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 May 1, 1999
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
Identification No.)
7 River Park Place East, Fresno, California 93720
- ------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area
code (209) 434-4800
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 May 31, 1999
was 12,575,565.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION -------
- ------------------------------
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
May 1, 1999, January 30, 1999 and May 2, 1998 2
Consolidated statements of operations -
thirteen weeks ended May 1, 1999 and May 2, 1998 3
Condensed consolidated statements of cash flows -
thirteen weeks ended May 1, 1999 and May 2, 1998 4
Notes to condensed consolidated financial statements -
thirteen weeks ended May 1, 1999 and May 2, 1998 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
- -------------------------------------------------------------------
May 1, January 30, May 2,
1999 1999 1998
------ ----------- ------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,319 $ 1,693 $ 1,812
Retained interest in
receivables sold (Note 3) 16,651 37,399 9,874
Receivables - net (Note 3) 6,423 18,985 4,160
Merchandise inventories 143,264 123,118 114,961
Other 12,561 12,836 10,565
------- ------- -------
Total current assets 181,218 194,031 141,372
PROPERTY AND EQUIPMENT 173,189 167,780 149,208
Less accumulated depreciation
and amortization 56,494 54,135 47,985
------- ------- -------
116,695 113,645 101,223
OTHER LONG-TERM ASSETS 17,123 16,688 8,238
------- ------- -------
$315,036 $324,364 $250,833
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and
other current liabilities
(Note 5) $ 69,659 $ 73,093 $ 50,069
Revolving line of credit 16,785 20,273 24,116
Current portion of long-term
obligations 4,507 4,434 4,228
Total current liabilities 90,951 97,800 78,413
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 40,000 40,000 25,000
Notes and mortgage loans payable 27,276 27,506 29,394
Capitalized lease obligations 6,152 6,608 7,380
------- ------- -------
73,428 74,114 61,774
DEFERRED INCOME & OTHER 27,564 28,364 28,728
SUBORDINATED NOTE PAYABLE
TO AFFILIATE (Note 2) 20,704 20,618
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY 102,389 103,468 81,918
------- ------- -------
$315,036 $324,364 $250,833
======= ======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
- ------------------------------------------------------------------
Thirteen Weeks
Ended
---------------------
May 1, May 2,
1999 1998
----- ------
<S> <C> <C>
Net sales $119,174 $ 95,468
Net credit revenues 2,237 1,880
------- -------
121,411 97,348
Costs and expenses:
Cost of sales 80,342 65,527
Selling, general & administrative
expenses 38,448 31,441
Depreciation & amortization 2,277 1,980
------- -------
121,067 98,948
------- -------
Operating income (loss) 344 (1,600)
Other (income) expense:
Interest expense 2,552 1,984
Miscellaneous income (357) (176)
------- ------
2,195 1,808
Loss before income tax benefit (1,851) (3,408)
Income tax benefit (772) (1,414)
------ ------
Net loss $ (1,079) $ (1,994)
====== ======
Net loss per common share -
basic and diluted $ (.09) $ (.19)
====== ======
Weighted average number of
common shares outstanding 12,575 10,479
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - Note 1)
(In thousands of dollars
- --------------------------------------------------------------------
Thirteen Weeks
Ended
-------------------
May 1, May 2,
1999 1998
------- -------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,079) $(1,994)
Adjustments:
Depreciation and amortization 2,277 1,980
Provision for credit losses 228 91
Other adjustments, net (1,543) (1,612)
Changes in operating assets
and liabilities:
Receivables (318) 2,381
Merchandise inventories (19,930) (15,510)
Other current and long-term assets 430 2,432
Trade accounts payable 5,565 423
Other current and long-term
liabilities (9,075) (5,321)
------ ------
Net cash used in operating
activities (23,445) (17,130)
INVESTING ACTIVITIES:
Available-for-sale securities (Note 3):
Maturities (78,090) (49,581)
Purchases 86,947 55,520
Capital expenditures (5,409) (3,989)
Other 49 510
------ ------
Net cash provided by investing
activities 3,497 2,460
FINANCING ACTIVITIES:
Net (repayments) proceeds under
revolving line of credit (3,488) 18,349
Proceeds from issuance of 1999-1
Series certificate (Note 3) 53,000
Principal payments on outstanding
Series certificates (Note 3) (28,400)
Principal payments on long-term
obligations (1,113) (1,027)
Proceeds from long-term obligations 500
Changes in cash management liability
and other 75 (2,441)
------ ------
Net cash provided by financing
activities 20,574 14,881
------ ------
INCREASE IN CASH 626 211
CASH AT BEGINNING OF YEAR 1,693 1,601
------ ------
CASH AT END OF PERIOD $ 2,319 $ 1,812
====== =======
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks Ended May 1, 1999 and May 2,1998
- --------------------------------------------------------------
1.NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Gottschalks Inc. is a regional department and
specialty store chain based in Fresno,
California, currently consisting of forty full-
line department stores, including thirty
"Gottschalks" and ten "Harris/Gottschalks"
department stores, and twenty specialty stores
which carry a limited selection of
merchandise. The Company's department stores
are located primarily in non-major
metropolitan cities throughout California and
in Oregon, Washington and Nevada, and
typically offer a wide range of moderate and
better 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. The Company operates in
one reportable operating segment.
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 week period ended May 1, 1999 are not
necessarily indicative of the results that may
be expected for the year ending January 29,
2000 (fiscal 1999), due to the seasonal nature
of the Company's business and its LIFO
inventory valuation adjustment ("LIFO
adjustment"), currently recorded only at the
end of each fiscal year (Note 4). These
financials statements should be read in
conjunction with the Company's Annual Report
on Form 10-K for the year ended January 30,
1999 (the "1998 Annual Report on Form 10-K").
The condensed consolidated balance sheet at
January 30, 1999, has been derived from the
audited consolidated financial statements at
that date.
2. BUSINESS ACQUISITION
As described more fully in the Company's
Annual Report on Form 10-K, the Company
completed the acquisition of substantially all
of the assets and business of The Harris
Company ("Harris") on August 20, 1998. Harris
operated nine full-line department stores
located throughout southern California. As
planned, the Company closed one of the
acquired stores on January 31, 1999. The
purchase price for the assets consisted of the
issuance to Harris of 2,095,900 shares of
common stock of the Company and a $22.2
million 8% Subordinated Note due August 2003
(extendable to August 2006 under certain
circumstances). The acquisition was accounted
for under the purchase method of accounting
and, accordingly, the results of operations of
the acquired stores are included in the
Company's financial statements from the
acquisition date of August 20, 1998.
3. RECEIVABLES SECURITIZATION PROGRAM
The Company's receivables securitization
program provides the Company with a source of
working capital and long-term 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, servicing
retained, to GCRC, and certain of those
receivables are subsequently conveyed to
Gottschalks Credit Card Master Trust ("GCC
Trust"), to be used as collateral for
securities issued to investors. Transfers of
receivables to GCC Trust are accounted for as
sales for financial reporting purposes and,
accordingly, such transferred receivables are
removed from the Company's balance sheet. The
Company retains an ownership interest in
certain of the receivables sold under the
program, represented by Exchangeable and
Subordinated Certificates, and also retains an
uncertificated ownership interest in
receivables that do not meet certain
eligibility requirements of the program. As of
January 30, 1999, the uncertificated
receivables included $12.7 million of
receivables acquired from Harris which were
subsequently sold in connection with the
refinancing of the program on March 1, 1999.
As described more fully in the Company's 1998
Annual Report on Form 10-K, the Company issued
a $53.0 million principal amount 7.66% Fixed
Base Class A-1 Credit Card Certificate (the
"1999-1 Series") on March 1, 1999. Proceeds
from the issuance of the 1999-1 Series were
used to repay the outstanding balances of
previously issued certificates under the
program, totaling $26.9 million as of that
date, reduce outstanding borrowings under the
line of credit by $25.3 million and pay
certain costs of the transaction. Interest on
the 1999-1 Series is earned by the certificate
holder on a monthly basis at a fixed interest
rate of 7.66%, and the outstanding principal
balance of the certificate, which is treated
as off-balance sheet for financial reporting
purposes, is to be repaid in twelve equal
monthly installments commencing September 2003
and continuing through August 2004. The
Company is required, among other things, to
maintain certain portfolio performance
standards under the program. Subject to
certain conditions, the Company may expand the
program to meet future receivables growth.
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 at January 30, 1999.
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 1999 operating
results.
5. TRADE ACCOUNTS PAYABLE AND OTHER
CURRENT LIABILTIIES
Trade accounts payable and other current
liabilities consist of the following:
<TABLE>
<CAPTION>
May 1, January 30,
(In thousands of dollars) 1999 1999
------ ----------
<S> <C> <C>
Trade accounts payable $28,743 $23,178
Cash management liability 12,253 12,176
Taxes, other than income taxes 6,409 11,078
Accrued expenses 7,901 10,597
Accrued payroll and related
liabilities 5,855 6,416
Federal and state income taxes
payable 4,028 5,178
Deferred income taxes 4,470 4,470
------ ------
$69,659 $73,093
====== ======
</TABLE>
6. REVOLVING LINE OF CREDIT
The Company has a $110.0 million revolving
line of credit facility with Congress
Financial Corporation ("Congress") through
March 30, 2001. Borrowings under the facility
are limited to a restrictive borrowing base
equal to 65% of eligible merchandise
inventories, increasing to 70% of such
inventories during the period of September 1
through December 20 of each year to fund
increased seasonal inventory requirements.
Interest under the facility is charged at a
rate of approximately LIBOR plus 2.00% (7.01%
at May 1, 1999), with no interest charged on
the unused portion of the line of credit. The
maximum amount available for borrowings under
the line of credit was $85.6 million as of May
1, 1999, of which $56.8 million was
outstanding as of that date. Of that amount,
$40.0 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
May 1, 1999.
7. 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
is not expected to have a material adverse
effect on the Company's financial position or
results of its operations.
The Company has entered into an agreement to
open one new department store in the second
half of fiscal 1999 and is in the process of
remodeling certain existing store locations.
The estimated cost of such projects, totaling
$8.8 million, is expected to be provided for
from existing financial resources. Such
projects are expected to be fully complete in
fiscal 1999. However, there can be no
assurance that the completion of such projects
will not be delayed subject to a variety of
conditions precedent or other factors.
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 may result in performance
for the thirteen weeks ended May 1, 1999 which
is not necessarily indicative of performance
for the remainder of the year. In addition,
the Company completed the acquisition of nine
stores from Harris on August 20, 1998, closing
one of the acquired stores on January 31,
1999, as planned. The acquisition has affected
the comparability of the Company's financial
results.
Thirteen Weeks Ended May 1, 1999 Compared to
Thirteen Weeks Ended May 2, 1998
Results of Operations
- -----------------------
The following table sets forth for the periods
indicated certain items from the Company's
Consolidated Statements of Operations as a
percent of net sales:
<TABLE>
<CAPTION>
First Quarter
1999 1998
------ -----
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.9 2.0
----- ----
101.9 102.0
Cost and expenses:
Cost of sales 67.4 68.6
Selling, general and
administrative expenses 32.3 32.9
Depreciation and
amortization 1.9 2.1
----- ----
101.6 103.6
----- ----
Operating income (loss) 0.3 (1.6)
Other (income) expense:
Interest expense 2.1 2.1
Miscellaneous income (0.3) (0.2)
----- -----
1.8 1.9
----- -----
LOSS BEFORE INCOME TAX BENEFIT (1.5) (3.5)
Income tax benefit (0.6) (1.4)
----- -----
NET LOSS (0.9)% (2.1)%
===== =====
</TABLE>
Net Sales
- ---------------
Net sales increased by approximately $23.7
million to $119.2 million in the first quarter
of 1999 as compared to $95.5 million in the
first quarter of 1998, an increase of 24.8%.
This increase is primarily due to additional
sales volume generated by the eight new
Harris/Gottschalks locations. Comparable store
sales increased by 7.7% in the first quarter
of 1999 as compared to the first quarter of
1998.
Net Credit Revenues
- --------------------
Net credit revenues related to the Company's
credit card receivables portfolio increased by
$357,000, or 19.0%, in the first quarter of
1999 as compared to the first quarter of 1998.
As a percent of net sales, net credit revenues
was 1.9% of net sales in the first quarter of
1999 as compared to 2.0% in the first quarter
of 1998. Amounts included in net credit
revenues are as follows:
<TABLE>
<CAPTION>
First Quarter
In thousands of dollars) 1999 1998
---- ----
<S> <C> <C>
Service charge revenues $3,835 $3,503
Interest expense on securitized
receivables (1,009) (925)
Charge-offs on receivables sold
and provision for credit
losses on receivables ineligible
for sale (646) (522)
Gain (loss) on sale of
receivables 57 (176)
------ ------
$2,237 $1,880
====== ======
</TABLE>
Service charge revenues increased by $332,000,
or 9.5%, in the first quarter of 1999 as
compared to the first quarter of 1998. This
increase is primarily due to additional
service charge revenues generated by customer
credit card receivables acquired from Harris,
an increase in the volume of late charge fees
collected on delinquent credit card balances,
and an increase in credit sales as a percent
of total sales (46.0% in the first quarter of
1999 as compared to 43.9% in the first quarter
of 1998).
Interest expense on securitized receivables
increased by $84,000, or 9.1%, in the first
quarter of 1999 as compared to the first
quarter of 1998. This increase is primarily
due to a higher weighted-average interest rate
applicable to securitized borrowings during
the period (7.59% in the first quarter of 1999
as compared to 7.27% in the first quarter of
1998) (see Note 3 to the accompanying
financial statements). Charge-offs on
receivables sold and the provision for credit
losses on receivables ineligible for sale
increased by $124,000, or 23.8%, in the first
quarter of 1999 as compared to the first
quarter of 1998. As a percent of sales,
however, such amounts remained unchanged at
0.5% in the first quarters of 1999 and 1998.
Cost of Sales
- ------------------
Cost of sales, which includes costs associated
with the buying, handling and distribution of
merchandise, increased by approximately $14.8
million to $80.3 million in the first quarter
of 1999 as compared to $65.5 million in the
first quarter of 1998, an increase of 22.6%.
The Company's gross margin percentage
increased to 32.6% in the first quarter of
1999 as compared to 31.4% in the first quarter
of 1998, primarily due to increased sales of
higher gross margin merchandise categories,
combined with lower markdowns and lower costs
associated with the processing of merchandise
at the Company's distribution center during
the period. (See Note 4 to the accompanying
financial statements.)
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses
increased by approximately $7.0 million to
$38.4 million in the first quarter of 1999 as
compared to $31.4 million in the first quarter
of 1998, an increase of 22.3%. Due to higher
sales volume gained through the acquisition of
the Harris stores and on-going Company-wide
expense control measures, selling, general and
administrative expenses as a percent of net
sales decreased to 32.3% in the first quarter
of 1999 as compared to 32.9% in the first
quarter of 1998.
Depreciation and Amortization
- ---------------------------------
Depreciation and amortization expense, which
includes the amortization of goodwill,
increased by approximately $300,000 to $2.3
million in the first quarter of 1999 as
compared to $2.0 million in the first quarter
of 1998, an increase of 15.0%. Due to higher
sales volume gained through the acquisition of
the Harris stores, depreciation and
amortization expense as a percent of net sales
decreased to 1.9% in the first quarter of 1999
as compared to 2.1% in the first quarter of
1998. The dollar increase is due to additional
depreciation related to assets acquired from
Harris, capital expenditures for the
renovation of existing stores and assets
acquired under capital lease obligations. The
increase is also due to the amortization of
goodwill resulting from the acquisition of the
Harris stores, which totaled $106,000 in the
first quarter of 1999.
Interest Expense
- -------------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $600,000 to $2.6
million in the first quarter of 1999 as
compared to $2.0 million in the first quarter
of 1998, an increase of 28.6%. As a percent
of net sales, interest expense remained
unchanged at 2.1% in the first quarters of
1999 and 1998. The dollar increase is
primarily due to interest associated with the
Subordinated Note issued to Harris (see Note 2
to the accompanying financial statements),
combined with higher average outstanding
borrowings under the Company's working capital
facility. This increase was partially offset
by a decrease in the weighted-average interest
rate applicable to outstanding borrowings
under the Company's working capital facility
(7.14% in the first quarter of 1999 as
compared to 7.96% in the first quarter of
1998), in part due to a 1/4% reduction to the
interest rate on the Congress facility
beginning March 1, 1999.
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,
increased by $181,000 to $357,000 in the first
quarter of 1999 as compared to $176,000 in the
first quarter of 1998. Miscellaneous income
in the first quarter of 1998 was reduced by
start-up costs associated with a new customer
loyalty program.
Income Taxes
- --------------------
The Company's interim effective tax credits of
(41.7%) in the first quarter of 1999 and
(41.5%) in the first quarter of 1998 relate to
net losses incurred during those periods and
represent the Company's best estimates of the
annual effective tax rates for those fiscal
years.
Net Loss
- ----------------
As a result of the foregoing, the Company's
net loss decreased by approximately $900,000
to $1.1 million in the first quarter of 1999
as compared to $2.0 million in the first
quarter of 1998. On a per share basis (basic
and diluted), the net loss decreased by $0.10
per share to $(0.09) per share in the first
quarter of 1999 as compared to $(0.19) per
share in the first quarter of 1998.
Liquidity and Capital Resources
- ----------------------------------
Sources of Liquidity.
As described more fully in the Company's 1998
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.
Revolving Line of Credit.
The Company has a $110.0 million revolving
line of credit facility with Congress through
March 30, 2001. Borrowings under the
arrangement are limited to a restrictive
borrowing base equal to 65% of eligible
merchandise inventories, increasing to 70% of
such inventories during the period of
September 1 through December 20 of each year
to fund increased seasonal inventory
requirements. Interest under the facility is
charged at a rate of approximately LIBOR plus
2.00%, with no interest charged on the unused
portion of the line of credit. The maximum
amount available for borrowings under the line
of credit was $85.6 million as of May 1, 1999,
of which $56.8 million was outstanding as of
that date.
Receivables Securitization Program.
The Company's receivables securitization
program provides the Company with an
additional source of working capital and long-
term financing that is generally more cost-
effective than traditional debt financing. As
described more fully in the Company's 1998
Annual Report on Form 10-K, on March 1, 1999,
the Company issued a $53.0 million principal
amount 7.66% Fixed Base Class A-1 Credit Card
Certificate (the "1999-1 Series") to a single
investor through a private placement. Proceeds
from the issuance of the 1999-1 Series were
used to repay the outstanding balances of
previously issued certificates, totaling $26.9
million as of that date, reduce outstanding
borrowings under the Company's revolving line
of credit by $25.3 million and pay certain
costs associated with the transaction.
Interest on the 1999-1 Series is earned by the
certificate holder on a monthly basis at a
fixed interest rate of 7.66%, and the
outstanding principal balance of the
certificate is to be repaid in twelve equal
monthly installments commencing September 2003
and continuing through August 2004. Monthly
cash flows generated by the Company's credit
card portfolio, consisting of principal and
interest collections, are first used to pay
certain costs of the program, which include
interest payable to the investor, and are then
available to fund the working capital
requirements of the Company. Subject to
certain conditions, the Company may expand the
securitization program to meet future
receivables growth.
Uses of Liquidity.
Capital expenditures in the first quarter of
1999, totaling $5.4 million, were primarily
related to the renovation and refixturing of
certain existing locations and certain of the
Company's new Harris/Gottschalks locations.
The Company has entered into an agreement to
open one new department store in the second
half of fiscal 1999 and is in the process of
remodeling certain existing store locations.
The estimated cost of such projects, totaling
$8.8 million, is expected to be provided for
from existing financial resources. Such
projects are expected to be fully complete in
fiscal 1999. However, there can be no
assurance that the completion of such projects
will not be delayed subject to a variety of
conditions precedent or other factors.
Management believes the previously described
sources of liquidity will be sufficient to
provide for the Company's working capital,
capital expenditure and debt service
requirements throughout fiscal 1999.
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.
Year 2000 Readiness
- -----------------------
The year 2000 problem is pervasive, with
almost every business, 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. The Company also exchanges
data with certain trade suppliers and other
third parties. 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 a material 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. Plans and progress against plans
are reviewed by the year 2000 task force and
are reported to the Company's senior executive
officers and the Board of Directors on a
regular basis. It is expected that activities
related to the year 2000 issues will be
continued through mid-fiscal 1999 with the
goal of appropriately resolving all material
internal systems and third party issues.
The Company's State of Readiness.
- ------------------------------------
As of May 1, 1999, 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
mid-fiscal 1999. Based on testing to date,
management believes its mainframe operating
system environment and point-of-sale systems
are already year 2000 compliant. Modifications
to the Company's proprietary, or custom
designed software, have been substantially
completed and tested. Upgrades have been
scheduled for certain purchased software
packages and are expected to be complete by
mid-fiscal 1999. The Company's operating
system contains a testing environment
specifically designed to test year 2000
compliance.
The Company has also completed the
identification and evaluation of all of its
non-IT systems, which include, among other
things, store alarm and security systems, air
conditioners and lighting, fire control,
elevators and escalators. 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
$357,000. The Company currently expects that
the total remaining cost of these efforts,
including both incremental spending and re-
deployed resources, will be approximately
$275,000. Such costs, which represent
approximately 10.7% of the Company's fiscal
1998-1999 IT budget, consist primarily of
internal personnel costs, external consulting
fees and costs in excess of normal hardware
and software upgrades and replacements and do
not include potential costs related to the
cost of internal software and hardware
replaced in the normal course of business.
Management expects such costs 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, or deferred, in order to
resolve year 2000 compatibility issues. The
acceleration, or delay of such projects,
however, will not have a material adverse
effect on the Company's financial position or
results of operations.
The cost of the project and the estimated
completion dates for the year 2000 conversion
are based on the Company's best estimates,
which have been derived based on a number of
assumptions of future events including the
continued availability of internal and
external resources, the timely completion of
third party modifications and other factors.
The ultimate cost of the project is subject to
change as the project progresses. Actual
results may differ from original estimates.
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.
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 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. If
necessary, the Company has the ability to
divert additional internal IT staff onto the
year 2000 project. 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 its
results of operations; however, it is
uncertain to what extent the Company may be
affected by such matters and no assurance can
be given. 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 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; and (ix) the solution of
year 2000 and other systems issues by the
Company and its suppliers. 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
As described more fully in Part II, Item 7A of
the Company's 1998 Annual Report on Form 10-K,
the Company is exposed to market risks in the
normal course of business due to changes in
interest rates on short-term borrowings under
its revolving line of credit. Based on current
market conditions, management does not believe
there has been a material change in the
Company's exposure to interest rate risks as
described in that report.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS
There were no sales of unregistered securities
by the Company during the thirteen week period
ended May 1, 1999.
The Company's credit agreement with Congress
prohibits the Company from paying dividends
without prior written consent from that
lender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed
pursuant to the requirements of Item 601 of
Regulation S-K:
Exhibit No. Description
- ----------- ------------------------
10.38 (*)
10.39 (*)
10.40 (*)
27 Financial Data Schedule
(*) Filed in the Company's Annual Report on Form 10-K
dated January 30, 1999 (File No. 1-09100).
(b) The Company did not file any Current
Reports on Form 8-K during the thirteen
week period ended May 1, 1999.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
Registrant has duly caused this report
to be signed on its behalf by the
undersigned thereunto duly authorized
Gottschalks Inc.
(Registrant)
June 15, 1999 \s\ Joseph W. Levy
------------- --------------------
(Joseph W. Levy, Chairman
and Chief Executive Officer)
June 15, 1999 \s\ Michael Geele
--------------- ---------------------
(Michael Geele, Senior Vice
President and Chief Financial
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T
AND INCLUDES UNAUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FIRST QUARTER ENDED MAY 1, 1999.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> MAY-01-1999
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<INVENTORY> 143,264
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<COMMON> 126
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