UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT
For the transition period from _________________ to ______________________.
Commission file number 1-09100
Gottschalks Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0159791
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
7 River Park Place East, Fresno, California 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (209) 434-8000
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for 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
The number of shares of the Registrant's common stock
outstanding as of August 31, 1998 was 12,575,565.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
August 1, 1998 and January 31, 1998 2
Consolidated statements of operations -
thirteen and twenty-six weeks ended
August 1, 1998 and August 2, 1997 3
Condensed consolidated statements of cash
flows - twenty-six weeks ended August 1,
1998 and August 2, 1997 4
Notes to condensed consolidated financial
statements - thirteen and twenty-six
weeks ended August 1, 1998 and
August 2, 1997 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-21
Item 3. Quantitative and qualitative disclosures
about market risk - not applicable
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Related
Stockholder Matter 22
Item 4. Submission of Matters to a Vote of
Security Holders 22 - 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
August 1, 1998 January 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,785 $ 1,601
Retained interest in receivables
sold (Note 3) 9,653 15,813
Receivables - net 4,595 6,560
Merchandise inventories 105,297 99,294
Other 10,033 11,444
Total current assets 131,363 134,712
PROPERTY AND EQUIPMENT 152,601 145,166
Less accumulated depreciation and
amortization 49,981 46,109
102,620 99,057
OTHER LONG-TERM ASSETS 8,010 8,542
$241,993 $242,311
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 22,724 $ 5,767
Cash management liability 6,416 10,141
Trade accounts payable 18,819 20,950
Accrued expenses and other liabilities 15,280 17,627
Taxes, other than income taxes 4,501 8,698
Current portion of long-term obligations 4,314 3,950
Total current liabilities 72,054 67,133
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 25,000 25,000
Notes and mortgage loans payable 28,820 30,083
Capitalized lease obligations 6,97 7,337
60,794 62,420
DEFERRED INCOME 17,923 18,408
DEFERRED LEASE PAYMENTS AND OTHER 10,656 10,445
STOCKHOLDERS' EQUITY 80,566 83,905
$241,993 $242,311
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
Thirteen Weeks Twenty-Six Weeks
Ended Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 104,131 $ 99,997 $199,599 $190,503
Net credit revenues 1,171 1,232 3,051 2,889
105,302 101,229 202,650 193,392
COSTS & EXPENSES:
Cost of sales 71,530 67,718 137,057 129,714
Selling, general &
administrative
expens 32,344 31,175 63,785 60,222
Depreciation &
amortization 2,033 1,430 4,013 2,986
105,907 100,323 204,855 192,922
Operating (loss) income (605) 906 (2,205) 470
Other (income) expense:
Interest expense 2,074 1,727 4,058 3,434
Miscellaneous income (369) (399) (545) (869)
1,705 1,328 3,513 2,565
LOSS BEFORE INCOME TAX BENEFIT (2,310) (422) (5,718) (2,095)
Income tax benefit (958) (174) (2,372) (860)
NET LOSS $ (1,352) $ (248) $ (3,346) $ (1,235)
Net loss per common share -
basic and diluted $ (0.13) $ (0.02) $ (0.32) $ (0.12)
Weighted average number of
common shares outstanding 10,479 10,473 10,479 10,473
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - NOTE 1)
(In thousands of dollars)
Twenty-Six Weeks
Ended
August 1, August 2,
1998 1997
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (3,346) $ (1,235)
Adjustments:
Depreciation and amortization 4,013 2,985
Provision for credit losses 219 192
Other adjustments, net (2,670) (1,176)
Changes in operating assets and liabilities:
Receivables, net 1,767 385
Merchandise inventories (5,688) (9,165)
Trade accounts payable (2,131) (970)
Other current and long-term assets and
liabilities (2,475) (1,915)
Net cash used in operating
activities (10,311) (10,899)
INVESTING ACTIVITIES:
Purchases of held-to-maturity securities
(Note 3) (101,606) (99,326)
Maturities of held-to-maturity securities
(Note 3) 107,766 110,192
Purchases of property and equipment (7,382) (4,577)
Proceeds from property and equipment sales 458 352
Distribution from limited partnership 101 110
Net cash (used in) provided by
investing activities (663) 6,751
FINANCING ACTIVITIES:
Net proceeds (repayments) under revolving
lines of credit 16,957 (7,496)
Proceeds from long-term obligations 3,214
Principal payments on long-term obligations (2,074) (1,328)
Changes in cash management liability and other (3,725) 10,023
Net cash used in financing activities 11,158 4,413
INCREASE IN CASH 184 265
CASH AT BEGINNING OF YEAR 1,601 1,496
CASH AT END OF PERIOD $ 1,785 $ 1,761
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen and Twenty-Six Weeks Ended August 1, 1998 and
August 1, 1997
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Gottschalks Inc. is a regional department and specialty
store chain based in Fresno, California, which, as of
August 1, 1998, consisted of thirty-seven "Gottschalks"
department stores and twenty-two "Village East" specialty
stores located primarily in non-major metropolitan cities
throughout California and in Oregon, Washington and
Nevada. As described more fully in Note 2, the Company
completed the acquisition substantially all of the assets
of The Harris Company ("Harris") on August 20, 1998,
increasing the total number of department stores to
forty-six as of that date. The acquired stores will be
operated under a "Harris/Gottschalks" nameplate. The
Company's department stores are generally located as
anchor tenants in regional shopping malls and typically
offer a wide range of brand-name and private-label
merchandise, including men's, women's, junior's and
children's apparel, cosmetics, shoes and accessories,
home furnishings and other consumer goods. Village East
specialty stores offer apparel for larger women.
The accompanying unaudited condensed consolidated
financial statements include the accounts of Gottschalks
Inc., and its wholly-owned subsidiary, Gottschalks Credit
Receivables Corporation ("GCRC"). (See Note 3). Such
financial statements have been prepared in accordance
with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required
by generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation
have been included. Operating results for the thirteen
and twenty-six week periods ended August 1, 1998 are not
necessarily indicative of the results that may be
expected for the year ending January 30, 1999 (fiscal
1998), due to the seasonal nature of the Company's
business, the acquisition of Harris (Note 2) and its LIFO
inventory valuation adjustment ("LIFO adjustment"),
currently recorded only at the end of each fiscal year
(Note 4). These financial statements should be read in
conjunction with the financial statements and footnotes
thereto included in the Company's Annual Report on Form
10-K for the year ended January 31, 1998 (the "1997
Annual Report on Form 10-K").
The condensed consolidated balance sheet at January 31,
1998 has been derived from the audited consolidated
financial statements at that date. Certain amounts in the
accompanying financial statements for the fiscal 1997
interim period have been reclassified to conform with
fiscal 1998 presentation.
2. ACQUISITION OF THE HARRIS COMPANY
On July 21, 1998, the Company entered into an Asset
Purchase Agreement with Harris and El Corte Ingles, S. A.
("ECI") of Spain, the parent company of Harris, pursuant
to which the Company would acquire substantially all of
the assets of Harris. Harris operated nine full-line
department stores located throughout southern California.
The purchase price for the assets consisted of the
issuance to Harris of 2,095,900 shares of common stock of
the Company, the issuance of an 8% Non-Negotiable,
Extendable, Subordinated Note (the "Subordinated Note")
due August 20, 2003 in the principal amount of
$22,179,598, and the assumption of certain liabilities
relating to the business, including vendor payables,
store leases and certain other contracts. Interest on the
Subordinated Note is payable semi-annually beginning in
February 1999, with the principal portion due and payable
upon its maturity date, unless such payment would result
in the default on any of the Company's other credit
facilities. In such an event, the maturity date of the
Subordinated Note would be extended by three years to
August 2006. The assets acquired consist primarily of
merchandise inventory, customer credit card receivables,
fixtures and equipment and certain intangibles.
Additional purchase liabilities that are expected to be
recorded will include costs related to the transaction,
severance and related costs, costs associated with the
consolidation of distribution and administrative
functions, and costs associated with the closure of the
former Harris store located in San Bernardino. The
acquisition, finalized on August 20, 1998, will be
accounted for under the purchase method of accounting
and, accordingly, the results of operations of Harris
will be included in the Company's financial statements
from the date of the acquisition beginning in the third
quarter of 1998.
3. RECEIVABLES SECURITIZATION PROGRAM
The Company's receivables securitization program provides
the Company with a source of working capital financing
that is generally more cost effective than traditional
debt financing. Under the program, the Company
automatically sells all of its accounts receivable
arising under its private-label customer credit cards to
a wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"), and certain of those receivables
are subsequently conveyed to a trust, Gottschalks Credit
Card Master Trust ("GCC Trust"), to be used as collateral
for securities issued to investors. The Company services
and administers the receivables in return for a monthly
servicing fee.
As described more fully in the Company's 1997 Annual
Report on Form 10-K, the transfer of receivables to GCC
Trust are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The Company
retains an ownership interest in certain of the
receivables sold under the program, represented by
Subordinated and Exchangeable Certificates issued to GCRC
by GCC Trust, and also retains an uncertificated
ownership interest in receivables that do not meet
certain eligibility requirements of the program. The
certificated retained interest is valued in accordance
with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and is classified as held-to-maturity
for financial statement purposes. The following
securities have been issued under the securitization
program:
Fixed Base Certificates. Since 1994, $40.0 million
principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates and a $6.0 million principal amount 6.79%
Fixed Base Class A-1 Credit Card Certificate
(collectively, the "Fixed Base Certificates") have been
issued under the program. Interest on the Fixed Base
Certificates is earned by the certificateholders 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 the
period. The issuances of the Fixed Base Certificates
were accounted for as sales for financial reporting
purposes. Accordingly, the $46.0 million of receivables
underlying the Fixed Base Certificates as of August 1,
1998 and January 31, 1998 and the corresponding debt
obligations have been excluded from amounts reported in
the accompanying financial statements. Management is
currently in process of refinancing the Fixed Base
Certificates with newly issued certificates under the
program. Such efforts are expected to be complete by the
end of the third quarter of 1998. However, there can be
no assurance that the completion of the refinancing will
not be delayed subject to a variety of conditions
precedent and other factors. (See Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- "Liquidity and Capital Resources".)
Variable Base Certificate. A Variable Base Class A-2
Credit Card Certificate ("Variable Base Certificate") was
also issued in 1994 in the principal amount of up to
$15.0 million to Bank Hapoalim. The Company can borrow
against the Variable Base Certificate on a revolving
basis, similar to a revolving line of credit arrangement,
through September 15, 1998. The Company may not borrow
additional funds against the Variable Base Certificate
after that date, with all outstanding borrowings due and
payable by March 15, 1999. Such outstanding borrowings
are also subject to a restrictive borrowing base. The
transfer of receivables under the Variable Base
Certificate are also treated as sales for financial
reporting purposes. Accordingly, the receivables
underlying the Variable Base Certificate, totaling
$700,000 as of August 1, 1998 and $7.7 million as of
January 31, 1998, and the corresponding outstanding
borrowings against the Variable Base Certificate as of
those dates have been excluded from amounts reported in
the accompanying financial statements. Management intends
to refinance the Variable Base Certificate with a newly
issued certificate in conjunction with the refinancing of
the Fixed Base Certificates.
Other Program Requirements: 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 such requirements as
of August 1, 1998.
4. MERCHANDISE INVENTORIES
Inventories, which consist of merchandise held for
resale, are valued by the retail method and are stated at
last-in, first-out (LIFO) cost, which is not in excess of
market value. The Company includes in inventory the
capitalization of certain indirect costs related to the
purchasing, handling and storage of merchandise to better
match sales with those related costs. Current cost, which
approximates replacement cost, under the first-in, first-out
(FIFO) method was equal to the LIFO value of
inventories as of January 31, 1998. A valuation of
inventory under the LIFO method is presently made only at
the end of each year based on actual inventory levels and
costs at that time. Since these factors are subject to
variability beyond the control of management, interim
results of operations are subject to the final year-end
LIFO inventory valuation adjustment. Management does not
currently anticipate that its year-end LIFO adjustment
will materially effect its 1998 operating results.
5. DEBT OBLIGATIONS
Revolving Line of Credit and Working Capital Facility. The
Company has a revolving line of credit arrangement with Congress
Financial Corporation ("Congress"), which, as of August 1, 1998,
provided the Company with an $80.0 million working capital facility
through March 30, 2000. On August 20, 1998, the agreement was amended
to increase the credit facility to $110.0 million and extend its
maturity date to March 31, 2001. The increase in the credit line was
primarily to provide the working capital necessary to fund additional
inventory and capital expenditure requirements associated with the
new stores acquired from Harris (see Note 2). There were no other
significant revisions to the terms of the arrangement. 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 purchases. Interest on
outstanding borrowings under the facility is charged at a rate of
approximately LIBOR plus 2.25% (8.0% at August 1, 1998), with no
interest charged on the unused portion of the line of credit. The
interest rate may be reduced by 1/8% in fiscal 1999 if specified
fiscal 1998 pre-tax income and minimum availability levels are
attained by the Company. The maximum amount available for borrowings
under the line of credit was $59.1 million as of August 1, 1998, of
which $47.7 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 August 1, 1998.
As described more fully in Note 3, the Company also has up to $15.0
million of additional working capital financing available under the
Variable Base Certificate, issued to Bank Hapoalim. Interest on
outstanding borrowings on the facility is charged at a rate of LIBOR
plus 1.0% (6.6% at August 1, 1998). At August 1, 1998, $700,000 was
outstanding under the Variable Base Certificate, which was the
maximum amount available for borrowings as of that date. Such
borrowings are off-balance sheet for financial purposes.
Long-Term Borrowings. The Company has four fifteen-year mortgage
loans with Midland Commercial Funding ("Midland") with outstanding
balances totaling $19.4 million at August 1, 1998. The Midland loans,
due October and November 2010, bear interest at rates ranging from
9.23% to 9.39%. The Company also has the following other long-term
loan facilities as of August 1, 1998: (i) a 10.45% mortgage loan
payable with Heller Financial, Inc. ("Heller"), due January 2002,
with an outstanding loan balance of $3.3 million; (ii) an additional
9.97% mortgage loan payable with Heller, due April 2004, with an
outstanding loan balance of $4.9 million; (iii) two 10.0% notes
payable to Federated Department Stores, Inc., due March and July
2001, with outstanding balances totaling $1.6 million; and (iv) other
long-term obligations with outstanding balances totaling $2.4
million.
Certain of the Company's long-term debt and lease agreements contain
various restrictive covenants. The Company was in compliance with all
such restrictive covenants as of August 1, 1998.
6. COMMITMENTS AND CONTINGENCIES
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 operations.
The Company is in the process of remodeling and improving fixturing
and visual presentation in certain existing store locations. The
Company also plans to commence minor refurbishing efforts and update
certain information systems equipment in the recently acquired Harris
stores. As of August 1, 1998, the estimated cost to complete these
projects is $3.8 million. While management expects to complete these
projects during the second half of 1998, there can be no assurance
that the completion of such projects will not be delayed.
7. NEW ACCOUNTING STANDARDS
Effective for the first quarter of fiscal 1998, the Company adopted
the provisions of SFAS No. 130, "Reporting Comprehensive Income",
however the statement had no impact on the Company's results of
operations or stockholders' equity. AICPA Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" is effective for fiscal years beginning
after December 15, 1998 (fiscal 1999). This SOP requires entities to
capitalize certain internal-use software costs once certain
capitalization criteria is met. The Company does not believe the
adoption of this SOP will have a material effect on the financial
position or the results of operations of the Company.
GOTTSCHALKS INC. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant
factors which have affected the Company's financial position and its
results of operations for the periods presented in the accompanying
condensed consolidated financial statements. The Company's results of
operations, like most retailers, are subject to seasonal influences,
with the major portion of sales, gross margin and operating results
realized during the fourth quarter of each fiscal year. This business
seasonality and the recent acquisition of Harris (see Note 2 to the
accompanying financial statements) may result in performance for the
thirteen and twenty-six weeks ended August 1, 1998 which is not
necessarily indicative of performance for the remainder of the year.
Thirteen Weeks Ended August 1, 1998 Compared To Thirteen Weeks Ended
August 2, 1997
Results of Operations
The following table sets forth for the periods indicated the
Company's Consolidated Statements of Operations as a percent of net
sales:
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.1 1.2
101.1 101.2
Costs and Expenses:
Cost of sales 68.7 67.7
Selling, general & administrative
expenses 31.1 31.2
Depreciation & amortization 1.9 1.4
101.7 100.3
Operating (loss) income (0.6) 0.9
Other (income) expense:
Interest expense 2.0 1.7
Miscellaneous income (0.4) (0.4)
1.6 1.3
LOSS BEFORE INCOME TAX BENEFIT (2.2) (0.4)
Income tax benefit (0.9) (0.2)
NET LOSS (1.3)% (0.2)%
</TABLE>
Net Sales
Net sales increased by $4.1 million to $104.1 million in
the second quarter of 1998 as compared to $100.0 million
in the second quarter of 1997, an increase of 4.1%. This
increase resulted primarily from additional sales volume
generated by two new stores opened in Sonora and Santa
Rosa, California, during the third quarter of 1997,
increasing the total number of Gottschalks stores open to
thirty-seven as of the end of the second quarter of 1998
as compared to thirty-five as of the end of the second
quarter of 1997. Comparable store sales, negatively
impacted by unseasonably cold and wet weather conditions
caused by the El Nino weather system, decreased by (0.8%)
as compared to the second quarter of 1997.
Net Credit Revenues
Net credit revenues, which includes service charges
associated with the Company's private label credit card
and certain amounts related to the Company's receivables
securitization program, was essentially unchanged at $1.2
million in the second quarters of 1998 and 1997. As a
percent of net sales, net credit revenues decreased to
1.1% in the second quarter of 1998 as compared to 1.2% in
the second quarter of 1997.
Service charges associated with the Company's customer
credit cards increased by approximately $100,000 to $2.8
million in the second quarter of 1998 as compared to $2.7
million in the second quarter of 1997, an increase of
3.7%. This increase is primarily due to an increase in
the volume of late charge fees collected on delinquent
credit card balances, partially offset by lower income
resulting from a decrease in credit sales as a percent of
total sales (41.9% in the second quarter of 1998 as
compared to 42.8% in the second quarter of 1997).
As described more fully in the Company's 1997 Annual
Report on Form 10-K, net credit revenues also include the
following amounts related to the Company's receivables
securitization program: (i) interest expense related to
securitized receivables, which remained unchanged at
approximately $900,000 in the second quarters of 1998 and
1997; and (ii) charge-offs related to receivables sold
and the provision for credit losses related to
receivables which were ineligible for sale, which
increased by approximately $100,000 to $700,000 in the
second quarter of 1998 as compared to $600,000 in the
second quarter of 1997. There was no material gain or
loss recognized on the sale of receivables in the second
quarters of 1998 and 1997.
Cost of Sales
Cost of sales, which includes costs associated with the
buying, handling and distribution of merchandise,
increased by approximately $3.8 million to $71.5 million
in the second quarter of 1998 as compared to $67.7
million in the second quarter of 1997, an increase of
5.6%. The Company's gross margin percentage decreased to
31.3% in the second quarter of 1998 as compared to 32.3%
in the second quarter of 1997, primarily due to higher
markdowns as a percentage of sales taken in an attempt to
improve sales of spring and summer merchandise which were
sluggish due to the unseasonably cold and wet weather
conditions caused by the El Nino weather system.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
approximately $1.1 million to $32.3 million in the second
quarter of 1998 as compared to $31.2 million in the
second quarter of 1997, an increase of 3.7%. As a percent
of net sales, selling, general and administrative
expenses decreased to 31.1% in the second quarter of 1998
as compared to 31.2% in the second quarter of 1997. The
Company's sales increased at a faster rate than its
selling, general and administrative expenses.
Charge-offs related to receivables sold and the provision
for credit losses related to receivables which were
ineligible for sale are reflected as reductions to net
credit revenues and are not included in selling, general
and administrative costs for financial reporting
purposes.
Depreciation and Amortization
Depreciation and amortization expense increased by
approximately $600,000 to $2.0 million in the second
quarter of 1998 as compared to $1.4 million in the second
quarter of 1997, an increase of 42.2%. As a percent of
net sales, depreciation and amortization increased to
1.9% in the second quarter of 1998 as compared to 1.4% in
the second quarter of 1997. These increases are primarily
due to additional depreciation related to capital and
other expenditures for new stores and the remodeling of
existing stores during the period, in addition to capital
lease obligations entered into during the second half of
1997.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, increased by approximately
$400,000 to $2.1 million in the second quarter of 1998
as compared to $1.7 million in the second quarter of
1997, an increase of 20.1%. As a percent of net sales,
interest expense increased to 2.0% in the second quarter
of 1998 as compared to 1.7% in the second quarter of
1997. These increases are primarily due to higher average
outstanding borrowings under the Company's lines of
credit ($51.5 in the second quarter of 1998 as compared
to $31.5 million in the second quarter of 1997) to fund
operating losses and inventory requirements and capital
expenditures for new and existing stores, partially
offset by a decrease in the weighted-average interest
rate applicable to outstanding borrowings under the
Company's lines of credit (7.9% in the second quarter of
1998 as compared to 8.3% in the second quarter of 1997).
The interest rate applicable to the Congress facility was
reduced by 1/4% to 2.25% above LIBOR starting in the
first quarter of 1998 upon achieving a specified earnings
target for fiscal 1997.
Interest expense related to securitized receivables is
reflected as a reduction to net credit revenues and is
not included in interest expense for financial reporting
purposes.
Miscellaneous Income
Miscellaneous income, which includes the amortization of
deferred income and other miscellaneous income and
expense amounts, remained unchanged at approximately
$400,000 in the second quarters of 1998 and 1997.
Income Taxes
The Company's interim effective tax credits of (41.5%) in
the second quarter of 1998 and (41.2%) in the second
quarter of 1997 relates to net losses incurred during
those periods and represent the Company's best estimate
of the annual effective tax rate for those fiscal years.
Net Loss
As a result of the foregoing, the Company's net loss
increased by approximately $1.1 million to a net loss of
($1.4 million) in the second quarter of 1998 as compared
to a net loss of ($248,000) in the second quarter of
1997. On a per share basis, the net loss increased by
$.11 per share to a net loss of ($.13) per share in the
second quarter of 1998 as compared to a net loss of
($.02) per share in the second quarter of 1997.
Twenty-Six Weeks Ended August 1, 1998 Compared To
Twenty-Six Weeks Ended August 1, 1997
<TABLE>
<CAPTION>
First Half
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.5 1.5
101.5 101.5
Costs and Expenses:
Cost of sales 68.7 68.1
Selling, general &
administrative expenses 31.9 31.6
Depreciation & amortization 2.0 1.6
102.6 101.3
Operating (loss) income (1.1) 0.2
Other (income) expense:
Interest expense 2.0 1.8
Miscellaneous income (0.2) (0.5)
1.8 1.3
LOSS BEFORE INCOME TAX
BENEFIT (2.9) (1.1)
Income tax benefit (1.2) (0.5)
NET LOSS (1.7)% (0.6)%
</TABLE>
Net Sales
Net sales increased by $9.1 million to $199.6 million
in the first half of 1998 as compared to $190.5 million
in the first half of 1997, an increase of 4.8%. This
increase resulted primarily from additional sales
volume generated by two new stores opened in Sonora and
Santa Rosa, California, during the third quarter of
1997, increasing the total number of Gottschalks stores
open to thirty-seven as of the end of the first half of
1998 as compared to thirty-five as of the end of the
first half of 1997. Comparable store sales, negatively
impacted by unseasonably cold and wet weather
conditions caused by the El Nino weather system,
decreased by (0.2%) as compared to the first half of
1997.
Net Credit Revenues
Net credit revenues, which includes service charges
associated with the Company's private label credit card
and certain income and expense amounts related to the
Company's receivables securitization program, increased
by approximately $200,000 to $3.1 million in the first
half of 1998 as compared to $2.9 million in the first
half of 1997, an increase of 5.6%. As a percent of net
sales, net credit revenues remained unchanged at 1.5%
in the first half of 1998 and 1997.
Service charges associated with the Company's customer
credit cards increased by approximately $300,000 to
$6.1 million in the first half of 1998 as compared to
$5.8 million in the first half of 1997, an increase of
5.2%. This increase is primarily due to an increase in
the volume of late charge fees collected on delinquent
credit card balances, partially offset by lower income
resulting from a decrease in credit sales as a percent
of total sales (42.7% in the first half of 1998 as
compared to 43.6% in the first half of 1997).
Net credit revenues also include the following amounts
related to the Company's receivables securitization
program: (i) interest expense related to securitized
receivables, which remained unchanged at approximately
$1.8 million in the first half of 1998 and 1997; and
(ii) charge-offs related to receivables sold and the
provision for credit losses related to receivables
which were ineligible for sale, which increased by
approximately $100,000 to $1.2 million in the first
half of 1998 as compared to $1.1 million in the first
half of 1997. There was no material gain or loss
recognized on the sale of receivables in the first half
of 1998 and 1997.
Cost of Sales
Cost of sales, which includes costs associated with the
buying, handling and distribution of merchandise,
increased by approximately $7.4 million to $137.1
million in the first half of 1998 as compared to $129.7
million in the first half of 1997, an increase of 5.7%.
The Company's gross margin percentage decreased to
31.3% in the first half of 1998 as compared to 31.9% in
the first half of 1997, primarily due to higher
markdowns as a percentage of sales taken in an attempt
to improve sales of spring and summer merchandise which
were sluggish due to the unseasonably cold and wet
weather conditions caused by the El Nino weather
system.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by approximately $3.6 million to $63.8 million in the
first half of 1998 as compared to $60.2 million in the
first half of 1997, an increase of 5.9%. As a percent
of net sales, selling, general and administrative
expenses increased to 31.9% in the first half of 1998
as compared to 31.6% in the first half of 1997. These
increases are primarily due to lower than expected
sales, combined with the impact of the mandatory
minimum wage increase in California (from $5.15 to
$5.75 per hour, an 11.7% increase) effective March 1,
1998. The Company also increased advertising
expenditures during the first half of 1998 in an
attempt to improve sluggish apparel sales.
Depreciation and Amortization
Depreciation and amortization expense increased by
approximately $1.0 million to $4.0 million in the first
half of 1998 as compared to $3.0 million in the first
half of 1997, an increase of 34.4%. As a percent of
net sales, depreciation and amortization increased to
2.0% in the first half of 1998 as compared to 1.6% in
the first half of 1997. These increases are primarily
due to additional depreciation related to capital and
other expenditures for new stores and the remodeling of
existing stores during the period, in addition to
capital lease obligations entered into during the
second half of 1997.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, increased by approximately
$600,000 to $4.1 million in the first half of 1998 as
compared to $3.4 million in the first half of 1997, an
increase of 18.2%. As a percent of net sales, interest
expense increased to 2.0% in the first half of 1998 as
compared to 1.8% in the first half of 1997. These
increases are primarily due to higher average
outstanding borrowings under the Company's lines of
credit ($49.3 million in the first half of 1998 as
compared to $32.7 in the first half of 1997) to fund
operating losses and inventory requirements and capital
expenditures for new and existing stores, partially
offset by a decrease in the weighted-average interest
rate applicable to outstanding borrowings under the
Company's lines of credit (7.9% in the first half of
1998 as compared to 8.1% in the first half of 1997).
The interest rate applicable to the Congress facility
was reduced by 1/4% to 2.25% above LIBOR starting in
the first quarter of 1998 upon achieving a specified
earnings target for fiscal 1997.
Miscellaneous Income
Miscellaneous income, which includes the amortization
of deferred income and other miscellaneous income and
expense amounts, decreased by approximately $300,000 to
approximately $500,000 in the first half of 1998 as
compared to approximately $800,000 in the first half of
1997. Miscellaneous income in the first half of 1998
was reduced by a loss on the sale of certain assets and
by costs, partially offset by program revenue, related
to the Company's new Kidzone program, through which
members can obtain additional merchandise discounts and
certain other benefits for purchases in the childrens'
department. Miscellaneous income in the first half of
1997 included a $142,000 gain on the sale of certain
assets.
Income Taxes
The Company's interim effective tax credits of (41.5%)
in the first half of 1998 and (41.0%) in the first half
of 1997 relates to net losses incurred during those
periods and represent the Company's best estimate of
the annual effective tax rate for those fiscal years.
Net Loss
As a result of the foregoing, the Company's net loss
increased by approximately $2.1 million to a net loss
of ($3.3 million) in the first half of 1998 as compared
to a net loss of ($1.2 million) in the first half of
1997. On a per share basis, the net loss increased by
$.20 per share to a net loss of ($.32) per share in the
first half of 1998 as compared to a net loss of ($.12)
per share in the first half of 1997.
Liquidity and Capital Resources
Sources of Liquidity.
As described more fully in the Company's 1997 Annual
Report on Form 10-K and Notes 3 and 5 to the
accompanying financial statements, the Company's
working capital requirements are currently met through
a combination of cash provided by operations, short-term
trade credit, and by borrowings under its
revolving line of credit and its receivables
securitization program. The Company's liquidity
position, like that of most retailers, is affected by
seasonal influences, with the greatest portion of cash
from operations generated in the fourth quarter of each
fiscal year. As described more fully below, the
Company's liquidity has been enhanced as a result of
the acquisition of Harris.
Acquisition of Harris.
As described more fully in Note 2 in the accompanying
financial statements, the Company acquired
substantially all of the assets of Harris on August 20,
1998. The purchase price for the assets was the
issuance to Harris of 2,095,900 shares of common stock
of the Company, the issuance of an 8% Subordinated
Note due August 20, 2003 in the principal amount of
$22,179,598, and the assumption of certain liabilities
relating to the business, including vendor payables,
store leases and certain other contracts. Interest on
the Subordinated Note is payable semi-annually
beginning in February 1999, with the principal portion
due and payable upon its maturity date, unless such
payment would result in the default on any of the
Company's other credit facilities. In such an event,
the maturity date of the Subordinated Note would be
extended by three years to August 2006. The assets
acquired consist primarily of merchandise inventory,
customer credit card receivables, fixtures and
equipment and certain intangibles. The Company also
expects to incur additional liabilities related to the
purchase, including costs related to the transaction,
severance and related costs, costs related to the
consolidation of distribution and administrative
functions and costs associated with the closure of the
former Harris store located in San Bernardino. As
described more fully below, the Company has amended its
primary credit facility in order to provide for
increased working capital requirements resulting from
the acquisition. Management also expects additional
liquidity to be provided from customer credit card
receivables acquired from Harris. Such receivables were
not previously financed by Harris and are expected to
be incorporated into the Company's receivables
securitization program.
Revolving Line of Credit and Working Capital Facility .
As described more fully in Note 5 to the accompanying
financial statements, the Company has a revolving line
of credit arrangement with Congress Financial
Corporation ("Congress"), which provided the Company
with an $80.0 million working capital facility through
March 30, 2000. On August 20, 1998, the agreement was
amended to increase the facility to $110.0 million and
extend its maturity date to March 31, 2001. The
increase in the credit line was primarily to provide
additional working capital necessary to fund additional
inventory and capital expenditure requirements
associated with the new stores acquired from Harris.
The Company had excess availability under its line of
$11.4 million as of August 1, 1998. As of the first
week of September 1998, the excess availability
increased to $30.4 million as a result of the seasonal
increase in the restrictive borrowing base and from the
additional collateral base resulting from the inventory
acquired from Harris.
In addition to the Congress facility, the Company also
has up to $15.0 million of additional working capital
financing available under the Variable Base
Certificate, issued to Bank Hapoalim. The Company can
borrow against the Variable Base Certificate on a
revolving basis, similar to a revolving line of credit
arrangement, through September 15, 1998. The Company
may not borrow additional funds against the Variable
Base Certificate after that date, with all outstanding
borrowings due and payable by March 15, 1999. Such
outstanding borrowings are also subject to a
restrictive borrowing base. As of August 1, 1998,
$700,000 was outstanding against the Variable Base
Certificate, and such borrowings are off-balance sheet
for financial reporting purposes. As described more
fully below, management is in process of refinancing
the Variable Base Certificate and believes that process
will be complete by the end of the third quarter of
1998.
Receivables 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 seeks to divert as large a percentage of
total borrowings as possible to its securitization
program. Since 1994, the Company has issued $40.0
million 7.35% Fixed Base Certificates and a $6.0
million 6.79% Fixed Base Certificate (collectively, the
"Fixed Base Certificates") under the program. The
Company also issued the previously described Variable
Base Class A-2 Credit Card Certificate ("Variable Base
Certificate") in 1994 in the principal amount of up to
$15.0 million to Bank Hapoalim. Interest is earned by
the certificateholders on a monthly basis and is paid
through finance charges collected under the program.
The outstanding principal balances of the Fixed Base
Certificates are to be repaid in equal monthly
installments commencing September 15, 1998 through
September 15, 1999, through the application of credit
card principal collections during that period.
Management is currently in process of refinancing the
Fixed Base Certificates and the Variable Base
Certificate with newly issued certificates under the
program. The Company expects that proceeds from the
newly issued certificates will be larger than that
received from the currently issued certificates as a
result of additional receivables acquired from Harris,
and that the newly issued certificates will bear an
interest rate equal to or less than the current
interest rates. The refinancing of the certificates is
expected to be finalized by the end of the third
quarter of 1998. However, there can be no assurance
that the completion of the refinancing will not be
delayed. In the event such refinancing is delayed,
management believes adequate excess availability exists
under its Congress facility to finance required
principal payments in the near term.
Other Financings.
The Company's long-term financing arrangements are
described more fully in Note 5 to the accompanying
financial statements.
Management believes the previously described sources of
liquidity are sufficient for its working capital,
capital expenditure and debt service requirements for
fiscal 1998. 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 Analysis.
Cash flows from operating activities consist primarily
of the net loss adjusted for certain non-cash income
and expense items, including depreciation and
amortization and the provision for credit losses, and
changes in operating assets and liabilities, including
receivables, merchandise inventory and other current
and long-term assets and liabilities. Net cash from
operating activities decreased by approximately
$600,000 to ($10.3 million) in the first half of 1998
as compared to ($10.9 million) in the first half of
1997. Cash used to fund increased operating losses was
partially offset by a lower investment in merchandise
inventory and higher collections of customer credit
card receivables as compared to the same period of the
prior year.
Net cash from investing activities decreased by
approximately $7.4 million to ($663,000) in the first
half of 1998 as compared to $6.8 million in the first
half of 1997. This decrease resulted from a $4.7
million decrease in cash provided under the
securitization program, related to the timing of the
sale of customer credit card accounts, combined with a
$2.8 million increase in capital expenditures for
tenant improvements, fixtures and equipment in
connection with the remodeling of certain existing
store locations.
Net cash from financing activities increased by $6.7
million to $11.2 million in the first half of 1998 as
compared to $4.4 million in the first half of 1997. The
Company's borrowings under its revolving lines of
credit increased as compared to the same period of the
prior year due to higher operating losses and capital
expenditures. This increase was partially offset by
principal payments on various long-term obligations and
a decrease in the cash management liability due to the
timing of payments of certain recurring payables.
The Company is in the process of remodeling and
improving fixturing and visual presentation in certain
existing store locations. The Company also plans to
commence minor refurbishing efforts in the recently
acquired Harris stores, and will also be required to
update certain information systems equipment at the
Harris locations. As of August 1, 1998, the estimated
cost to complete these projects is $3.8 million. While
management expects to complete these projects during
the second half of 1998, there can be no assurance that
the completion of such projects will not be delayed.
Year 2000 Conversion
The year 2000 problem is pervasive, with almost all
businesses, large and small, affected. The year 2000
problem impacts both information technology ("IT"),
including hardware (mainframes, client/server systems
and personal computers) and software (packaged software
and custom designed), and impacts non-information
technology ("non-IT"), including building security,
climate control and telephone systems. Like many other
companies, the year 2000 computer issue creates risks
and uncertainties for the Company. If internal systems
do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact
on the Company's operations. To address year 2000
issues, the Company established a task force in fiscal
1997 to coordinate the identification, evaluation and
implementation of changes to computer systems and
applications necessary to achieve a year 2000 date
conversion with no disruption to business operations.
These actions are necessary to ensure that the systems
and applications will recognize and process the year
2000 and beyond. It is expected that activities related
to the year 2000 issues will be on-going throughout
1998 and 1999 with the goal of appropriately resolving
all material internal systems and third party issues.
The Company's State of Readiness.
As of August 31, 1998, the Company's efforts towards
becoming year 2000 compliant with respect to its IT
systems are progressing on schedule with a projected
completion date of April 1999. The Company's mainframe
operating system environment, including its point-of-sale
systems, is already year 2000 compliant and has
been fully tested. Modifications to the Company's
proprietary, or custom designed software, have been
substantially completed and are currently being tested.
Upgrades have been scheduled for certain purchased
software packages and are expected to be
complete by April 1999. The Company's operating system
contains a testing environment specifically designed to
test year 2000 compliance. IT systems acquired from
Harris are limited to point-of-sale equipment, which
has already been converted to Gottschalks technology
and is year 2000 compliant.
The Company has also commenced the identification and
evaluation of all of its non-IT systems, which include,
among other things, its store alarm and security
systems, air conditioners and lighting, fire control,
elevators and escalators. The Company is in process of
communicating with its various suppliers', including
suppliers providing services to the new
Harris/Gottschalks locations, to determine their year
2000 compliance status. The Company's efforts towards
becoming year 2000 compliant with respect to its non-IT
systems are progressing with a scheduled completion
date of July 1999.
The Company has already communicated with its
suppliers, dealers, financial institutions and other
third parties with which it does business to determine
that the suppliers' operations and the products or
services they provide are year 2000 compliant or to
monitor their progress toward year 2000 compliance.
Some providers are not yet year 2000 compliant and
the Company is monitoring their progress on a
continual basis.
Costs Associated with Year 2000 Issues.
The costs incurred to date related to the IT year 2000
conversion are approximately $197,000. The Company
currently expects that the total remaining cost of
these efforts, including both incremental spending and
redeployed resources, will be approximately $357,000, to
be incurred throughout the fiscal 1998-1999 conversion
period. The total cost estimate consists primarily of
internal personnel costs, external consulting fees and
costs in excess of normal hardware and software
upgrades and replacements and does not include
potential costs related to the cost of internal
software and hardware replaced in the normal course of
business. Such costs represent approximately 9.4% of
the Company's IT budget for the conversion period and
will be funded with working capital. Purchased hardware
and software are being capitalized in accordance with
normal policy. Personnel and all other costs related to
the year 2000 project are being expensed as incurred.
In some instances, the installation schedule of new
software and hardware in the normal course of business
has been accelerated to also afford a solution to year
2000 capability issues. The total cost estimate is
based on the current assessment of the projects and is
subject to change as the projects progress. The Company
has not yet completed its assessment of costs that may
be associated with non-IT year 2000 issues, as such
determination will be dependant upon the results of
communications with the related suppliers. Several
programming projects have been deferred due to the year
2000 project. The delay of such projects, however, will
not have a material adverse effect on the Company's
financial position or results of operations.
Contingency Plans.
Management believes its efforts towards year 2000
compliance will be completed on schedule in mid-fiscal
1999. In the event the Company is not able to progress
according to schedule, however, the Company has
developed appropriate contingency plans. The Company's
year 2000 conversion schedule contains "trigger" dates
to implement the contingency plan specifically designed
for each system in the event the conversion has not
progressed accordingly to schedule. Such contingency
plans include the diversion of additional internal IT
staff onto the year 2000 project. Currently,
approximately 50% of the IT staff is assigned to the year
2000 project, with approximately 50% of their daily
time spent on year 2000 activities. The Company also
has additional sources of contract programming
specialists who are familiar with the Company's
operating environment. The Company also believes that
it has alternate sources of suppliers for substantially
all of its non-IT systems to replace suppliers that are
unable to become year 2000 compliant within an
appropriate time frame.
Based on currently available information, management
does not believe that the year 2000 matters discussed
above related to internal systems will have a material
adverse impact on the Company's financial condition or
overall trends in results of operations; however, it is
uncertain to what extent the Company may be affected by
such matters. In addition, there can be no assurance
that the failure to ensure year 2000 capability by a
supplier or another third party would not have a
material adverse effect on the Company.
Safe Harbor Statement
Certain statements contained in this Quarterly Report
on Form 10-Q are 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 that involve risks and uncertainties.
Such forward-looking statements may be identified by
words including, but not limited to: "will",
"believes", "anticipates", "intends", "seeks", "may",
"expects" and "estimates", or similar terms, variations
of such terms or the negative of such terms.
The forward-looking statements are qualified by
important factors that could cause actual results to
differ materially from those identified in such
forward-looking statements, including, without
limitation, the following: (i) the ability of the
Company to gauge 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 and to successfully integrate the
business acquired from Harris; (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; (viii) the effect of
competitive pressures from other retailers; (ix) the
solution of year 2000 and other system issues by the
Company and its suppliers; and (x) the ability to
refinance various certificates issued under the
receivables securitization program in the near term.
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 3. Quantitative and Qualitative Disclosures
about Market Risk - Not Applicable
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND RELATED
STOCKHOLDER MATTERS
There were no sales of unregistered securities by the
Company during the thirteen week period ended August 1,
1998.
The Company's credit agreement with Congress Financial
Corporation prohibits the Company from paying dividends
without prior written consent from that lender.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On June 25, 1998, the Company held its 1998 Annual
Meeting of Stockholders at which the following matters
were submitted to a vote of the Company's stockholders:
1. The election of the following nine nominees for
director. Each of the nine nominees were elected.
The following represents a tabulation of the votes
cast for each of the nine nominees for director:
<TABLE>
<CAPTION>
NOMINEE FOR DIRECTOR VOTES FOR VOTES WITHHELD
<S> <C> <C>
Joe Levy 7,505,587 2.179,674
James R. Famalette 9,035,849 649,412
Bret W. Levy 7,503,853 2,181,408
Max Gutmann 7,502,037 2,186,224
Sharon Levy 7,506,437 2,178,824
Joseph J. Penbera 7,506,737 2,178,524
Frederick R. Ruiz 7,497,537 2,187,724
O. James Woodward III 7,497,437 2,187,824
William Smith 9,046,149 639,112
</TABLE>
2. A proposal to approve The Gottschalks Inc. 1998
Stock Option Plan. Such proposal was approved as
follows:
<TABLE>
<CAPTION>
NUMBER OF VOTES
<S> <C>
For: 8,067,503
Against: 255,944
Abstain: 34,547
Broker Non-Votes: 1,327,267
</TABLE>
3. A proposal to approve The Gottschalks Inc. 1998
Employee Stock Purchase Plan. Such proposal was
approved as follows:
<TABLE>
<CAPTION>
NUMBER OF VOTES
<S> <C>
For: 222,575
Against: 106,013
Abstain: 29,406
Broker Non-Votes: 1,327,267
</TABLE>
4. The Stockholder Proposal for Cumulative Voting. Such
proposal was not approved as follows:
<TABLE>
<CAPTION>
NUMBER OF VOTES
<S> <C>
For: 2,844,537
Against: 5,412,526
Abstain: 100,931
Broker Non-Votes: 1,327,267
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the
requirements of Item 601 of Regulation S-K:
Exhibit No. Description
2.1 Asset Purchase Agreement dated
as of July 21, 1998 among
Gottschalks Inc., The Harris
Company and El Corte Ingles, S.
A., together will all Exhibits
thereto.(*)
2.2 Non-Negotiable, Extendable,
Subordinated Note due August 20, 2003
issued to The Harris Company. (**)
2.3 Registration Rights Agreement
between The Harris Company and
Gottschalks Inc. dated August
20, 1998. (**)
2.4 Employee Lease Agreement
between The Harris Company and
Gottschalks Inc. dated August
20, 1998. (**)
2.5 Tradename License Agreement
between The Harris Company and
Gottschalks Inc. dated August
20, 1998. (**)
2.6 Stockholders' Agreement among
El Corte Ingles, S.A.,
Gottschalks Inc., Joseph Levy
and Bret Levy dated August 20,
1998. (**)
2.7 Standstill Agreement between El
Corte Ingles, S. A., and
Gottschalks Inc. dated August
20, 1998. (**)
2.8 Store Lease Agreement between
El Corte Ingles, S.A., and
Gottschalks Inc. dated August 20, 1998 re:
East Hills Mall, Bakersfield,
California. (**)
2.9 Store Lease Agreement between
El Corte Ingles, S.A., and
Gottschalks Inc. dated August 20, 1998 re:
Moreno Valley Mall at Towngate, Moreno Valley,
California. (**)
2.10 Store Lease Agreement between
El Corte Ingles, S.A., and
Gottschalks Inc. dated August 20, 1998 re:
Antelope Valley Mall at Palmdale, California.(**)
2.11 Store Lease Agreement between
El Corte Ingles, S.A., and Gottschalks
Inc. dated August 20, 1998 re:
Carousel Mall at San Bernardino, California.(**)
27 Financial Data Schedule
(*) Filed as an exhibit to the Company's Form 8-K dated July 21, 1998
(File No. 1-09100), and incorporated herein by reference.
(**) Filed as an exhibit to the Company's Form 8-K dated August 20, 1998
(File No. 1-09100), and incorporated herein by reference.
(b) The Company filed the following Current
Report on Form 8-K during the thirteen
week period ended August 1, 1998:
-- Current Report on Form 8-K dated July 21, 1998,
describing pursuant to Item 5, Other Events,
the execution of an Asset Purchase Agreement among
Gottschalks Inc., The Harris Company and El Corte Ingles, S. A.,
pursuant to which Gottschalks will acquire substantially all of the
assets and will assume certain liabilities of Harris.
- -- Current Report on Form 8-K dated August 20, 1998, describing pursuant
to Item 2, Acquisition or Disposition of Assets, the completion of
the acquisition of substantially all of the assets and the assumption
of certain of the liabilities of Harris.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
Gottschalks Inc.
(Registrant)
September 15, 1998
\s\ Joseph W. Levy
(Joseph W. Levy,
Chairman
and Chief Executive
Officer)
September 15, 1998
\s\ Alan A. Weinstein
(Alan A. Weinstein,
Senior Vice President and
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCEPTANCE WITH REGULATION S-T
AND INCLUDES UNAUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE SECOND QUARTER ENDED AUGUST 1, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 1,785
<SECURITIES> 9,653
<RECEIVABLES> 4,867
<ALLOWANCES> 272
<INVENTORY> 105,297
<CURRENT-ASSETS> 131,363
<PP&E> 152,601
<DEPRECIATION> 49,981
<TOTAL-ASSETS> 241,993
<CURRENT-LIABILITIES> 72,054
<BONDS> 60,794
0
0
<COMMON> 105
<OTHER-SE> 80,461
<TOTAL-LIABILITY-AND-EQUITY> 241,993
<SALES> 199,599
<TOTAL-REVENUES> 202,650
<CGS> 137,057
<TOTAL-COSTS> 137,057
<OTHER-EXPENSES> 4,013
<LOSS-PROVISION> 1,249
<INTEREST-EXPENSE> 4,058
<INCOME-PRETAX> (5,718)
<INCOME-TAX> (2,372)
<INCOME-CONTINUING> (3,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,346)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
