of Borrower as at the
dates and for the periods set forth therein, except
that unaudited financial statements do not have all
GAAP required footnotes and are subject to accruals and
other year-end adjustments. Except as disclosed in any
interim financial statements furnished by Borrower to
Lender prior to the date of this Agreement, there has
been no material adverse change in the assets, liabi-
lities, properties and condition, financial or
otherwise, of Borrower, since the date of the most
recent audited financial statements furnished by
Borrower to Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral
Locations. The chief executive office of Borrower and
Borrower's Records concerning Accounts are located only
at the address set forth below and its only other
places of business and the only other locations of
Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of
Borrower to establish new locations in accordance with
Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are
not owned by Borrower and sets forth the owners and/or
operators thereof.
8.4 Priority of Liens; Title to Properties.
The security interests and liens granted to Lender
under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and
security interests in and upon the Collateral subject
only to the liens indicated on Schedule 8.4 hereto and
the other liens permitted under Section 9.8 hereof.
Borrower has good and marketable title to all of its
properties and assets subject to no liens, mortgages,
pledges, security interests, encumbrances or charges of
any kind, except those granted to Lender and such
others as are specifically listed on Schedule 8.4
hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused
to be filed, in a timely manner all tax returns,
reports and declarations which are required to be filed
by it (without requests for extension except as
previously disclosed in writing to Lender). All
information in such tax returns, reports and
declarations is complete and accurate in all material
respects. Borrower has paid or caused to be paid all
taxes due and payable or claimed due and payable in any
assessment received by it, except taxes the validity of
which are being contested in good faith by appropriate
proceedings diligently pursued and available to
Borrower and with respect to which adequate reserves
have been set aside on its books. Adequate provision
has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes
whether or not yet due and payable and whether or not
disputed.
8.6 Litigation. Except as set forth on the
Information Certificate, there is no present
investigation by any governmental agency pending, or to
the best of Borrower's knowledge threatened, against or
affecting Borrower, its assets or business and there is
no action, suit, proceeding or claim by any Person
pending, or to the best of Borrower's knowledge
threatened, against Borrower or its assets or goodwill,
or against or affecting any transactions contemplated
by this Agreement, which if adversely determined
against Borrower would result in any material adverse
change in the assets, business or prospects of Borrower
or would impair the ability of Borrower to perform its
obligations hereunder or under any of the other
Financing Agreements to which it is a party or of
Lender to enforce any Obligations or realize upon any
Collateral.
8.7 Compliance with Other Agreements and
Applicable Laws. Borrower is not in default in any
material respect under, or in violation in any material
respect of any of the terms of, any agreement,
contract, instrument, lease or other commitment to
which it is a party or by which it or any of its assets
are bound and Borrower is in compliance in all material
respects with all applicable provisions of laws, rules,
regulations, licenses, permits, approvals and orders of
any foreign, Federal, State or local governmental
authority.
8.8 Environmental Compliance.
(a) Except as set forth on Schedule 8.8
hereto, Borrower has not generated, used, stored,
treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its
premises (whether or not owned by it) in any manner
which at any time violates any applicable Environmental
Law or any license, permit, certificate, approval or
similar authorization thereunder and the operations of
Borrower complies in all material respects with all
Environmental Laws and all licenses, permits,
certificates, approvals and similar authorizations
thereunder.
(b) Except as set forth on Schedule 8.8
hereto, there has been no investigation, proceeding,
complaint, order, directive, claim, citation or notice
by any governmental authority or any other person nor
is any pending or to the best of Borrower's knowledge
threatened, with respect to any non-compliance with or
violation of the requirements of any Environmental Law
by Borrower or the release, spill or discharge,
threatened or actual, of any Hazardous Material or the
generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any
Hazardous Materials or any other environmental, health
or safety matter, which affects Borrower or its
business, operations or assets or any properties at
which Borrower has transported, stored or disposed of
any Hazardous Materials.
(c) Borrower has no material liability
(contingent or otherwise) in connection with a release,
spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage,
treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits,
certificates, approvals or similar authorizations
required to be obtained or filed in connection with the
operations of Borrower under any Environmental Law and
all of such licenses, permits, certificates, approvals
or similar authorizations are valid and in full force
and effect.
8.9 Employee Benefits.
(a) Borrower has not engaged in any
transaction in connection with which Borrower or any of
its ERISA Affiliates could be subject to either a civil
penalty assessed pursuant to Section 502(i) of ERISA or
a tax imposed by Section 4975 of the Code, including
any accumulated funding deficiency described in Section
8.9(c) hereof and any deficiency with respect to vested
accrued benefits described in Section 8.9(d) hereof.
(b) No liability to the Pension Benefit
Guaranty Corporation has been or is expected by
Borrower to be incurred with respect to any employee
pension benefit plan of Borrower or any of its ERISA
Affiliates. There has been no reportable event (within
the meaning of Section 4043(b) of ERISA) or any other
event or condition with respect to any employee pension
benefit plan of Borrower or any of its ERISA Affiliates
which presents a risk of termination of any such plan
by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all
amounts which Borrower or any of its ERISA Affiliates
is required under Section 302 of ERISA and Section 412
of the Code to have paid under the terms of each
employee pension benefit plan as contributions to such
plan as of the last day of the most recent fiscal year
of such plan ended prior to the date hereof, and no
accumulated funding deficiency (as defined in Section
302 of ERISA and Section 412 of the Code), whether or
not waived, exists with respect to any employee pension
benefit plan, including any penalty or tax described in
Section 8.9(a) hereof and any deficiency with respect
to vested accrued benefits described in Section 8.9(d)
hereof.
(d) The current value of all vested
accrued benefits under all employee pension benefit
plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the
assets of such plans allocable to such vested accrued
benefits, including any penalty or tax described in
Section 8.9(a) hereof and any accumulated funding
deficiency described in Section 8.9(c) hereof. The
terms "current value" and "accrued benefit" have the
meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA
Affiliates is or has ever been obligated to contribute
to any "multiemployer plan" (as such term is defined in
Section 4001(a)(3) of ERISA) that is subject to Title
IV of ERISA.
8.10 Accuracy and Completeness of Information.
All information furnished by or on behalf of Borrower
in writing to Lender in connection with this Agreement
or any of the other Financing Agreements or any
transaction contemplated hereby or thereby, including,
without limitation, all information on the Information
Certificate is true and correct in all material
respects on the date as of which such information is
dated or certified and does not omit any material fact
necessary in order to make such information not
misleading. No event or circumstance has occurred
which has had or could reasonably be expected to have a
material adverse affect on the business, assets or
prospects of Borrower, which has not been fully and
accurately disclosed to Lender in writing.
8.11 Survival of Warranties; Cumulative. All
representations and warranties contained in this
Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this
Agreement and shall be deemed to have been made again
to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be
conclusively presumed to have been relied on by Lender
regardless of any investigation made or information
possessed by Lender. The representations and
warranties set forth herein shall be cumulative and in
addition to any other representations or warranties
which Borrower shall now or hereafter give, or cause to
be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall
at all times preserve, renew and keep in full force and
effect its corporate existence and rights and
franchises with respect thereto and maintain in full
force and effect all permits, licenses, trademarks,
trade names, approvals, authorizations, leases and
contracts necessary to carry on the business as
presently or proposed to be conducted. Borrower shall
give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice
shall set forth the new name and Borrower shall deliver
to Lender a copy of the amendment to the Certificate of
Incorporation of Borrower providing for the name change
certified by the Secretary of State of the jurisdiction
of incorporation of Borrower as soon as it is
available.
9.2 New Collateral Locations. Borrower may
open any new location within the continental United
States provided Borrower (a) gives Lender thirty (30)
days prior written notice of the intended opening of
any such new location, and (b) executes and delivers,
or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may
deem reasonably necessary or desirable to protect its
interests in the Collateral at such location,
including, without limitation, UCC financing statements
and, if Borrower leases such new location, provides a
favorable landlord waiver or subordination, or, in the
alternative, Lender may apply an Availability Reserve
in an amount equal to two (2) months gross rent in a
manner consistent with the Availability Reserve
established to cover tent as defined in Section 1.5
hereof.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply
in all material respects with all laws, rules,
regulations, licenses, permits, approvals and orders
applicable to it and duly observe all requirements of
any Federal, State or local governmental authority,
including, without limitation, the Employee Retirement
Security Act of 1974, as amended, the Occupational
Safety and Hazard Act of 1970, as amended, the Fair
Labor Standards Act of 1938, as amended, and all
statutes, rules, regulations, orders, permits and
stipulations relating to environmental pollution and
employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Borrower shall take prompt and
appropriate action to respond to any non-compliance
with any of the Environmental Laws and shall report to
Lender on such response.
(c) Borrower shall give both oral and
written notice to Lender immediately upon Borrower's
receipt of any notice of, or Borrower's otherwise
obtaining knowledge of, (i) the occurrence of any event
involving the release, spill or discharge, threatened
or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive,
claims, citation or notice with respect to: (A) any
non-compliance with or violation of any Environmental
Law by Borrower or (B) the release, spill or discharge,
threatened or actual, of any Hazardous Material or (C)
the generation, use, storage, treatment,
transportation, manufacture, handling, production or
disposal of any Hazardous Materials or (D) any other
environmental, health or safety matter, which affects
Borrower or its business, operations or assets or any
properties at which Borrower transported, stored or
disposed of any Hazardous Materials.
(d) Borrower shall indemnify and hold
harmless Lender, its directors, officers, employees,
agents, invitees, representatives, successors and
assigns, from and against any and all losses, claims,
damages, liabilities, costs, and expenses (including
attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use,
generation, manufacture, reproduction, storage,
release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including, without
limitation, the costs of any required or necessary
repair, cleanup or other remedial work with respect to
any property of Borrower and the preparation and
implementation of any closure, remedial or other
required plans. All representations, warranties,
covenants and indemnifications in this Section 9.3
shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
9.4 Payment of Taxes and Claims. Borrower
shall duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against
it or its properties or assets, except for taxes the
validity of which are being contested in good faith by
appropriate proceedings diligently pursued and
available to Borrower and with respect to which
adequate reserves have been set aside on its books.
Borrower shall be liable for any tax or penalties
imposed on Lender as a result of the financing
arrangements provided for herein and Borrower agrees to
indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount
thereof, and until paid by Borrower such amount shall
be added and deemed part of the Loans, provided, that,
nothing contained herein shall be construed to require
Borrower to pay any income or franchise taxes
attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations
and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times,
maintain with financially sound and reputable insurers
insurance with respect to the Collateral against loss
or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by
corporations of established reputation engaged in the
same or similar businesses and similarly situated.
Said policies of insurance shall be satisfactory to
Lender as to form, amount and insurer. Borrower shall
furnish certificates, policies or endorsements to
Lender as Lender shall require as proof of such
insurance, and, if Borrower fails to do so, Lender is
authorized, but not required, to obtain such insurance
at the expense of Borrower. All policies shall provide
for at least thirty (30) days prior written notice to
Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in
obtaining, and at any time an Event of Default exists
or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall
cause Lender to be named as a loss payee and an
additional insured (but without any liability for any
premiums) under such insurance policies and Borrower
shall obtain non-contributory lender's loss payable
endorsements to all insurance policies in form and
substance satisfactory to Lender. Such lender's loss
payable endorsements shall specify that the proceeds of
such insurance shall be payable to Lender as its
interests may appear and further specify that Lender
shall be paid regardless of any act or omission by
Borrower or any of its affiliates. At its option,
Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or
replacement of Collateral and/or to payment of the
Obligations, whether or not then due, in any order and
in such manner as Lender may determine or hold such
proceeds as cash collateral for the Obligations.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and
records in which true and complete entries shall be
made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its
subsidiaries (if any) in accordance with GAAP and
Borrower shall furnish or cause to be furnished to
Lender: (i) within twenty (20) days after the end of
each fiscal month, monthly unaudited consolidated
financial statements, (including a balance sheet,
statement of income or loss and statement of
stockholders' equity), all in reasonable detail, fairly
presenting the financial position and the results of
the operations of Borrower and its subsidiaries as of
and through such fiscal month, (ii) within twenty (20)
days after the end of each fiscal quarter, a store-by-store
profitability report for each of Borrower's
retail stores, (iii) within ninety (90) days after the
end of each fiscal year, audited consolidated financial
statements for the Borrower and within one hundred and
twenty (120) days after the end of each fiscal year,
audited financial statements for GCRC, (including in
each case balance sheets, statements of income and
loss, statements of cash flow and statements of
stockholders' equity), and the accompanying notes
thereto, all in reasonable detail, fairly presenting
the financial position and the results of operations of
Borrower and its subsidiaries as of the end of and for
such fiscal year, together with the opinion of
independent certified public accountants, which
accountants shall be an independent accounting firm
selected by Borrower and reasonably acceptable to
Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly
the results of operations and financial condition of
Borrower and its subsidiaries as of the end of and for
the fiscal year then ended.
(b) Borrower shall promptly notify Lender
in writing of the details of (i) any loss, damage,
investigation, action, suit, proceeding or claim
relating to the Collateral or any other property which
is security for the Obligations or which would result
in any material adverse change in Borrower's business,
properties, assets, goodwill or condition, financial or
otherwise and (ii) the occurrence of any Event of
Default or event which, with the passage of time or
giving of notice or both, would constitute an Event of
Default.
(c) Borrower shall promptly after the
sending or filing thereof furnish or cause to be
furnished to Lender copies of all financial reports
which Borrower sends to its stockholders generally and
copies of all reports and registration statements which
Borrower files with the Securities and Exchange
Commission, any national securities exchange or the
National Association of Securities Dealers, Inc.
(d) Borrower shall furnish or cause to be
furnished to Lender such budgets, forecasts,
projections and other information in respect of the
Collateral and the business of Borrower, as Lender may,
from time to time, reasonably request. Lender is
hereby authorized to deliver a copy of any financial
statement or any other information relating to the
business of Borrower to any court or other government
agency or to any participant or assignee or prospective
participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to
deliver to Lender, at Borrower's expense, copies of the
financial statements of Borrower and any reports or
management letters prepared by such accountants or
auditors on behalf of Borrower and to disclose to
Lender such information as they may have regarding the
business of Borrower. Any documents, schedules,
invoices or other papers delivered to Lender may be
destroyed or otherwise disposed of by Lender one (1)
year after the same are delivered to Lender, except as
otherwise designated by Borrower to Lender in writing.
(e) Borrower shall promptly, after
sending such reports to Bankers Trust Company, furnish
or cause to be furnished to Lender copies of the
Monthly Servicer's Certificate and Distributions Date
Sheet, the Annual Report and such other monthly,
quarterly or annual reports provided to Bankers Trust
Company by the Borrower as Servicer under the Pooling
Agreements; and, if requested by Lender, Borrower shall
promptly provide Lender copies of the Daily Servicer's
Report prepared by it pursuant to the Pooling
Agreement.
9.7 Sale of Assets, Consolidation, Merger,
Dissolution, Etc. Borrower shall not, directly or
indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge
into or with or consolidate with it, or (b) sell,
assign, lease, transfer, abandon or otherwise dispose
of any indebtedness to any other Person or any of its
assets to any other Person (except for (i) sales of
Inventory in the ordinary course of business, (ii) the
sale or other disposition of Equipment in the event of
a store closure, (iii) the sale of Accounts arising out
of Borrower's private label credit card program to GCRC
in accordance with the procedures set forth in the
documentation evidencing the Securitization Facility,
and (iv) the disposition of worn-out or obsolete
Equipment or Equipment no longer used in the business
of Borrower so long as (A) if an Event of Default
exists or has occurred and is continuing, any net
proceeds are paid to Lender and (B) such sales do not
involve Equipment having an aggregate fair market value
in excess of Two Hundred Fifty Thousand Dollars
($250,000) for all such Equipment disposed of in any
fiscal year of Borrower), or (c) form or acquire any
subsidiaries, or (d) wind up, liquidate or dissolve or
(e) agree to do any of the foregoing.
9.8 Encumbrances. Borrower shall not create,
incur, assume or suffer to exist any security interest,
mortgage, pledge, lien, charge or other encumbrance of
any nature whatsoever on any of its assets or
properties, including, without limitation, the
Collateral, except: (a) liens and security interests
of Lender; (b) liens securing the payment of taxes,
either not yet overdue or the validity of which are
being contested in good faith by appropriate
proceedings diligently pursued and available to
Borrower and with respect to which adequate reserves
have been set aside on its books; (c) security deposits
in the ordinary course of business; (d) non-consensual
statutory liens (other than liens securing the payment
of taxes) arising in the ordinary course of Borrower's
business to the extent: (i) such liens secure
indebtedness which is not overdue or (ii) such liens
secure indebtedness relating to claims or liabilities
which are fully insured and being defended at the sole
cost and expense and at the sole risk of the insurer
(subject to applicable deductibles) or being contested
in good faith by appropriate proceedings diligently
pursued and available to Borrower, in each case prior
to the commencement of foreclosure or other similar
proceedings and with respect to which adequate reserves
have been set aside on its books; (e) liens in favor of
Credit Card Processors with respect to Credit Card
Receivables processed by them; (f) zoning restrictions,
easements, licenses, covenants and other restrictions
affecting the use of real property which do not
interfere in any material respect with the use of such
real property or ordinary conduct of the business of
Borrower as presently conducted thereon or materially
impair the value of the real property which may be
subject thereto; (g) purchase money security interests
in Equipment (including operating and capital leases)
and purchase money mortgages on real estate so long as
such security interests and mortgages do not apply to
any property of Borrower other than the Equipment or
real estate so acquired, and the indebtedness secured
thereby does not exceed the cost of the Equipment or
real estate so acquired, as the case may be; (h) the
security interests and liens set forth on Schedule 8.4
hereto; and (i) liens granted pursuant to the
Securitization Facility.
9.9 Indebtedness. Borrower shall not incur,
create, assume, become or be liable in any manner with
respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in
the ordinary course of business not yet due and
payable, or with respect to which Borrower is
contesting in good faith the amount or validity thereof
by appropriate proceedings diligently pursued and
available to Borrower and with respect to which
adequate reserves have been set aside on its books;
(c) with respect to the Securitization
Facility;
(d) costs and expenses of opening new stores in
compliance with Section 9.2; and
(e) obligations or indebtedness set forth on
the Information Certificate; provided, that, (i)
Borrower may only make regularly scheduled payments of
principal and interest in respect of such indebtedness
in accordance with the terms of the agreement or
instrument evidencing or giving rise to such
indebtedness as in effect on the date hereof, (ii)
Borrower shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such indebtedness
or any agreement, document or instrument related
thereto as in effect on the date hereof, or (B) except
as otherwise permitted under this Agreement, redeem,
retire, defease, purchase or otherwise acquire such
indebtedness, or set aside or otherwise deposit or
invest any sums for such purpose, and (iii) Borrower
shall furnish to Lender all notices or demands in
connection with such indebtedness either received by
Borrower or on its behalf, promptly after the receipt
thereof, or sent by Borrower or on its behalf,
concurrently with the sending thereof, as the case may
be.
9.10 Revolving Loans, Investments, Guarantees,
Etc. Borrower shall not, directly or indirectly, make
any loans or advance money or property to any person,
or invest in (by capital contribution, dividend or
otherwise) or purchase or repurchase the stock or
indebtedness or all or a substantial part of the assets
or property of any person, or guarantee, assume,
endorse, or otherwise become responsible for (directly
or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do
any of the foregoing in an amount, whether contingent
or non-contingent, in excess of One Hundred Fifty
Thousand Dollars ($150,000) during any twelve month
period, except: (a) the endorsement of instruments for
collection or deposit in the ordinary course of
business; (b) investments in: (i) short-term direct
obligations of the United States Government, (ii)
negotiable certificates of deposit issued by any bank
satisfactory to Lender, payable to the order of the
Borrower or to bearer and delivered to Lender, and
(iii) commercial paper rated A1 or P1; provided, that,
as to any of the foregoing, unless waived in writing by
Lender, Borrower shall take such actions as are deemed
necessary by Lender to perfect the security interest of
Lender in such investments; and (c) the guarantees set
forth in the Information Certificate.
9.11 Dividends and Redemptions. Borrower shall
not, without the prior written consent of Lender,
directly or indirectly, declare or pay any dividends on
account of any shares of any class of capital stock of
Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose,
or redeem, retire, defease, purchase or otherwise
acquire any shares of any class of capital stock (or
set aside or otherwise deposit or invest any sums for
such purpose) for any consideration other than common
stock or apply or set apart any sum, or make any other
distribution (by reduction of capital or otherwise) in
respect of any such shares or agree to do any of the
foregoing.
9.12 Transactions with Affiliates. Borrower
shall not enter into any transaction for the purchase,
sale or exchange of property or the rendering of any
service to or by any affiliate, except in the ordinary
course of and pursuant to the reasonable requirements
of Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than Borrower
would obtain in a comparable arm's length transaction
with an unaffiliated person.
9.13 Compliance with ERISA. Borrower shall not
with respect to any "employee pension benefit plans"
maintained by Borrower or any of its ERISA Affiliates:
(a) (i) terminate any of such employee
pension benefit plans so as to incur any liability to
the Pension Benefit Guaranty Corporation established
pursuant to ERISA, (ii) allow or suffer to exist any
prohibited transaction involving any of such employee
pension benefit plans or any trust created thereunder
which would subject Borrower or such ERISA Affiliate to
a tax or penalty or other liability on prohibited
transactions imposed under Section 4975 of the Code or
ERISA, (iii) fail to pay to any such employee pension
benefit plan any contribution which it is obligated to
pay under Section 302 of ERISA, Section 412 of the Code
or the terms of such plan, (iv) allow or suffer to
exist any accumulated funding deficiency, whether or
not waived, with respect to any such employee pension
benefit plan, (v) allow or suffer to exist any
occurrence of a reportable event or any other event or
condition which presents a material risk of termination
by the Pension Benefit Guaranty Corporation of any such
employee pension benefit plan that is a single employer
plan, which termination could result in any liability
to the Pension Benefit Guaranty Corporation or (vi)
incur any withdrawal liability with respect to any
multiemployer pension plan.
(b) As used in this Section 9.13, the
term "employee pension benefit plans," "employee
benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings
assigned to them in ERISA, and the term "prohibited
transaction" shall have the meaning assigned to it in
Section 4975 of the Code and ERISA.
9.14 Adjusted Net Worth. Borrower shall, at all
times, maintain Adjusted Worth of not less than Seventy
Million Dollars ($70,000,000); provided, however,
Lender will only test for Borrower's compliance with
this financial covenant on a monthly basis and then
only in the event that Borrower's Excess Availability
is less than Five Million Dollars ($5,000,000).
9.15 Costs and Expenses. Borrower shall pay to
Lender, and, to the extent covered, in a manner
consistent with Lender's proposed letter to Borrower of
October 31, 1996, on demand all costs, expenses, filing
fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery,
recording, administration, collection, liquidation,
enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other
Financing Agreements and all other documents related
hereto or thereto, including any amendments,
supplements or consents which may hereafter be
contemplated (whether or not executed) or entered into
in respect hereof and thereof, including, but not
limited to: (a) all costs and expenses of filing or
recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes,
intangibles taxes and mortgage recording taxes and
fees, if applicable); (b) costs and expenses and fees
for title insurance and other insurance premiums,
environmental audits, surveys, assessments, engineering
reports and inspections, appraisal fees and search
fees; (c) costs and expenses of remitting loan
proceeds, collecting checks and other items of payment,
and establishing and maintaining the Blocked Accounts,
together with Lender's customary charges and fees with
respect thereto; (d) charges, fees or expenses charged
by any bank or issuer in connection with the Letter of
Credit Accommodations; (e) costs and expenses of
preserving and protecting the Collateral; (f) costs and
expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security
interests and liens of Lender, selling or otherwise
realizing upon the Collateral, and otherwise enforcing
the provisions of this Agreement and the other
Financing Agreements or defending any claims made or
threatened against Lender arising out of the
transactions contemplated hereby and thereby
(including, without limitation, preparations for and
consultations concerning any such matters); (g) all
out-of-pocket expenses and costs incurred by Lender's
examiners in the conduct of their periodic field
examinations of the Collateral and Borrower's
operations; and (h) the fees and disbursements of
counsel (including legal assistants) to Lender in
connection with any of the foregoing.
9.16 Securitization Facility. So long as there
are any Loans or Letter of Credit Accommodations
outstanding, Borrower, as the sole shareholder of GCRC
shall cause GCRC, subject to customary corporate
procedures, to cause GCRC to pay (including the
purchase of receivables) or distribute to Borrower, by
payment directly to the Blocked Account, all amounts
available (after application of all reserves required
or anticipated under the Securitization Facility) for
the purchase of Receivables under and as defined in the
Receivables Purchase Agreement, including amounts
available due to the collection of the Receivables and
GCRC's utilization of the maximum financing under the
Securitization Facility.
9.17 Amendment of Securitization Facility.
During the term of this Agreement, and thereafter for
so long as there are any Obligations to Lender
outstanding, Borrower shall not unless otherwise
consented to by Lender in writing, amend or consent to
any amendment of or modification to any of the terms of
the Securitization Facility or the agreements related
thereto.
9.18 Renewal of Securitization Facility. Within
ninety (90) days prior to any expiration of the
Securitization Facility or prior to any repayment of
principal under the Fixed Base Certificates, Borrower
shall provide Lender with satisfactory evidence that
either (i) the Securitization Facility has been renewed
or (ii) GCRC has obtained a replacement facility on
terms that are no less favorable to GCRC or Lender and
on terms otherwise acceptable to Lender, with a
replacement lender acceptable to Lender, and subject to
intercreditor arrangements acceptable to Lender.
9.19 No Defaults. No default, event of default
or Early Amortization Event (as defined in the Pooling
Agreement) has occurred under or with respect to the
Securitization Facility or any of the Borrower's or
GCRC's agreements related thereto.
9.20 Use of Private Label Card. At Lender's
direction, Borrower shall cease making any sales of
merchandise to its customers that purchase such
merchandise with Borrower's private label credit
card(s) (a) upon the occurrence of an Event of Default
that is continuing or (b) if the percentage of the face
amount of GCRC Receivables which is advanced or paid to
Borrower by GCRC pursuant to the Receivables Purchase
Agreement is at any time less than eighty-four percent
(84%).
9.21 GCRC Receivables Collections. Unless
otherwise provided in the Pooling Agreement or the
Receivables Purchase Agreement, Borrower shall cause
GCRC to promptly remit to Borrower all amounts, however
denominated, received by GCRC from the trustee for the
Gottschalks Credit Card Master Trust.
9.22 Purchase Price for GCRC Receivables.
Borrower shall cause GCRC to purchase GCRC Receivables
in accordance with the terms of the Receivables
Purchase Agreement, including, without limitation,
Section 2.01(e) thereof. To the extent that the
consideration for the purchase of GCRC Receivables
consists of a capital contribution of the type
described in Section 2.01(e)(ii) of the Receivables
Purchase Agreement, Borrower shall, as soon as
practicable thereafter, cause GCRC to distribute cash
in redemption of the capital contribution to Borrower
as shareholder of GCRC in the maximum amount permitted
by law.
9.23 Further Assurances. At the request of
Lender at any time and from time to time, Borrower
shall, at its expense, duly execute and deliver, or
cause to be duly executed and delivered, such further
agreements, documents and instruments, and do or cause
to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the
security interests and the priority thereof in the
Collateral and to otherwise effectuate the provisions
or purposes of this Agreement or any of the other
Financing Agreements. Lender may at any time and from
time to time request a certificate from an officer of
Borrower representing on behalf of the Borrower that
all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained
herein are satisfied. In the event of such request by
Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit
Accommodations until Lender has received such
certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by
law, Borrower hereby authorizes Lender to execute and
file one or more UCC financing statements signed only
by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or
existence of any one or more of the following events
are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) any Borrower shall fail (i) to pay
when due any of the Obligations within two (2) Business
Days of the due date thereof or (ii) to observe or
perform any of the other terms, covenants, conditions
or provisions contained in this Agreement or the other
Financing Agreements other than as described in Section
10.1(a)(i) above and such failure shall continue for
fifteen (15) consecutive days (with the exception of
the failure to observe or perform any covenants or
provisions with respect to Collateral under this
Agreement or any of the other Financing Agreements
including, but not limited to, Section 7.1 hereof for
which the time period shall be five (5) days);
provided, that, such fifteen (15) day period (or five
(5) day period as the case may be) shall not apply in
the case of: (A) any failure to observe any such term,
covenant, condition or provision which is not capable
of being cured at all or within such fifteen (15) day
period (or five (5) day period as the case may be) or
which has been the subject of a prior failure within a
six (6) month period or (B) an intentional breach by
Borrower of any such term, covenant, condition or
provision;
(b) any representation, warranty or
statement of fact made by Borrower to Lender in this
Agreement, the other Financing Agreements or any other
agreement, schedule, confirmatory assignment or
otherwise shall when made or deemed made be false or
misleading in any material respect;
(c) any Obligor revokes, terminates or
fails to perform any of the terms, covenants,
conditions or provisions of any guarantee, endorsement
or other agreement of such party in favor of Lender;
(d) any judgment for the payment of money
is rendered against Borrower in excess of Two Hundred
Fifty Thousand Dollars ($250,000) in any one case or in
excess of Five Hundred Thousand Dollars ($500,000) in
the aggregate (in each case in excess of any insurance
coverage which Lender has determined in its reasonable
credit judgment adequately and fully covers any such
liability) and shall remain undischarged or unvacated
for a period in excess of thirty (30) days or execution
shall at any time not be effectively stayed, or any
material judgment other than for the payment of money,
or injunction, attachment, garnishment or execution is
rendered against Borrower or any Obligor or any of
their assets;
(e) any Obligor (being a natural person
or a general partner of an Obligor which is a
partnership) dies or Borrower or any Obligor, which is
a partnership, limited liability company, or
corporation, dissolves or suspends or discontinues
doing business;
(f) Borrower or any Obligor becomes
insolvent (however defined or evidenced), makes an
assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its
creditors or principal creditors;
(g) a case or proceeding under the
bankruptcy laws of the United States of America now or
hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any
jurisdiction now or hereafter in effect (whether at law
or in equity) is filed against Borrower or any Obligor
or all or any part of its properties and such petition
or application is not dismissed within thirty (30) days
after the date of its filing or Borrower or any Obligor
shall file any answer admitting or not contesting such
petition or application or indicates its consent to,
acquiescence in or approval of, any such action or
proceeding or the relief requested is granted sooner;
(h) a case or proceeding under the
bankruptcy laws of the United States of America now or
hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any
jurisdiction now or hereafter in effect (whether at a
law or equity) is filed by Borrower or for all or any
part of its property; or
(i) any default by Borrower or any
Obligor under any agreement, document or instrument
relating to any indebtedness for borrowed money owing
to any person other than Lender, or any capitalized
lease obligations, contingent indebtedness in
connection with any guarantee, letter of credit,
indemnity or similar type of instrument in favor of any
person other than Lender, in any case in an amount in
excess of Two Hundred Fifty Thousand Dollars
($250,000), which default continues for more than the
applicable cure period, if any, with respect thereto,
or any default by Borrower under any material contract,
lease, license or other obligation to any person other
than Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;
(j) any change in the controlling
ownership of Borrower;
(k) the indictment of Borrower or any
Obligor under any criminal statute, or the commencement
of criminal or civil proceedings by a governmental
entity against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the
property of Borrower or such Obligor;
(l) there shall be a material adverse
change in the business, assets or prospects of Borrower
or any Obligor after the date hereof;
(m) any event of default shall occur
under, or Borrower or GCRC shall default in the
performance or observance of any covenant, condition,
term, provision, warranty, representation or agreement
evidencing the Securitization Facility, or under the
notes and agreements evidencing or related to the
Securitization Facility, and such default shall
continue beyond any applicable grace or cure period
provided therefor;
(n) an Early Amortization Event (as
defined in the Pooling Agreement) shall have occurred;
(o) the Securitization Facility is
terminated for any reason, or Borrower fails to renew
the Securitization Facility or provide Lender, within
ninety (90) days prior to the scheduled expiration of
the same; with satisfactory evidence that Borrower has
obtained a replacement facility (i) on terms that are
no less favorable to Borrower or Lender and on terms
otherwise acceptable to Lender, (ii) with a replacement
lender acceptable to Lender, and (iii) that shall be
subject to intercreditor arrangements acceptable to
Lender; or
(p) there shall be an event of default
under any of the other Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists
or has occurred and is continuing, Lender shall have
all rights and remedies provided in this Agreement, the
other Financing Agreements, the Uniform Commercial Code
and other applicable law, all of which rights and
remedies may be exercised without notice to or consent
by Borrower, except as such notice or consent is
expressly provided for hereunder or required by
applicable law. All rights, remedies and powers
granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or
other applicable law, are cumulative, not exclusive and
enforceable, in Lender's discretion, alternatively,
successively, or concurrently on any one or more
occasions, and shall include, without limitation, the
right to apply to a court of equity for an injunction
to restrain a breach or threatened breach by Borrower
of this Agreement or any of the other Financing
Agreements. Lender may, at any time or times, proceed
directly against Borrower to collect the Obligations
without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any
time an Event of Default exists or has occurred and is
continuing, Lender may, in its discretion and without
limitation, (i) accelerate the payment of all
Obligations and demand immediate payment thereof to
Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and
10.1(h), all Obligations shall automatically become
immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others,
enter upon any premises on or in which any of the
Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and
repair of all or any portion of the Collateral,
provided that no action taken by Lender shall
constitute a breach of the peace, (iii) require
Borrower, at Borrower's expense, to assemble and make
available to Lender any part or all of the Collateral
at any place and time designated by Lender, (iv)
collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which
the same may be located for the purpose of effecting
the sale, foreclosure or other disposition thereof or
for any other purpose, provided that no action taken by
Lender shall constitute a breach of the peace, (vi)
sell, lease, transfer, assign, deliver or otherwise
dispose of any and all Collateral (including, without
limitation, entering into contracts with respect
thereto, public or private sales at any exchange,
broker's board, at any office of Lender or elsewhere)
at such prices or terms as Lender may deem reasonable,
for cash, upon credit or for future delivery, with the
Lender having the right to purchase the whole or any
part of the Collateral at any such public sale, all of
the foregoing being free from any right or equity of
redemption of Borrower, which right or equity of
redemption is hereby expressly waived and released by
Borrower and/or (vii) terminate this Agreement. If any
of the Collateral is sold or leased by Lender upon
credit terms or for future delivery, the Obligations
shall not be reduced as a result thereof until payment
therefor is finally collected by Lender. If notice of
disposition of Collateral is required by law, five (5)
days prior notice by Lender to Borrower designating the
time and place of any public sale or the time after
which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be
reasonable notice thereof and Borrower waives any other
notice. In the event Lender institutes an action to
recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, Borrower
waives the posting of any bond which might otherwise be
required.
(c) Lender may apply the cash proceeds of
Collateral actually received by Lender from any sale,
lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or
in part and in such order as Lender may elect, whether
or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest
at the highest rate provided for herein and all costs
and expenses of collection or enforcement, including
attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon
the occurrence of an Event of Default or an event which
with notice or passage of time or both would constitute
an Event of Default, Lender may, at its option, without
notice, (i) cease making Loans or arranging Letter of
Credit Accommodations or reduce the lending formulas or
amounts of Loans and Letter of Credit Accommodations
available to Borrower and/or (ii) terminate any
provision of this Agreement providing for any future
Loans or Letter of Credit Accommodations to be made by
Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of
Process; Jury Trial Waiver.
(a) The validity, interpretation and
enforcement of this Agreement and the other Financing
Agreements and any dispute arising out of the
relationship between the parties hereto, whether in
contract, tort, equity or otherwise, shall be governed
by the internal laws of the State of California
(without giving effect to principles of conflicts of
law).
(b) Borrower and Lender irrevocably
consent and submit to the non-exclusive jurisdiction of
the state courts of the County of Los Angeles, State of
California and of the United States District Court for
the Central District of California and waive any
objection based on venue or forum non conveniens with
respect to any action instituted therein arising under
this Agreement or any of the other Financing Agreements
or in any way connected with or related or incidental
to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements
or the transactions related hereto or thereto, in each
case whether now existing or hereafter arising, and
whether in contract, tort, equity or otherwise, and
agree that any dispute with respect to any such matters
shall be heard only in the courts described above
(except that Lender shall have the right to bring any
action or proceeding against Borrower or its property
in the courts of any other jurisdiction which Lender
deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights
against Borrower or its property).
(c) Borrower hereby waives personal
service of any and all process upon it and consents
that all such service of process may be made by
certified mail (return receipt requested) directed to
its address set forth on the signature pages hereof and
service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in
the U.S. mails, or, at Lender's option, by service upon
Borrower in any other manner provided under the rules
of any such courts. Within thirty (30) days after such
service, Borrower shall appear in answer to such
process, failing which Borrower shall be deemed in
default and judgment may be entered by Lender against
Borrower for the amount of the claim and other relief
requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR
ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY
WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR
THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND
LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER
OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to
Borrower (whether in tort, contract, equity or
otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related
to the transactions or relationships contemplated by
this Agreement, or any act, omission or event occurring
in connection herewith, unless it is determined by a
final and non-appealable judgment or court order
binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or
willful misconduct. In any such litigation, Lender
shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of
the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby
expressly waives demand, presentment, protest and
notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper,
included in or evidencing any of the Obligations or the
Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except
such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give
shall entitle Borrower to any other or further notice
or demand in the same, similar or other circumstances.
11.3 Amendments and Waivers. Neither this
Agreement nor any provision hereof shall be amended,
modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an
authorized officer of Lender. Lender shall not, by any
act, delay, omission or otherwise be deemed to have
expressly or impliedly waived any of its rights, powers
and/or remedies unless such waiver shall be in writing
and signed by an authorized officer of Lender. Any
such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Lender of
any right, power and/or remedy on any one occasion
shall not be construed as a bar to or waiver of any
such right, power and/or remedy which Lender would
otherwise have on any future occasion, whether similar
in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives
all rights to interpose any claims, deductions, setoffs
or counterclaims of any nature (other than compulsory
counterclaims) in any action or proceeding with respect
to this Agreement, the Obligations, the Collateral or
any matter arising therefrom or relating hereto or
thereto.
11.5 Indemnification. Borrower shall indemnify
and hold Lender, and its directors, agents, employees
and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses
imposed on, incurred by or asserted against any of them
in connection with any litigation, investigation, claim
or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery,
enforcement, performance or administration of this
Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the
transactions contemplated hereby or any act, omission,
event or transaction related or attendant thereto,
including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of
counsel, except that nothing herein shall be considered
to obligate Borrower to indemnify Lender for gross
negligence or wilful misconduct on the part of Lender
and its directors, agents, employees and counsel. To
the extent that the undertaking to indemnify, pay and
hold harmless set forth in this Section may be
unenforceable because it violates any law or public
policy, Borrower shall pay the maximum portion which it
is permitted to pay under applicable law to Lender in
satisfaction of indemnified matters under this Section.
The foregoing indemnity shall survive the payment of
the Obligations and the termination or non-renewal of
this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other
Financing Agreements shall become effective as of the
date set forth on the first page hereof and shall
continue in full force and effect for a term ending on
March 31, 2000 (the "Renewal Date"), and from year to
year thereafter, unless sooner terminated pursuant to
the terms hereof. Unless sooner terminated, all other
Financing Agreements shall be terminated simultaneously
with this Agreement. Lender or Borrower may terminate
this Agreement and the other Financing Agreements
effective on the Renewal Date or on the anniversary of
the Renewal Date in any year by giving to the other
party at least sixty (60) days prior written notice.
Borrower may terminate this Agreement prior to the end
of the then current term, including any renewal term,
for any reason upon thirty (30) days prior written
notice to Lender, and in such case Borrower agrees to
pay Lender the applicable early termination fee
provided for in Section 12.1(c) hereof. Regardless of
the timing of termination, this Agreement and all other
Financing Agreements must be terminated simultaneously.
Upon the effective date of termination or non-renewal
of the Financing Agreements, Borrower shall pay to
Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such
amounts as Lender determines are reasonably necessary
to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in
connection with any contingent Obligations, including
issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to
the Obligations and/or as to which Lender has not yet
received final and indefeasible payment. Such cash
collateral shall be remitted by wire transfer in
Federal funds to such bank account of Lender, as Lender
may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until
and including the next business day, if the amounts so
paid by Borrower to the bank account designated by
Lender are received in such bank account later than
10:30 a.m., Los Angeles time.
(b) No termination of this Agreement or
the other Financing Agreements shall relieve or
discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the
other Financing Agreements until all Obligations have
been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral
and the rights and remedies of Lender hereunder, under
the other Financing Agreements and applicable law,
shall remain in effect until all such Obligations have
been fully and finally discharged and paid.
(c) Except as otherwise provided in this
Agreement, if for any reason this Agreement is
terminated prior to the end of the then current term or
a renewal term, if any, of this Agreement, in view of
the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of
the parties as to a reasonable calculation of Lender's
lost profits as a result thereof, Borrower agrees to
pay to Lender, upon the effective date of such
termination, an early termination fee in the amount set
forth below if such termination is effective in the
period indicated:
Amount Period
(i) 2% of the Maximum Credit from the date of
this Agreement to
and including the
day preceding the
first anniversary
of this Agreement;
(ii) 1% of the Maximum Credit from the first
anniversary of this
Agreement to and
including the day
preceding the
second anniversary
of this Agreement;
(iii) 0.5% of the Maximum Credit from the second anniversary of this
Agreement to and
including the
Renewal Date; and
(iv) 0.25% of the Maximum Credit if the Renewal Date
is extended as
provided in Section
12.1(a), at any
time during a
renewal term, if
any.
Notwithstanding the foregoing, in the event that all
Obligations under this Agreement are refinanced and
this Agreement terminated in conjunction with either
(i) a secondary offering of the capital stock of the
Borrower, or (ii) the sale of in excess of fifty
percent (50%) of the shares of the issued and
outstanding capital stock of the Borrower, or (iii) the
sale by the Company of in excess of fifty percent (50%)
of its assets to an unrelated third party, then the
above-referenced applicable termination fee shall be
reduced by fifty percent (50%). Additionally, in the
event, at any time after the first anniversary of this
Agreement, all Obligations are fully repaid through the
refinancing thereof by CoreStates Bank, N.A., the then
applicable termination fee shall be waived by Lender.
Such early termination fee shall be presumed to be the
amount of damages sustained by Lender as a result of
such early termination and Borrower agrees that it is
reasonable under the circumstances currently existing.
The early termination fee provided for in this Section
12.1 shall be deemed included in the Obligations.
Notwithstanding the foregoing, in the event that
Lender, either establishes additional Availability
Reserves, or revises the criteria for Eligible
Inventory, or reduces the lending formulas under
Section 2.1(a)(i), other than based upon an updated
Inventory appraisal, or specific events adversely
affecting the Collateral or Lender's security interest
therein, and the effect of any such action by Lender is
to reduce Borrower's borrowing availability by greater
than ten percent (10%) under Section 2.1(a), provided
that no Event of Default shall have occurred and be
continuing hereunder other than as a result of any such
reduction in availability, Borrower may, at any time
during a period ninety (90) days following the date of
such action taken by Lender, fully refinance the
Obligations hereunder with another lender willing to
provide Borrower with Inventory financing at lending
formulas equal to or better than those in effect
hereunder immediately prior to the reduction and on
other terms, conditions and funding levels
substantially similar to or better than those provided
by Lender, and Borrower fully repays the Obligations by
the end of such ninety (90) day period and terminates
this Agreement as provided in Section 12.1(a) hereof;
then, in such event, Borrower shall have no obligation
to pay the early termination fee otherwise provided for
in this Section 12.1(c).
12.2 Notices. All notices, requests and demands
hereunder shall be in writing and (a) made to Lender at
its address set forth below and to Borrower at its
chief executive office set forth below, or to such
other address as either party may designate by written
notice to the other in accordance with this provision,
and (b) deemed to have been given or made: if delivered
in person, immediately upon delivery; if by telex,
telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with
instructions to deliver the next business day, one (1)
business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of
this Agreement is held to be invalid or unenforceable,
such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this
Agreement shall be construed as though it did not
contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the
parties shall be construed and enforced only to such
extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other
Financing Agreements and any other document referred to
herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower
and their respective successors and assigns, except
that Borrower may not assign its rights under this
Agreement, the other Financing Agreements and any other
document referred to herein or therein without the
prior written consent of Lender. Lender may, after
notice to Borrower, assign its rights and delegate its
obligations under this Agreement and the other
Financing Agreements and further may assign, or sell
participations in, all or any part of the Loans, the
Letter of Credit Accommodations or any other interest
herein to another financial institution or other
person, in which event, the assignee or participant
shall have, to the extent of such assignment or
participation, the same rights and benefits as it would
have if it were the Lender hereunder, except as
otherwise provided by the terms of such assignment or
participation.
12.5 Entire Agreement. This Agreement, the
other Financing Agreements, any supplements hereto or
thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith
represents the entire agreement and understanding
concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other
prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject
matter hereof, whether oral or written.
12.6 Publicity. Borrower consents to Lender
publishing a tombstone or similar advertising material
relating to the financing transaction contemplated by
this Agreement.
IN WITNESS WHEREOF, Lender and Borrower have
caused these presents to be duly executed as of the day
and year first above written.
LENDER
CONGRESS FINANCIAL CORPORATION (WESTERN)
\s\ Donald A. McLeod
By: Donald A. McLeod
Title: Senior Vice President
Address:
225 South Lake Avenue
Suite 1000
Pasadena, California 91101
BORROWER
GOTTSCHALKS INC.
\s\ Alan A. Weinstein
By: Alan A. Weinstein
Title: Senior Vice President and
Chief Financial Officer
Chief Executive Office:
7 River Park Place East
Fresno, California 93720
AGREEMENT
This Agreement (Agreement) is made this 14th day of
March, 1997, by and between Gottschalks Inc., a Delaware
Corporation (Company) and James R. Famalette
an individual (Employee).
1. EMPLOYMENT
Company agrees to hire Employee as President and C.O.O.
The initial term of this employment shall be for two
years with automatic one-year extensions thereafter.
Company may terminate upon the last day of the initial
term or thereafter, provided one year notice is given the
other party in writing. Employee shall also be a member
of the Board of Directors of the Company during his term
of employment. The initial term shall begin upon
Employee reporting to Corporate Headquarters in Fresno
California, ready to assume his duties. Should Employee
fail to report by April 15, 1997, this Agreement for
employment shall become null and void.
2. COMPENSATION
As compensation for performance in the position of
President and C.O.O. and as Director, Employee's base
compensation for year one shall be three hundred twenty
five thousand dollars ($325,000), payable bi-weekly.
Base compensation for year two (2) shall be three hundred
and fifty thousand dollars ($350,000), payable bi-weekly.
Employee shall receive as bonus compensation,
one hundred thousand dollars ($100,000) in May 1998. For
purposes of this Agreement, "base compensation" means
Employee's annual base salary only, and excludes all
other income heretofore received by Employee, such as,
but not limited to, bonuses, incentive compensation,
fringe benefits, commissions, overtime, retainers, fees
under contracts, income arising from the exercise of
stock options or expense allowances granted by Company.
3. STOCK OPTION
Employee shall be granted the option to purchase 20,000
shares of common stock in the Company on the date of
employment, under the Company's stock option plan,
whereby one quarter of the option becomes vested each
anniversary of Employee's employment date. The option
price shall be the market price effective on the date of
employment.
4. BONUS PLAN
Employee shall be eligible to participate in Company's
Bonus Plan, which is effective for 1997. This
participation is separate and apart from the $100,000
bonus discussed above in Article 2, Compensation.
5. CAR ALLOWANCE
Employee shall receive a monthly car allowance of $1,000,
but in no event shall such amount paid as a car allowance
exceed that which is allowed as a tax deduction by the
Company for a car allowance. Should an excise tax or
other penalty be imposed upon the Company due to the
amount of the car allowance, then Company shall be
allowed to deduct a portion of the amount of the car
allowance paid, to avoid such tax or penalty.
6. TEMPORARY EXPENSES & CLOSING COSTS
Employee shall be entitled to receive up to six months
temporary housing allowance. Upon the close of escrow on
a permanent residence, the temporary housing allowance
shall terminate. However all closing costs on the
purchase of the permanent residence shall be paid by
Company. Employee shall be entitled to one round trip
per month to Hawaii during the temporary time period.
7. MOVING EXPENSES
Employee shall receive reimbursement for all properly
documented moving expenses, including the transportation
by boat of two vehicles from Hawaii to Fresno, CA.
8. OTHER BENEFITS:
Employee shall be entitled to three weeks vacation during
his first year of employment, and each year thereafter,
until he has completed five years of employment, at which
time he shall be entitled to four weeks yearly vacation.
He shall be eligible to participate in the Company's 401K
plan beginning upon his first day of employment. He
shall also be eligible to participate in the Company's
health insurance benefits, life insurance, and disability
insurance beginning upon his date of employment. All
other company benefits shall be made available to
Employee beginning upon his first day of employment.
9. TERMINATION WITHOUT COMPENSATION
Notwithstanding anything to the contrary contained in
this Agreement, Employee shall not be entitled to
continued compensation in any form if employee terminates
his employment from the Company, including without
limitation, (i) through retirement, disability or death
of Employee; (ii) Company sells all or part of its
business (or otherwise merges, divides, consolidates or
reorganizes), and Employee has the opportunity to
continue employment with the buyer (or with one of the
resulting entities in the event of a merger, division,
consolidation or reorganization), at or above the
employee's base compensation, regardless of whether the
other terms and conditions of Employee's employment after
such sale, division, consolidation or reorganization are
the same or different from the terms and conditions of
Employee's employment with Company; or (iii) Employee is
terminated for "cause", which includes, without
limitation , a good faith determination by Company that
Employee (1) has committed a material breach of his
duties and responsibilities, (2) refused to perform
required duties and responsibilities or performed them
incompetently, (3) breached or violated any fiduciary
duty owed to Company or (4) is or has been personally
dishonest, or has willfully or negligently violated any
law, rule or regulation or has been convicted of a felony
or misdemeanor (other than minor traffic violations and
similar offenses).
10. INTERPRETATION, ASSIGNMENT, INTEGRATION, AMENDMENT
This Agreement shall be governed by the laws of the State
of California. This Agreement may be amended only by a
subsequent written agreement signed by Employee and an
authorized representative of Company following approval
by the Board of Directors of Company. This Agreement is
personal to Employee and is not assignable by Employee.
This Agreement shall inure to the benefit of and be
binding upon Company and its successors and assigns and
any such successor or assignee shall be deemed
substituted for Company under the terms of this Agreement
for all purposes. As used herein, "successor" and
"assignee" shall include any person, firm, corporation or
other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly
acquires the stock of Company or to which Company assigns
this Agreement by operation of law or otherwise. This
instrument constitutes and contains the entire agreement
and understanding concerning the subject matters
addressed herein between the parties, and supersedes and
replaces all prior negotiations and all agreements
proposed or otherwise, whether written or oral,
concerning the subject matters hereof. This is an
integrated document.
11. ARBITRATION, ATTORNEY FEES
Any dispute, controversy or claim arising out of or in
connection with this Agreement or any other aspect of
Employee's employment with Company, shall be resolved
exclusively through binding arbitration to be held in
Fresno County, California in accordance with California
Civil Procedure Code ss 1282-1284.2. In the event either
party institutes arbitration under this Agreement, the
party prevailing in any such arbitration shall be
entitled, in addition to all other relief, to reasonable
attorneys' fees relating to such arbitration. The
nonprevailing party shall be responsible for all costs of
the arbitration, including but not limited to, the
arbitration fees, court reporter fees, etc.
IN WITNESS WHEREOF, Company has caused to be executed and
delivered, and Employee has executed and delivered this
Agreement as of the day and year first above set forth.
GOTTSCHALKS INC.
By:_\s\Joe Levy__________________________
Title: CHAIRMAN & CEO
Employee:______________________
By: \s\James Famalette
INDEPENDENT AUDITORS' REPORT
We consent to the incorporation by reference in
Registration Statements No. 33-54783 and No. 33-54789 of
Gottschalks Inc. on form S-8 of our report dated February
27, 1997 (March 13, 1997 as to Paragraph 4 of Note 3),
appearing in this Annual Report on Form 10-K of
Gottschalks Inc. for the year ended February 1, 1997.
\s\ Deloitte & Touche LLP
Fresno, California
April 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T
AND INCLUDES SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE PERIOD ENDED FEBRUARY 1, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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104
0
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</TABLE>
