Securities and Exchange Commission
Washington, D. C. 20549
Form 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 20, 1998
Gottschalks Inc.
(Exact Name of Registrant as specified in its charter)
Delaware 1-09100 77-0159791
(State or other (Commission (IRS Employer
jurisdiction File Number Identification
Number)
7 River Park Place East, Fresno California 93720
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (209) 434-4800
Not Applicable
(Former name or former address, if changed since last report)
The purpose of this Form 8-K/A is to amend the Form 8-K, which
was filed on September 2, 1998, to provide the
following required financial information:
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
INDEX
Page
(a) Financial Information of Business Acquired.
(i) Historical Financial Statements of The
Harris Company
Audited financial statements for each of the three
years in the period ended January 31, 1998, and the
independent auditors' report of Eadie and Payne LLP
with respect thereto..................... 3 - 17
(ii) Unaudited Financial Statements of The
Harris Company
Unaudited balance sheet as of
August 1, 1998.............................. 19 - 20
Unaudited statement of operations for the
six month period ended
August 1, 1998.............................. 21
Unaudited statement of cash flows for the
six month period ended August 1, 1998....... 22
Notes to unaudited financial statements for
the six month period ended August 1, 1998... 23 - 24
(b) Pro Forma Financial Information.
Unaudited pro forma combined condensed
consolidated balance sheet as of
August 1, 1998.............................. 26 - 27
Unaudited proforma combined consolidated
statement of operations for the six month
period ended August 1, 1998................. 28
Unaudited pro forma combined consolidated
statement of operations for the fiscal year
ended January 31,1998....................... 29
Notes to unaudited pro forma combined condensed
consolidated financial statements.......... 30 - 32
(c) Exhibit and Signature 33
THE HARRIS COMPANY
Audited Financial Statements for
each of the three years in the period
ended January 31, 1998 and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Harris Company
San Bernardino, California
We have audited the accompanying balance sheets of The
Harris Company as of January 31, 1998 and February 1,
1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1998. These
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion
on these financial statements 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, the financial statements referred to
above present fairly, in all material respects, the
financial position of The Harris Company as of January
31, 1998 and February 1, 1997, and the results of its
operations and its cash flows for each of the three
years in the period ended January 31, 1998, in
conformity with generally accepted accounting
principles.
s/Eadie and Payne LLP
EADIE AND PAYNE LLP
San Bernardino, California
March 20, 1998
<TABLE>
<CAPTION>
THE HARRIS COMPANY
BALANCE SHEETS
(In thousands of dollars)
ASSETS
January 31, February 1,
1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,270 $ 1,894
Receivables:
Customers' accounts, less allowances 16,584 20,024
of $444 in 1997 and $1,381 in 1996
Other receivables 1,897 2,118
18,481 22,142
Merchandise inventories 25,512 28,575
Other 2,411 2,833
Total current assets 47,674 55,444
PROPERTY, LEASEHOLD IMPROVEMENTS,
AND EQUIPMENT:
Land and land improvements 524 11,881
Buildings 13,708 37,720
Remodeling and improvements 7,657 7,633
Fixtures, furniture, and equipment 23,361 23,488
Construction-in-progress 252
Property and equipment under capital
leases 112 112
45,362 81,086
Less accumulated depreciation and
amortization 23,228 24,792
22,134 56,294
OTHER ASSETS 869 1,144
TOTAL ASSETS $ 70,677 $112,882
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
BALANCE SHEETS
(In thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, February 1,
1998 1997
CURRENT LIABILITIES:
<S> <C> <C>
Revolving line of credit - Note 4 $ 1,000 $ 18,800
Current portion of long-term debt -
Note 5 202 423
Trade accounts payable 4,429 4,665
Accrued expenses 4,990 5,681
Total current liabilities 10,621 29,569
LONG-TERM DEBT, less current portion:
Mortgage loans payable - Note 5 6,855 29,849
Float loan payable - Note 5 3,150 3,150
Capitalized lease obligations 45 69
10,050 33,068
DEFERRED INCOME AND OTHER 202 8,508
COMMITMENTS AND CONTINGENCIES - Note 10
STOCKHOLDERS' EQUITY:
Capital stock, par value $100; authorized
2,000,000 and 1,000,000 shares,
respectively; issued and outstanding
1,056,639 and 826,639 shares,
respectively 109,447 86,447
Accumulated deficit (59,643) (44,710)
49,804 41,737
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 70,677 $112,882
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
STATEMENTS OF OPERATIONS
(In thousands of dollars)
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 97,403 $ 97,538 $ 97,243
Service charge income 2,900 3,469 3,573
100,303 101,007 100,816
Costs and expenses:
Cost of sales 66,259 62,747 64,137
Selling, general and
administrative
expenses 41,944 42,333 41,566
Depreciation and
amortization 3,388 3,590 3,644
111,591 108,670 109,347
Operating loss (11,288) (7,663) (8,531)
Other (income) expense:
Interest expense 3,655 4,028 3,548
Miscellaneous income (8,323) (594) (869)
(4,668) 3,434 2,679
Loss before income
taxes (6,620) (11,097) (11,210)
Income taxes - Note 7 --- --- ---
Net loss $ (6,620) $(11,097) $(11,210)
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars)
Capital Accumulated
Stock Deficit Total
BALANCE,
<S> <C> <C> <C>
JANUARY 29, 1995 $ 86,447 $(22,403) $ 64,044
Net loss (11,210) (11,210)
BALANCE,
FEBRUARY 3, 1996 86,447 (33,613) 52,834
Net loss (11,097) (11,097)
BALANCE,
FEBRUARY 1, 1997 86,447 (44,710) 41,737
Net loss (6,620) (6,620)
Distribution to stockholder -
Note 3 23,000 (8,313) 14,687
BALANCE,
JANUARY 31, 1998 $109,447 $(59,643) $ 49,804
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(6,620) $(11,097) $(11,210)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 3,388 3,590 3,644
Provision for losses on accounts
receivable 2,268 1,331 1,113
Amortization of contributed
property (872) (872) (872)
Realized gain on distribution of
contributed property (7,433)
Loss on disposal of assets 252 4
Software in progress written off 420 45
(Increase) decrease in assets:
Receivables 1,393 93 1,754
Merchandise inventories 3,063 (4,431) 3,601
Other current and long-term
assets 422 1,379 (622)
Increase (decrease) in liabilities:
Trade accounts payable (237) 1,244 (936)
Other current and long-term
liabilities (690) 2,405 (1,647)
Net cash used in operating
activities (5,066) (5,938) (5,126)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on disposal of furniture
and fixtures 27 24
Purchases of property, leasehold
improvements and equipment (333) (1,153) (1,037)
Purchases of software (24) (173)
Net cash used in investing
activities (333) (1,150) (1,186)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayments) under
revolving line of credit (17,800) 7,800 (1,350)
Proceeds from issuance of stock 23,000
Proceeds from long-term debt 7,350
Principal payments on long-term
debt (425) (415) (290)
Net cash provided by financing
activities 4,775 7,385 5,710
NET INCREASE (DECREASE) IN CASH (624) 297 (602)
CASH AT BEGINNING OF YEAR 1,894 1,597 2,199
CASH AT END OF YEAR $ 1,270 $ 1,894 $ 1,597
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for interest $ 4,198 $ 3,964 $ 3,601
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Purchase of equipment though the
issuance of capital leases $ --- $ 8 $ 104
Distribution of assets - Note 3
</TABLE>
The accompanying notes are an integral part of the financial statements.
THE HARRIS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Harris Company ("Harris") is a wholly-owned
subsidiary of El Corte Ingles ("ECI") of Spain. Harris
currently operates nine retail department stores
located throughout southern California.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - The Company reports on a 52/53-week
fiscal year ending on the Saturday nearest to January
31. Fiscal years 1997, 1996 and 1995 ended on January
31, 1998, February 1, 1997 and February 3, 1996,
respectively. Fiscal years 1997 and 1996 each
contained 52 weeks; fiscal year 1995 contained 53
weeks.
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.
Cash and Cash Equivalents - For purposes of reporting
cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Receivables - Trade accounts receivable consist of
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. Earned
finance charges associated with the Company's customer
credit card receivables were $2,900,000, $3,469,000 and
$3,574,000 in 1997, 1996 and 1995.
The Company maintains reserves for possible credit
losses based on the expected collectibility of all
receivables.
Concentrations of Credit Risk - The Company extends
credit to individual customers based on their credit
worthiness and generally requires no collateral from
such customers. Such customers are primarily local
residents in the southern California area.
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 stated at the lower of
cost or market. The cost of inventories, which
approximates replacement cost, is calculated on a
first-in, first-out basis determined by the retail
inventory method.
Property and Equipment - Property and equipment is
stated on the basis of cost or appraised value as to
certain contributed land and parking facilities.
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 fixtures, furniture and equipment.
Amortization of fixtures and equipment under capital
leases is computed by the straight-line method over the
lesser of the length of the related leases or the
estimated useful lives of the assets and is combined
with depreciation in the accompanying statements of
operations.
Deferred Income - Deferred income consists of land,
cash and parking facilities contributed to the Company
by mall developers. Contributed land and parking
facilities are recorded at their appraised fair market
values with a related deferred credit which is recorded
and amortized to operations over the fifteen-year term
of the operating covenant for the related store.
Deferred income, net of accumulated amortization,
totaled $8,306,000 at February 1, 1997. There was no
deferred income as of January 31, 1998. Amortization of
deferred income totaled $872,000 in 1997, 1996 and
1995. As described more fully in Note 3, on January 30,
1998, all contributed property was distributed to ECI
and the unamortized portion of the credit, totaling
$7,433,000, was recognized as income.
Software Development Costs - Certain software
development costs are capitalized and amortized on a
straight-line basis over a period of five years from
the date the program is placed into service. Software
development costs, net of accumulated amortization,
totaling $248,000 at January 31, 1998 and $509,000 at
February 1, 1997, are included in other long-term
assets. Amortization of software development costs,
totaling $261,000 in 1997, $282,000 in 1996 and
$284,000 in 1995, is included in depreciation and
amortization in the accompanying financial statements.
Store Pre-Opening Costs - Certain expenditures incurred
prior to the opening of new stores are deferred and
charged to expense over a twelve-month period following
the date the related store is opened. There were no
pre-opening costs charged to expense in 1997, 1996 or
1995. The Company has not opened a new store since
1992.
Income Taxes - Deferred tax assets and liabilities are
generally recognized for the expected future tax
consequences of events that have been included in the
financial statements or tax returns, determined based
on the differences between the financial statement and
tax basis of assets and liabilities and net operating
loss and tax credit carryforwards, and by using enacted
tax rates in effect when the differences are expected
to reverse. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that
some portion or all of the deferred tax asset will not
be realized.
Leased Department Sales - Net sales include leased
department sales of $4,310,000 , $3,665,000 and
$2,134,000 in 1997, 1996 and 1995. Cost of sales
include related costs of $3,624,000, $3,063,000 and
$1,776,000 in 1997, 1996 and 1995.
Fair Value of Financial Instruments - The carrying
value of the Company's cash and cash equivalents,
receivables, trade payables and other accrued expenses,
revolving line of credit and stand-by letters of credit
approximate their estimated fair values because of the
short maturities or variable interest rates underlying
those instruments. Management believes that the rates
currently available to the Company for debt of the same
remaining maturities as existing debt are not
significantly different from the rates charged on
existing debt. Therefore, the aggregate fair values of
the Company's long-term debt is not significantly
different from its aggregate carrying values totaling
$7,035,000 at January 31, 1998 and $30,253,000 at
February 1, 1997.
Long-Lived Assets - The Company periodically evaluates
the carrying value of long-lived assets to be held and
used when events and circumstances warrant such a
review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted
cash flow from such an asset is separately identified
and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted
at a rate commensurate with the risks involved. Based
on such a review, the Company determined that no
impairment loss need be recognized for 1997 or 1996.
Recently Issued Accounting Standards - Statement of
Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" was recently issued
and establishes standards for reporting and displaying
comprehensive income and its components in a full set
of general-purpose financial statements. The new rules
are effective for fiscal years beginning after December
15, 1997 (fiscal 1998), with earlier application
permitted. SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" changes the
manner in which operating segments are defined and
reported externally to be consistent with the basis on
which they are defined and reported on internally. The
new rules are also effective for periods beginning
after December 15, 1997, with earlier application
permitted. The application of SFAS No. 130 and 131 will
not impact the Company's financial position, results of
operations or cash flows, and any effect will be
limited to the form and content of its disclosures. The
Company does not anticipate adoption of these standards
prior to their effective dates.
3. CAPITAL CONTRIBUTION
ECI has traditionally provided the Company with
significant financial support. On January 30, 1998,
the Company distributed to ECI land and land
improvements and buildings associated with three of its
department stores located in Palmdale, Bakersfield and
Moreno Valley. ECI also assumed all outstanding debt
associated with those properties, including accrued
interest payments. The difference between the net book
value of the assets distributed, totaling $31,127,000,
and the outstanding balances of the related mortgage
loans payable, totaling $22,814,000, has been reflected
as a capital contribution by ECI. The Company issued
ECI 230,000 shares of capital stock in connection with
the distribution.
4. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit agreement
with Bank of America, N.A., which provides for
borrowings of up to $34,250,000 through July 31, 1998.
Borrowings under the line of credit are limited to
$34,250,000, less standby letters of credit issued
totaling $6,100,000 at January 31, 1998, or
$28,150,000. Such borrowings are collateralized by
accounts receivable and are fully guaranteed by ECI.
Interest on outstanding borrowings under the line of
credit is charged at the variable prime rate (7.80% at
January 31, 1998). Outstanding borrowings totaled
$1,000,000 at January 31, 1998 and $18,800,000 at
February 1, 1997. The standby letters of credit
outstanding may not exceed $7,000,000 and may not
extend beyond July 31, 1999. The weighted-average
interest rate charged on the Company's revolving line
of credit arrangement was 7.80% in 1997, 7.61% in 1996
and 8.16% in 1995.
The agreement contains various loan covenants which,
among other things, require the Company to maintain a
minimum ratio of quick assets to current liabilities
and a minimum tangible net worth. The Company was in
compliance with all applicable loan covenants as of
January 31, 1998.
5. LONG-TERM DEBT
Mortgage loans payable consist of the following:
<TABLE>
<CAPTION>
January 31, February 1,
(In thousands of dollars) 1998 1998
HUD Section 108 Loan - City
of San Bernardino
Principal is payable
annually beginning
on August 1, 1996 with
the final payment due
August 1, 2015; interest
is payable semi- annually
at a variable rate
currently at 7.2059%;
secured by real estate
and building located in
<S> <C> <C>
San Bernardino $7,035 $7,200
Mortgage Payable - Banco
Central Hispanoamericano
Due in quarterly
installments of $158,237,
including interest at
10.005% through June 5, 2000;
secured by real estate and
building located in
Bakersfield 5,706
Mortgage Payable - Banco
Central Hispanoamericano
Due in quarterly installments
of $208,240, including interest
at 9.85% through November 20, 2000;
secured by real estate and building
located in Palmdale 7,638
Mortgage Payable - Banco
Central Hispanoamericano
Due in quarterly installments of
$231,027, including interest at
8.50% through November 19, 2002;
secured by real estate and
building located in Moreno
Valley 9,709
7,035 30,253
Less: Current portion 180 404
TOTALS $6,855 $29,849
</TABLE>
As described more fully in Note 3, ECI assumed
responsibility for the payment of the three mortgage
loans with Banco Central Hispanoamericano during 1997.
The Company entered into the HUD Section 108 loan for
the purpose of financing a portion of the $10,500,000
purchase price of its department store in San
Bernardino. The Company had previously sold the
property to a third party and had leased it back under
an operating lease. The HUD loan contains certain
restrictive covenants which are designed to be
consistent with the covenants contained in the
previously described revolving line of credit agreement
(see Note 4.)
The future minimum loan principal payments required on
mortgage loans payable as of January 31, 1998 are
$180,000, $195,000, $210,000 and $230,000 and $250,000
for 1998 through 2002, respectively, with $5,970,000
due thereafter.
Float Loan. On January 30, 1995, the Company entered
into an agreement with the City of San Bernardino,
whereby the City provided the Company with a float loan
("Float" loan) in the amount of $3,150,000 for the
purpose of financing a portion of the total $10,500,000
purchase price of its downtown store in San Bernardino.
The Float loan bears interest at a rate 8.5%, with
principal due and payable on February 1, 2000. The City
may extend the maturity of the loan at its option for
up to an additional five years after its original
maturity date with the same terms and conditions.
Monthly interest payments of $22,313 are retained by
the City in a separate sinking fund account, along with
interest earned by those funds. The Float loan is
secured by a letter of credit in the amount of
$3,150,000 which matures on February 1, 2000 and
contains certain restrictive covenants which are
designed to be consistent with the covenants contained
in the previously described revolving line of credit
agreement (see Note 4).
The Float Loan also requires the Company to maintain
operations in its downtown San Bernardino store for a
period of up to ten years and maintain specific
employment guidelines as specified by the City. In the
event the Company maintains compliance with all
applicable requirements, the accumulated interest
payments and earnings thereon retained by the City in
the separate sinking fund account may be credited
against the final principal payment due on the loan on
February 1, 2000, or at a later date if so extended by
the City.
6. LEASES
The Company leases five of its retail department
stores, and certain land and equipment under
noncancellable operating leases that expire in various
years through 2007. 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 one to ten
years. One of the operating leases also provides for
scheduled rent increases over the lease term. On
February 1, 1998, subsequent to year end, the Company
entered into an agreement to lease the three store
locations distributed to ECI (see Note 3).
Future minimum lease payments, by year and in the
aggregate, under noncancellable operating leases with
initial or remaining terms of one year or more consist
of the following at January 31, 1998:
<TABLE>
<CAPTION>
Operating Capital
(In thousands of dollars) Leases Leases
<C> <C> <C>
1998 $ 2,958 $ 30
1999 2,986 29
2000 3,012 19
2001 2,895 1
2002 2,744
Thereafter 16,573
Total minimum lease
payments $31,168 79
Amount representing
interest 12
Present value of minimum
lease payments 67
Less current portion 22
$ 45
</TABLE>
Rental expense consists of the following:
<TABLE>
<CAPTION>
(In thousands of dollars) 1997 1996 1995
Operating leases:
<S> <C> <C> <C>
Minimum rentals $1,717 $1,946 $1,695
Contingent rentals 166 161 216
Executory costs 565 522 529
$2,448 $2,629 $2,440
</TABLE>
7. INCOME TAXES
There was no current or deferred income tax provision
provided for in 1997, 1996 or 1995. The principal
components of deferred tax assets and liabilities (in
thousands of dollars) are as follows:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
Deferred Tax Assets:
Current:
<S> <C> <C>
Reserve for bad debts $ 274 $ 683
Capitalized inventory costs 647 671
Vacation accrual 341 355
1,262 1,709
Long-Term:
Net operating loss
carryforwards 23,105 20,266
General business credit
carryforwards 100 191
Alternative minimum tax
credit carryforwards 374 374
Workers' compensation accrual 249 249
Other 135 196
23,963 21,276
Deferred Tax Liabilities:
Long-Term:
Depreciation expense 775 1,056
Deferred gain on contributed
property 2,069
775 3,125
Net deferred tax asset 24,450 19,860
Valuation allowance (24,450) (19,860)
Net deferred tax asset $ --- $ ---
</TABLE>
The realization of the deferred tax assets associated
with the net operating loss carryforwards and tax
credit carryforwards are dependent upon generating
sufficient taxable income prior to their expiration.
Management has established a valuation allowance in an
amount that is not expected to be realized.
The income tax benefit varies from the amount computed
by applying the statutory federal income tax rate to
the loss before income taxes. The reasons for this
difference are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory rate (35.0)% (35.0)% (35.0)%
Valuation allowance 35.0 35.0 35.0
Effective rate 0.0% 0.0% 0.0%
</TABLE>
At January 31, 1998, the Company has, for federal tax
purposes, net operating loss carryforwards of
$60,635,000 which expire in the years 2007 through
2012, general business credits of $100,000 which expire
in the years 1998 through 2000, and alternative minimum
tax credits of $374,000 which may be used for an
indefinite period. At January 31, 1998, the Company
has, for state tax purposes, net operating loss
carryforwards of $28,156,000 which expire in the years
1998 through 2002.
8. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Plan that covers all
employees who have completed one year of service and
attained the age of 21. The Company did not make
contributions to the Plan in 1997, 1996 or 1995, but
allowed employees to make elective income deferrals to
the Plan per Plan specifications. The Company has the
option of making matching contributions to the Plan.
9. RELATED PARTY TRANSACTIONS
The Company purchases certain merchandise from ECI in
the ordinary course of business. Management believes
these transactions are under terms no less favorable to
the Company than those arranged with other parties.
Total merchandise purchased from ECI was $339,000,
$439,000 and $407,000 in 1997, 1996 and 1995. In 1993,
the Company established an office in New York for the
purpose of purchasing certain merchandise on behalf of
ECI. The Company earned commission income on those
purchases totaling $69,000, $1,114,000 and $999,000 in
fiscal 1997, 1996 and 1995 and such amounts are
included in miscellaneous income in the accompanying
statements of operations. ECI has fully guaranteed all
outstanding borrowings under the Company's line of
credit agreement with Bank of America (see Note 4). As
described more fully in Note 3, ECI contributed
$8,313,000 to the Company in 1997 in return for 230,000
shares of common stock.
10. COMMITMENTS AND CONTINGENCIES
The Company issues letters of credit in the ordinary
course of business pursuant to certain factor and
vendor contracts. (See Note 4). In managements opinion,
the likelihood of non-performance under such contracts
is remote.
The Company is party to legal proceedings and claims
which arise in 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 HARRIS COMPANY
Unaudited Financial Statements
as of and for the six month
period ended August 1, 1998
<TABLE>
<CAPTION>
THE HARRIS COMPANY
UNAUDITED BALANCE SHEET
(In thousands of dollars)
ASSETS
August 1, 1998
CURRENT ASSETS:
<S> <C>
Cash $ 1,318
Receivables:
Customers' accounts,
less allowance of $566 12,657
Other receivables 931
13,588
Merchandise inventories 24,466
Other 2,697
Total current assets 42,069
PROPERTY, LEASEHOLD IMPROVEMENTS,
AND EQUIPMENT:
Remodeling and improvements 7,657
Fixtures, furniture, and equipment 23,361
Construction-in-progress 475
Property and equipment under
capital leases 262
31,755
Less accumulated depreciation
and amortization (23,083)
8,672
OTHER ASSETS 715
TOTAL ASSETS $51,456
</TABLE>
See accompanying notes to unaudited financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
UNAUDITED BALANCE SHEET
(In thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
August 1, 1998
CURRENT LIABILITIES:
<S> <C>
Revolving line of credit $ 500
Current portion of long-term debt 48
Trade accounts payable 4,077
Accrued expenses 3,846
Total current liabilities 8,471
DEFERRED INCOME AND OTHER 351
STOCKHOLDERS' EQUITY:
Capital stock, par value $100; authorized
2,000,000 and 1,000,000 shares,
respectively; issued and outstanding
1,056,639 shares 109,447
Accumulated deficit (66,813)
42,634
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 51,456
</TABLE>
See accompanying notes to unaudited financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
UNAUDITED STATEMENT OF OPERATIONS
(In thousands of dollars)
For the six month period
ended August 1, 1998
<S> <C>
Net sales $ 43,885
Service charge income 1,439
45,324
Costs and expenses:
Cost of sales 28,315
Selling, general and administrative
expenses 19,143
Depreciation and amortization 1,228
48,686
Operating loss (3,362)
Other (income) expense:
Interest expense 137
Miscellaneous income (49)
88
Loss before income taxes (3,450)
Income taxes ---
Net loss $(3,450)
</TABLE>
See accompanying notes to unaudited financial statements.
<TABLE>
<CAPTION>
THE HARRIS COMPANY
UNAUDITED STATEMENT OF CASH FLOWS
(In thousands of dollars)
For the six month period
ended August 1, 1998
OPERATING ACTIVITIES:
<S> <C>
Net loss $ (3,450)
Adjustments:
Depreciation and amortization 1,228
Provision for losses on
accounts receivable 417
(Increase) decrease in assets:
Receivables 3,510
Merchandise inventories 1,046
Other current and long-term assets 680
Increase (decrease) in liabilities:
Trade accounts payable (352)
Other current and long-term liabilities (995)
Net cash used in operating activities 2,084
INVESTING ACTIVITIES:
Purchases of property, leasehold
improvements and equipment (645)
Net cash used in investing activities (645)
FINANCING ACTIVITIES:
Net repayments under revolving
line of credit (500)
Principal payments on long-term debt (891)
Net cash used in financing activities (1,391)
INCREASE IN CASH 48
CASH AT BEGINNING OF YEAR 1,270
CASH AT END OF PERIOD 1,318
NON-CASH INVESTING AND
FINANCING ACTIVITIES -- Note 3
</TABLE>
See accompanying notes to unaudited financial statements.
THE HARRIS COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Six month period ended August 1, 1998
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Harris Company ("Harris") is a wholly-owned
subsidiary of El Corte Ingles ("ECI") of Spain. Harris
currently operates nine retail department stores
located throughout southern California.
The accompanying unaudited balance sheet and statement
of operations (collectively, the "interim financial
statements") have been prepared in accordance with
generally accepted accounting principals for interim
financial information. Such interim financial
statements do not include all of the information and
footnotes required by generally accepted accounting
principals 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.
These financial statements should be read in
conjunction with the Company's audited financial
statements and footnotes thereto for the year ended
January 31, 1998 included elsewhere in this Form 8-K/A.
2. ASSET PURCHASE AGREEMENT
On July 21, 1998, the Company entered into an Asset
Purchase Agreement, pursuant to which the Company sold
substantially all of its assets to Gottschalks Inc.
Gottschalks Inc. is a regional department and specialty
store chain based in Fresno, California. The purchase
price for the assets consisted of the issuance to
Harris of 2,095,900 shares of Gottschalks common stock,
the issuance of an 8% Non-Negotiable, Extendable,
Subordinated Note due August 20, 2003 in the principal
amount of $22,179,598 and the assumption of certain
liabilities, including vendor payables, store leases
and certain other contracts. The assets sold consisted
primarily of merchandise inventory, customer credit
card receivables, fixtures and equipment and certain
intangibles. The Company's revolving line of credit
with Bank of America, N.A. was terminated in connection
with the sale of assets and all outstanding borrowings
were repaid as of that date. Outstanding borrowings
under the arrangement totaled $500,000 as of August 1,
1998. The acquisition was finalized on August 20,
1998. Harris will continue to provide certain services
to ECI, including the coordination of certain
merchandise purchasing activities in the United States.
3. CAPITAL TRANSACTION
In May 2, 1998, the Company distributed to ECI the land
and building associated with its department store
located in San Bernardino, California. ECI also
assumed the outstanding debt associated with the
property. The difference between the net book value of
the assets distributed, totalling $13,033,000, and the
outstanding balances of the related debt obligations,
totalling $9,313,000, has been reflected as a reduction
to capital.
4. INCOME TAXES
The Company has increased its previously established
valuation allowance for its net deferred tax asset by
$1,311,000 for the six month period ended August 1,
1998, representing the amount that is not expected to
be realized. The adjustment to the valuation allowance
resulted in no current or deferred income tax benefit
recognized in the six month period ended August 1,
1998.
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined
condensed consolidated financial statements of
Gottchalks Inc. and Subsidiary (the "Company") give
effect to the acquisition of certain of the assets and
the assumption of certain of the liabilities of The
Harris Company, ("Harris") on August 20, 1998. The
acquisition was accounted for under the purchase method
of accounting, which requires the purchase price to be
allocated to the acquired assets and liabilities
assumed of Harris on the basis of their estimated fair
values as of the date of acquisition. The following
unaudited pro forma combined condensed consolidated
balance sheet gives effect to the acquisition of Harris
as if it had occurred on August 1, 1998, and the
unaudited pro forma combined condensed consolidated
statements of operations (collectively, the "Unaudited
Pro Forma Financial Information") reflects the results
of operations of the Company for the six month period
ended August 1, 1998 and the fiscal year ended January
31, 1998 as if the acquisition of Harris had occurred
on February 1, 1998 (the first day of fiscal 1998) and
February 2, 1997, (the first day of fiscal 1997) and
includes adjustments directly attributable to the
acquisition and expected to have a continuing impact on
the combined company. The Unaudited Pro Forma Financial
Information has been prepared based on preliminary
estimates of certain direct costs and liabilities
associated with the transaction, and amounts actually
recorded may change upon final determination of such
amounts. Specifically, additional information is
expected to be obtained for the value of inventories,
customer credit card receivables, and accrued expenses
and exit costs related to the acquisition.
The Unaudited Pro Forma Financial Information
and related notes are provided for informational
purposes only and are not necessarily indicative of
what the Company's actual financial position or results
of operations would have been had the forgoing
transaction been consummated on such dates, nor does it
give effect to the synergies, cost savings and other
charges expected to result from the acquisition.
Accordingly, the pro forma financial information does
not purport to be indicative of the Company's financial
position or results of operations as of the date hereof
or for any period ended on the date hereof or as of or
for any other future date or period.
The following unaudited pro forma financial
information is based in part on the historical
consolidated financial statements of the Company, and
the related notes thereto, which are included in the
Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1998, and the Company's
Quarterly Report on Form 10-Q for the six month period
ended August 1, 1998, and the historical financial
statements of Harris, and the related notes thereto,
presented elsewhere in this Current Report on Form 8-K/A.
The retail business is seasonal in nature, with
a higher proportion of sales and earnings usually being
generated in the months of November and December than
in other periods. Because of this seasonality and other
factors, results of operations for an interim period
are not necessarily indicative of results of operations
for an entire fiscal year.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND HARRIS
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF AUGUST 1, 1998
(In thousands of dollars)
ASSETS
Historical Pro-Forma Pro-Forma
Gottschalks Harris Adjustments Combined
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 1,785 $ 1,318 $ 3,103
Retained interest in
receivables sold 9,653 --- 9,653
Receivables - net 4,595 13,588 18,183
Merchandise inventories 105,297 24,466 $(5,687)(a) 124,076
Other 10,033 2,697 12,730
Total current assets 131,363 42,069 (5,687) 167,745
PROPERTY AND
EQUIPMENT, NET 102,620 8,672 (3,313)(b) 107,979
OTHER LONG-TERM ASSETS 8,010 715 5,786 (c) 14,511
TOTAL ASSETS $241,993 $51,456 $ (3,214) $290,235
</TABLE>
See accompanying notes to unaudited proforma financial information.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND HARRIS
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF AUGUST 1, 1998
(In thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
Historical Pro-Forma Pro-Forma
Gottschalks Harris Adjustments Combined
CURRENT LIABILITIES:
<S> <C> <C> <C>
Revolving line of credit $ 22,724 $ 500 $ 23,224
Cash management liability 6,416 --- 6,416
Trade accounts payable 18,819 4,077 22,896
Accrued expenses and
other liabilities 15,280 3,846 $ 2,800(d) 21,926
Taxes, other than income
taxes 4,501 --- 4,501
Current portion of long-term
obligations 4,314 48 4,362
Total current
liabilities 72,054 8,471 2,800 83,325
LONG-TERM OBLIGATIONS,
(less current portion):
Line of credit 25,000 --- 25,000
Notes and mortgage loans
payable 28,820 --- 20,467(e) 49,287
Capitalized lease
obligations 6,974 --- 6,974
60,794 --- 20,467 81,261
DEFERRED INCOME 17,923 --- 17,923
DEFERRED LEASE
PAYMENTS AND OTHER 10,656 351 515 11,522
STOCKHOLDERS' EQUITY 80,566 42,634 (26,996)(f) 96,204
$241,993 $51,456 $ (3,214) $290,235
</TABLE>
See accompanying notes to unaudited pro forma financial information.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND HARRIS
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED AUGUST 1, 1998
(In thousands of dollars, except per share data)
Historical Pro-Forma Pro-Forma
Gottschalks Harris Adjustments Combined
<S> <C> <C> <C>
Net sales $199,599 $ 43,885 $243,484
Net credit revenues 3,051 1,439 4,490
202,650 45,324 247,974
COSTS & EXPENSES:
Cost of sales 137,057 28,315 165,372
Selling, general and
administrative
expenses 63,785 19,143 $ (417)(g) 82,511
Depreciation
and amortization 4,013 1,228 (808)(h) 4,433
204,855 48,686 (1,225) 252,316
Operating loss (2,205) (3,362) 1,225 (4,342)
Other (income) expense:
Interest expense 4,058 137 887(i) 5,082
Miscellaneous income (545) (49) (594)
3,513 88 887 4,488
LOSS BEFORE INCOME
TAX BENEFIT (5,718) (3,450) 338 (8,830)
Income tax benefit (2,372) --- 139(j) (2,233)
NET LOSS $(3,346) $(3,450) $ 199 $ (6,597)
Net loss per common share -
basic and diluted $( .32) $ --- $ (.52)(k)
Weighted average number of
common shares outstanding 10,479 --- 12,575(k)
</TABLE>
See accompanying notes to unaudited pro forma financial information.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND HARRIS
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
(In thousands of dollars, except per share data)
Historical Pro-Forma Pro-Forma
Gottschalks Harris Adjustments Combined
<S> <C> <C> <C>
Net sales $448,192 $97,403 $545,595
Net credit revenues 6,385 2,900 9,285
454,577 100,303 554,880
COSTS & EXPENSES:
Cost of sales 304,558 66,259 370,817
Selling, general and
administrative
expenses 130,922 41,944 $ 74(l) 172,940
Depreciation
and amortization 6,667 3,388 (2,549)(m) 7,506
442,147 111,591 (2,475) 551,263
Operating income (loss) 12,430 (11,288) 2,475 3,617
Other (income) expense:
Interest expense 7,325 3,655 1,774 (n) 12,754
Miscellaneous income (1,955) (8,323) (10,278)
Acquisition related
expenses 673 --- 673
6,043 (4,668) 1,774 3,149
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE
(BENEFIT) 6,387 (6,620) 701 468
Income tax expense
(benefit) 2,657 --- 292 (o) 2,949
NET INCOME (LOSS) $ 3,730 $(6,620) $ 409 $ (2,481)
Net income (loss) per common share -
basic and diluted $ .36 $ --- $ (.20)(p)
Weighted average number of
common shares outstanding 10,474 --- 12,570 (p)
</TABLE>
See accompanying notes to unaudited pro forma financial information.
GOTTSCHALKS INC. AND HARRIS
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(In thousands of dollars)
Note 1. Notes to Unaudited Pro Forma Combined
Condensed Consolidated Balance Sheet as of
August 1, 1998
(a) Represents the following:
Adjustment to record acquired
merchandise inventory at estimated
fair value (7,554)
Adjustment to conform Harris'
direct cost method of
accounting for inventory
to the full cost method used
by the Company 1,867
Net adjustment $(5,687)
(b) Adjustment to record acquired
leaseholds, fixtures and equipment
at estimated fair value.
(c) Represents the adjustment to record
the excess of purchase price
over the estimated fair value of
identifiable net assets acquired
as computed below:
Fair value of common stock
issued to Harris $14,273
Fair value of 8% Junior
Subordinated Note issued to
Harris 20,467
Total estimated direct fees
and expenses in connection
with the acquisition 1,218
Total purchase price $35,958
Preliminary allocation of
purchase price:
Customer credit card and other
receivables $12,149
Merchandise inventories 20,850
Other current and long-term
assets 3,486
Leaseholds, fixtures and
equipment 5,731
Current liabilities (9,947)
Deferred tax liability (515)
Accrued purchase liabilities (1,582)
Excess of purchase price over
the estimated fair value
of identifiable net assets
acquired 5,786
Total purchase price $35,958
(d) Adjustment to reflect the following:
To accrue for estimated severance
costs associated with
contractual obligations of
former Harris employees $ 1,382
To accrue for estimated costs
associated with exiting certain
activities of the acquired
business 200
To accrue for estimated direct
fees and expenses in connection
with the acquisition of Harris 1,218
Net adjustment $ 2,800
(e) Adjustment to reflect the issuance of 8% Junior
Subordinated Note to Harris at fair value.
(f) Adjustment to reflect the following:
Issuance of 2,095,900 shares of
common stock to Harris $ 14,273
Adjustment to eliminate
historical capital of
Harris (41,269)
Net adjustment $(26,996)
Note 2. Notes to Unaudited Pro Forma Combined
Consolidated Statement of
Operations for the six-month
period ended August 1, 1998
(g) Adjustment to reflect the following:
To eliminate rental expense for
former store lease agreements
of Harris $(1,678)
To reflect rental expense for
new lease agreements entered
into in connection with the
acquisition 261
Net adjustment $ (417)
(h) Adjustment to reflect the following:
To eliminate historical basis
depreciation and amortization
expense of Harris $(1,228)
To reflect depreciation expense
based on the fair value of the
assets acquired 288
To reflect the amortization of
estimated excess of cost
over net assets acquired over
an assumed 20-year period 132
Net adjustment $ (808)
(i) Adjustment to reflect interest expense on
acquisition debt.
(j) To reflect income tax benefit for certain
proforma adjustments based upon an assumed
composite (federal, state, and local) income tax
rate of 41.0%.
(k) To reflect the issuance of 2,095,000 common
shares of the Company's common stock in
connection with the acquisition of Harris.
Note 3. Notes to Unaudited Pro Forma Combined
Consolidated Statement of
Operations for the fiscal year ended
January 31, 1998
(l) Adjustment to reflect the following:
To eliminate rental expense for former
store lease agreements of
Harris $(2,448)
To reflect rental expense for
new lease agreements entered
into in connection with the
acquisition 2,522
Net adjustment $ 74
(m) Adjustment to reflect the following:
To eliminate historical basis
depreciation and
amortization expense of Harris $(3,388)
To reflect depreciation expense
based on the fair value of the
assets acquired 575
To reflect the amortization of
estimated excess of cost
over net assets acquired
over an assumed 20-year period 264
Net adjustment $(2,549)
(n) Adjustment to reflect interest expense on
acquisition debt.
(o) To reflect income tax benefit for certain
proforma adjustments based upon an assumed
composite (federal, state, and local) income tax
rate of 41.6%.
(p) To reflect the issuance of 2,095,000 common
shares of the Company's common stock in
connection with the acquisition of Harris at
fair value.
(c) Exhibits.
Exhibit
Number Description
23.1 Consent of Eadie and Payne LLP.
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.
By: /s/ James R. Famalette
President and
Chief Operating
Officer
Dated: November 2, 1998
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the filing of our reports on the
financial statements of The Harris Company dated April
8, 1996, April 1, 1997 and March 20, 1998 with this
Current Report on Form 8-K of Gottschalks Inc. and to
the incorporation by reference in Registration
Statements No. 33-54783, No. 33-54789, No. 333-61471
and No. 333-61473 of Gottschalks Inc. on Form S-8.
s/Eadie and Payne LLP
Eadie and Payne LLP
San Bernardino, California
October 31, 1998
