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 July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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.
incorporation or organization Employer
Identification No.)
7 River Park Place East, Fresno, California
93720
- ----------------------------------------------
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area
code (559) 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 July 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 - July 31, 1999,
January 30, 1999 and August 1, 1998 3
Consolidated statements of operations-
thirteen and twenty-six weeks ended
July 31, 1999 and August 1, 1998 4
Condensed consolidated statements of
cash flows - twenty-six weeks ended
July 31, 1999 and August 1, 1998 5
Notes to condensed consolidated
financial statements - thirteen and
twenty-six weeks ended July 31, 1999
and August 1, 1998 6 -8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 19
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 19
PART II. OTHER INFORMATION
- --------------------------
Item 2. Changes in Securities and Use of
Proceeds 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
- ----------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
- ---------------------------------------------------------------------------
July 31, January 30, August 1,
1999 1999 1998
-------- ----------- ---------
(Unaudited) (Unaudited)
ASSETS
- -------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,242 $ 1,693 $ 1,785
Retained interest in
receivables sold 17,116 37,399 9,653
Receivables, net 6,039 18,985 4,595
Merchandise inventories 136,504 123,118 105,297
Other 9,489 12,836 10,033
------- ------- -------
Total current assets 171,390 194,031 131,363
PROPERTY AND EQUIPMENT, net 117,526 113,645 102,620
OTHER LONG-TERM ASSETS 16,776 16,688 8,010
------- ------- -------
$305,692 $324,364 $241,993
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Trade accounts payable and
other current liabilities $ 58,538 $ 73,093 $ 45,016
Revolving line of credit 20,801 20,273 22,724
Current portion of long-term
obligations 4,559 4,434 4,314
------- ------- -------
Total current liabilities 83,898 97,800 72,054
LONG-TERM OBLIGATIONS
(less current portion):
Line of credit 40,000 40,000 25,000
Notes and mortgage loans
payable 26,565 27,506 28,820
Capitalized lease obligations 5,689 6,608 6,974
------- ------- -------
72,254 74,114 60,794
DEFERRED INCOME & OTHER 26,467 28,364 28,579
SUBORDINATED NOTE PAYABLE
TO AFFILIATE 20,789 20,618
STOCKHOLDERS' EQUITY 102,284 103,468 80,566
------- ------- -------
$305,692 $324,364 $241,993
======= ======= =======
</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
--------------- ------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $126,465 $104,131 $245,639 $199,599
Net credit revenues 1,926 1,171 4,163 3,051
------- ------- ------- -------
128,391 105,302 249,802 202,650
COSTS & EXPENSES:
Cost of sales 84,342 71,530 164,684 137,057
Selling, general &
administrative expenses 39,800 32,344 78,248 63,785
Depreciation &
amortization 2,307 2,033 4,584 4,013
------- ------- ------- -------
126,449 105,907 247,516 204,855
------- ------- ------- -------
Operating income (loss) 1,942 (605) 2,286 (2,205)
Other (income) expense:
Interest expense 2,576 2,074 5,128 4,058
Miscellaneous income (454) (369) (811) (545)
------- ------ ------ ------
2,122 1,705 4,317 3,513
------- ------ ------ ------
LOSS BEFORE INCOME TAX
BENEFIT (180) (2,310) (2,031) (5,718)
Income tax benefit (75) (958) (847) (2,372)
------ ------ ------ ------
$ (105) $(1,352) $(1,184) $(3,346)
====== ====== ====== ======
Net loss per common share -
basic and diluted $ (0.01) $ (0.13) $ (0.09) $ (0.32)
====== ====== ====== ======
Weighted average number of
common shares outstanding
basic and diluted 12,575 10,479 12,575 10,479
</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
----------------------
July 31, August 1,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,184) $(3,346)
Adjustments:
Depreciation and
amortization 4,584 4,013
Provision for credit
losses 538 219
Other adjustments, net (2,604) (2,670)
Changes in operating assets
and liabilities:
Receivables (169) 1,767
Merchandise inventories (12,948) (5,688)
Other current and long-
term assets 3,741 3,907
Trade accounts payable (2,188) (2,131)
Other current and long-
term liabilities (8,672) (6,382)
------- ------
Net cash used in
operating activities (18,902) (10,311)
INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases (143,679) (101,606)
Maturities 154,570 107,766
Capital expenditures (8,736) (7,382)
Other 97 559
------- -------
Net cash provided by
(used in) investing
activities 2,252 (663)
FINANCING ACTIVITIES:
Proceeds from issuance of
1999-1 Series certificate 53,000
Principal payments on
outstanding Series
certificates (30,900)
Net proceeds under revolving
line of credit 528 16,957
Principal payments on long-
term obligations (2,235) (2,074)
Proceeds from long-term
obligations 500
Changes in cash management
liability and other (3,694) (3,725)
------ ------
Net cash provided by
financing activities 17,199 11,158
------ ------
INCREASE IN CASH 549 184
CASH AT BEGINNING OF YEAR 1,693 1,601
------ ------
CASH AT END OF PERIOD $ 2,242 $ 1,785
====== ======
</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 July 31,
1999 and August 1, 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 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
July 31, 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 financial 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 1998
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. The
assets acquired consisted primarily of
merchandise inventories, customer credit card
receivables, fixtures and equipment and
certain intangibles. The Company also assumed
certain liabilities relating to the business,
including vendor payables, store leases and
certain other contracts. 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. The Company closed one of
the acquired stores on January 31, 1999, as
planned.
3. RECEIVABLES SECURITIZATION FACILITY
As described more fully in the Company's 1998
Annual Report of Form 10-K, the Company sells
certain of its accounts receivable arising
under its private-label credit cards on an
ongoing basis under a receivables
securitization facility. The facility provides
the Company with a source of working capital
and long-term financing that is generally more
cost-effective than traditional debt
financing. 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"). Proceeds from the
issuance of the 1999-1 Series were used to
repay the outstanding balances of previously
issued certificates under the facility,
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 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 fiscal 1999
operating results.
5. TRADE ACCOUNTS PAYABLE AND OTHER
CURRENT LIABILITIES
<TABLE>
<CAPTION>
Trade accounts payable and other current
liabilities consist of the following:
July 31, January 30, August 1,
1999 1999 1998
(In thousands of dollars)
- -----------------------------------------------------
Trade accounts
<S> <C> <C> <C>
payable $20,990 $23,178 $18,819
Cash management
Liability 8,482 12,176 6,416
Taxes, other than
income taxes 5,639 11,078 4,501
Accrued expenses 9,262 10,597 5,312
Accrued payroll and
related
liabilities 5,737 6,416 4,503
Federal and state
income taxes
payable 3,958 5,178 1,682
Deferred income
taxes 4,470 4,470 3,783
------ ------ ------
$58,538 $73,093 $45,016
====== ====== ======
</TABLE>
6. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit
arrangement with Congress Financial
Corporation ("Congress"), which provides the
Company with a $140.0 million facility 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% from September
1 through January 31 and, at the Company's
option, to 80% for any period from November 1
through December 31 of each year, to fund
increased seasonal inventory requirements.
Interest under the facility is charged at a
rate of LIBOR plus 2.00% (LIBOR plus 2.25% on
incremental borrowings in excess of the 70%
advance rate), 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 $75.0 million as of
July 31, 1999, of which $60.8 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
July 31, 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 agreements to
open two new department stores in the second
half of fiscal 1999 and is in the process of
remodeling certain existing store locations.
The estimated remaining cost of such projects,
totaling $3.1 million as of July 31, 1999, and
is expected to be financed with working
capital. 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 and twenty-six week periods
ended July 31, 1999 (hereinafter referred to
as the "second quarter" and "first half" of
fiscal 1999, respectively) 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.
Results of Operations
- ----------------------
Second Quarter of Fiscal 1999 Compared to
Second Quarter of Fiscal 1998
- ---------------------------------------------
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>
Second Quarter
--------------
1999 1998
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.5 1.1
----- -----
101.5 101.1
Cost and expenses:
Cost of sales 66.7 68.7
Selling, general and
administrative expenses 31.5 31.1
Depreciation and
amortization 1.8 1.9
----- -----
100.0 101.7
----- -----
Operating income (loss) 1.5 (0.6)
Other (income) expense:
Interest expense 2.0 2.0
Miscellaneous income (0.4) (0.4)
----- -----
1.6 1.6
----- -----
LOSS BEFORE INCOME TAX BENEFIT (0.1) (2.2)
Income tax benefit (0.0) (0.9)
----- -----
NET LOSS (0.1)% (1.3)%
===== =====
</TABLE>
Net Sales
- ----------
Net sales increased by approximately $22.4
million to $126.5 million in the second
quarter of 1999 as compared to $104.1 million
in the second quarter of 1998, an increase of
21.5%. This increase is primarily due to
additional sales volume generated by the eight
new Harris/Gottschalks locations. On a
comparable store basis, sales increased by
4.9% in the second quarter of 1999 as compared
to the second quarter of 1998.
Net Credit Revenues
- ----------------------
Net credit revenues related to the Company's
credit card receivables portfolio increased by
$755,000, or 64.5%, in the second quarter of
1999 as compared to the second quarter of
1998. As a percent of net sales, net credit
revenues was 1.5% of net sales in the second
quarter of 1999 as compared to 1.1% in the
second quarter of 1998. Net credit revenues
consist of the following:
<TABLE>
<CAPTION>
Second Quarter
(In thousands of dollars) 1999 1998
- ----------------------------------------------
<S> <C> <C>
Service charge revenues $3,756 $2,823
Interest expense on
securitized receivables (1,029) (875)
Charge-offs on receivables
sold and provision for
credit losses on receivables
ineligible for sale (875) (727)
Gain (loss) on sale of
receivables 74 (50)
----- -----
$1,926 $1,171
===== =====
</TABLE>
Service charge revenues increased by $933,000,
or 33.0%, in the second quarter of 1999 as
compared to the second 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 (44.5% in the second quarter of
1999 as compared to 42.7% in the second
quarter of 1998).
Interest expense on securitized receivables
increased by $154,000, or 17.6%, in the second
quarter of 1999 as compared to the second
quarter of 1998. This increase is primarily
due to a higher level of outstanding
securitized borrowings, combined with a higher
weighted-average interest rate applicable to
securitized borrowings during the period (7.6%
in the second quarter of 1999 as compared to
7.4% in the second quarter of 1998). Charge-
offs on receivables sold and the provision for
credit losses on receivables ineligible for
sale increased by $148,000, or 20.4%, in the
second quarter of 1999 as compared to the
first quarter of 1998. As a percent of sales,
however, such amounts remained unchanged at
0.7% in the second 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 $12.8
million to $84.3 million in the second quarter
of 1999 as compared to $71.5 million in the
second quarter of 1998, an increase of 17.9%.
The Company's gross margin percentage
increased to 33.3% in the second quarter of
1999 as compared to 31.3% in the second
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. The Company's gross
margin in the second quarter of 1998 was also
negatively affected by higher than expected
markdowns taken in an attempt to improve
sluggish sales of spring and summer
merchandise resulting from the unseasonably
cold and rainy weather conditions caused by
the El Nino weather system.
Selling, General and Administrative Expenses
- ----------------------------------------------
Selling, general and administrative expenses
increased by approximately $7.5 million to
$39.8 million in the second quarter of 1999 as
compared to $32.3 million in the second
quarter of 1998, an increase of 23.1%.
Selling, general and administrative expenses
as a percent of net sales increased to 31.5%
in the second quarter of 1999 as compared to
31.1% in the second quarter of 1998. This
increase is primarily due to higher sales
promotion costs, which partially contributed
to the increased sales, higher recruiting and
relocation costs for new senior level
merchandising executives and higher
maintenance costs in certain of the Company's
stores.
Depreciation and Amortization
- -------------------------------
Depreciation and amortization expense, which
includes the amortization of goodwill,
increased by approximately $300,000 to $2.3
million in the second quarter of 1999 as
compared to $2.0 million in the second quarter
of 1998, an increase of 13.5%. Due to higher
sales volume generated by the new
Harris/Gottschalks stores, depreciation and
amortization expense as a percent of net sales
decreased to 1.8% in the second quarter of
1999 as compared to 1.9% in the second 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 an
increase in the amortization of goodwill
resulting from the acquisition of the Harris
stores, which totaled $105,000 in the second
quarter of 1999. These increases were
partially offset by a decrease in the
amortization of new store pre-opening expense
as compared to the same period of the prior
year.
Interest Expense
- ------------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $500,000 to $2.6
million in the second quarter of 1999 as
compared to $2.1 million in the second quarter
of 1998, an increase of 24.2%. As a percent
of net sales, interest expense remained
unchanged at 2.0% in the second 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
(7.1% in the second quarter of 1999 as
compared to 7.9% in the second quarter of
1998), in part due to a 1/4% reduction in the
interest rate on the Congress facility
beginning March 1, 1999.
Interest expense related to securitized
receivables is reflected as a reduction of 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 $85,000 to $454,000 in the second
quarter of 1999 as compared to $369,000 in the
second quarter of 1998. Miscellaneous income
as a percent of net sales remained unchanged
at 0.4% in the second quarters of 1999 and
1998.
Income Taxes
- -------------
The Company's interim effective tax credits of
(41.7%) in the second quarter of 1999 and
(41.5%) in the second 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 $1.2
million to $105,000 in the second quarter of
1999 as compared to $1.4 million in the second
quarter of 1998. On a per share basis (basic
and diluted), the net loss decreased by $0.12
per share to $(0.01) per share in the second
quarter of 1999 as compared to $(0.13) per
share in the second quarter of 1998.
<TABLE>
<CAPTION>
First Half of Fiscal 1999 Compared To First
Half of Fiscal 1998
- -------------------------------------------
First Half
--------------------
1999 1998
------- -------
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.7 1.5
----- -----
101.7 101.5
Costs and Expenses:
Cost of sales 67.0 68.7
Selling, general &
administrative
expenses 31.8 31.9
Depreciation &
amortization 1.9 2.0
----- -----
100.7 102.6
----- -----
Operating income (loss) 1.0 (1.1)
Other (income) expense:
Interest expense 2.1 2.0
Miscellaneous income (0.3) (0.2)
----- -----
1.7 1.8
----- -----
LOSS BEFORE INCOME TAX
BENEFIT (0.8) (2.9)
Income tax benefit (0.3) (1.2)
----- -----
NET LOSS (0.5)% (1.7)%
===== =====
</TABLE>
Net Sales
- ----------
Net sales increased by approximately $46.0
million to $245.6 million in the first half of
1999 as compared to $199.6 million in the
first half of 1998, an increase of 23.1%.
This increase is primarily due to additional
sales volume generated by the eight new
Harris/Gottschalks locations. On a comparable
store basis, sales increased by 6.2% in the
first half of 1999 as compared to the first
half of 1998.
Net Credit Revenues
- --------------------
Net credit revenues related to the Company's
credit card receivables portfolio increased by
$1.1 million, or 36.4%, in the first half of
1999 as compared to the first half of 1998.
As a percent of net sales, net credit revenues
was 1.7% of net sales in the first half of
1999 as compared to 1.5% in the second half of
1998. Net credit revenues consist of the
following:
<TABLE>
<CAPTION>
First Half
(In thousands of dollars) 1999 1998
- ----------------------------------------------
<S> <C> <C>
Service charge revenues $7,591 $6,078
Interest expense on
securitized receivables (2,038) (1,800)
Charge-offs on receivables
sold and provision for
credit losses on
receivables ineligible
for sale (1,521) (1,249)
Gain on sale of
receivables 131 22
----- -----
$4,163 $3,051
===== =====
</TABLE>
Service charge revenues increased by
approximately $1.5 million, or 24.9%, in the
first half of 1999 as compared to the first
half 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 (45.2% in the first half of 1999 as
compared to 43.3% in the first half of 1998).
Interest expense on securitized receivables
increased by $238,000, or 13.2%, in the first
half of 1999 as compared to the first half of
1998. This increase is primarily due to a
higher level of outstanding securitized
borrowings, combined with a higher weighted-
average interest rate applicable to
securitized borrowings during the period (7.5%
in the first half of 1999 as compared to 7.3%
in the first half of 1998). Charge-offs on
receivables sold and the provision for credit
losses on receivables ineligible for sale
increased by $272,000, or 21.8%, in the first
half of 1999 as compared to the first half of
1998. As a percent of sales, however, such
amounts remained unchanged at 0.6% in the
first half 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 $27.6
million to $164.7 million in the first half of
1999 as compared to $137.1 million in the
first half of 1998, an increase of 20.2%. The
Company's gross margin percentage increased to
33.0% in the first half of 1999 as compared to
31.3% in the first half 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. The
Company's gross margin in the first half of
1998 was also negatively affected by higher
than expected markdowns taken in an attempt to
improve sluggish sales of spring and summer
merchandise resulting from unseasonably cold
and rainy weather conditions caused by the El
Nino weather system.
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses
increased by approximately $14.4 million to
$78.2 million in the first half of 1999 as
compared to $63.8 million in the first half of
1998, an increase of 22.7%. Due primarily to
the increased sales volume generated by the
new Harris/Gottschalks stores, selling,
general and administrative expenses as a
percent of net sales decreased to 31.8% in the
first half of 1999 as compared to 31.9% in the
first half of 1998.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense, which
includes the amortization of goodwill,
increased by approximately $600,000 to $4.6
million in the first half of 1999 as compared
to $4.0 million in the first half of 1998, an
increase of 14.2%. Due to higher sales volume
generated by the new Harris/Gottschalks
stores, depreciation and amortization expense
as a percent of net sales decreased to 1.9% in
the first half of 1999 as compared to 2.0% in
the first half 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 an increase in the amortization of
goodwill resulting from the acquisition of the
Harris stores, which totaled $210,000 in the
first half of 1999. These increases were
partially offset by a decrease in the
amortization of new store pre-opening expense
as compared to the same period of the prior
year.
Interest Expense
- -----------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $1.0 million to
$5.1 million in the first half of 1999 as
compared to $4.1 million in the first half of
1998, an increase of 26.4%. As a percent of
net sales, interest expense increased to 2.1%
in the first half of 1999 as compared to 2.0%
in the first half of 1998. The dollar
increase is primarily due to interest
associated with the Subordinated Note issued
to Harris, 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 (7.1% in the first
half of 1999 as compared to 8.0% in the first
half of 1998), in part due to a 1/4% reduction
in the interest rate on the Congress facility
beginning March 1, 1999.
Miscellaneous Income
- ---------------------
Miscellaneous income, which includes the
amortization of deferred income and other
miscellaneous income and expense amounts,
increased by $266,000 to $811,000 in the first
half of 1999 as compared to $545,000 in the
first half of 1998. Miscellaneous income in
the first half 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 half of 1999 and (41.5%)
in the first half 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 $2.1
million to $1.2 million in the first half of
1999 as compared to $3.3 million in the first
half of 1998. On a per share basis (basic and
diluted), the net loss decreased by $0.23 per
share to $(0.09) per share in the first half
of 1999 as compared to $(0.32) per share in
the first half 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 6
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 $140.0 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%
from September 1 through January 31 and, at
the Company's option, to 80% for any period
from November 1 through December 31 of each
year, to fund increased seasonal inventory
requirements. Interest under the facility is
charged at a rate of approximately LIBOR plus
2.00% (LIBOR plus 2.25% on incremental
borrowings in excess of the 70% advance rate),
with no interest charged on the unused portion
of the line of credit. The Company had $14.2
million of excess availability under the
credit facility as of July 31, 1999.
Receivables Securitization Facility.
As described more fully in the Company's 1998
Annual Report on Form 10-K, the Company sells
certain of its accounts receivable arising
under its private-label credit cards on an
ongoing basis under a receivables
securitization facility. The facility provides
the Company with an additional source of
working capital and long-term financing that
is generally more cost-effective than
traditional debt financing. 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 half of
1999, totaling $8.7 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 two new department stores in the second
half of fiscal 1999 and is in the process of
remodeling certain existing store locations.
The estimated remaining cost of such projects,
totaling $3.1 million as of July 31, 1999, 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 also 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.
The Company's State of Readiness.
- ---------------------------------
As of July 31, 1999, the Company believes that
all tasks towards becoming year 2000 compliant
with respect to its IT systems have been
completed, as scheduled. Based on testing to
date, management believes its mainframe
operating system environment, point-of-sale
systems and other computer hardware is year
2000 compliant. Modifications to the Company's
proprietary, or custom designed software, and
upgrades to certain purchased software
packages have been completed and tested, and
are also believed to be year 2000 compliant.
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. Based on such
communications, substantially all of the
Company's major suppliers are believed to
already be year 2000 compliant. Some of the
Company's less significant 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
$521,000, which represents approximately 9.4%
of the Company's fiscal 1998-1999 IT budget.
Such costs 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 costs related to the cost of internal
software and hardware replaced in the normal
course of business. Hardware and software
purchased in connection with its year 2000
compliance efforts are capitalized in
accordance with normal policy. Personnel and
all other costs related to the year 2000
project are 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. Management does not believe that the
acceleration, or delay of such projects, will
have a material adverse effect on the
Company's financial position or results of
operations.
Management intends to continue to test its IT
hardware and software on its operating system
test environment through January 1, 2000 to
ensure continued year 2000 compliance. With
the exception of payroll costs related to
certain internal IT staff that have been
redeployed to conduct such periodic testing,
which is not expected to exceed $25,000, the
Company does not expect to incur any
additional material costs related to the IT
year 2000 conversion. The ultimate cost of the
year 2000 project is based on the Company's
best estimates, which have been derived based
on a number of assumptions of future events
including the success of ongoing year 2000
compliance testing and other factors, and may
be subject to change as the project
progresses. Actual results may differ from
original estimates. While the Company has not
yet completed its assessment of costs that may
be associated with non-IT year 2000 issues,
based on the results of communications to date
with the related suppliers, such costs are not
expected to be material to the Company's
financial position or results of operations.
Contingency Plans.
- ------------------
Management believes its efforts towards year
2000 compliance with respect to its internal
systems are complete. However, the Company
will continue to test its IT hardware and
software on its operating system test
environment through January 1, 2000 to ensure
continued year 2000 compliance. Contingency
plans have been specifically designed for each
system in the event a problem with an internal
system is detected during the testing period
throughout the remainder of the year. Such
plans include the diversion of additional
internal IT staff onto the year 2000 project,
and, if necessary, additional sources of
contract programming specialists who are
familiar with the Company's operating
environment.
The Company believes its most reasonably
likely worst-case scenario would relate to
problems with the systems of third parties
rather than with the Company's internal
systems, because the Company has less control
over assessing and remediating the year 2000
problems of third parties. Based on
communications to date with its third parties,
however, management believes its major
suppliers, including those with which the
Company exchanges data electronically, are
already year 2000 compliant. For less
significant suppliers, the Company's
contingency plans include the identification
of alternative suppliers. 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)
fluctuations in consumer demand and
confidence; (ii) fluctuations in costs and
expenses; (iii) the continued ability to
purchase merchandise on normal payment terms;
(iv) the continued availability and terms of
short-term and long-term financing; (v)
general economic conditions, such as rate of
employment, inflation, interest rates and the
condition of capital markets, both nationally
and in the Company's specific market areas;
(vi) the effect of severe weather or natural
disasters; (vii) the effect of competitive
pressures from other retailers; and (viii) 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 July 31, 1999.
The Company's credit agreement with Congress
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 24, 1999, the Company held its 1999
Annual Meeting of Stockholders at which the
following matter was submitted to a vote of
the Company's stockholders:
1. The stockholders voted for eleven
nominees for director, each for one year
terms. Each of the eleven nominees were
elected. The results of the vote are as
follows:
NOMINEE FOR DIRECTOR VOTES FOR VOTES WITHHELD
Joe Levy 9,617,772 1,599,463
James R. Famalette 11,143,922 73,313
Max Gutmann 9,618,670 1,598,565
Bret W. Levy 9,611,022 1,606,213
Sharon Levy 9,614,790 1,602,445
Joseph J. Penbera 9,611,259 1,605,976
Frederick R. Ruiz 9,621,333 1,595,902
O. James Woodward III 9,624,120 1,593,115
William Smith 9,623,920 1,593,315
Isidoro Alvarez Alvarez 9,605,342 1,611,893
Jorge Pont Sanchez 9,605,342 1,611,893
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
- ----------- ------------
10.41 Sixth Amendment to Loan
and Security Agreement dated August 12, 1999,
by and between Gottschalks Inc. and Congress
Financial Corporation (Western).
10.42 Employment Agreement dated
June 25, 1999 by and between Gottschalks Inc.
and James R. Famalette (*).
27 Financial Data Schedule
(*) Management contract, compensatory plan or
arrangement.
(b) The Company did not file any Current
Reports on Form 8-K during the thirteen
week period ended July 31, 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)
September 13, 1999 \s\ James R. Famalette
------------------- ----------------------
(James R.Famalette,
President and Chief
Executive Officer)
September 13, 1999 \s\ Michael S. Geele
------------------- ----------------------
(Michael S.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 SECOND QUARTER ENDED JULY 31,1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JUL-31-1999
<CASH> 2,242
<SECURITIES> 17,116
<RECEIVABLES> 6,039
<ALLOWANCES> 570
<INVENTORY> 136,504
<CURRENT-ASSETS> 171,390
<PP&E> 176,297
<DEPRECIATION> 58,772
<TOTAL-ASSETS> 305,692
<CURRENT-LIABILITIES> 83,898
<BONDS> 93,043
0
0
<COMMON> 126
<OTHER-SE> 102,284
<TOTAL-LIABILITY-AND-EQUITY> 305,692
<SALES> 245,639
<TOTAL-REVENUES> 249,802
<CGS> 164,684
<TOTAL-COSTS> 164,684
<OTHER-EXPENSES> 4,584
<LOSS-PROVISION> 1,521
<INTEREST-EXPENSE> 5,128
<INCOME-PRETAX> (2,031)
<INCOME-TAX> (847)
<INCOME-CONTINUING> (1,184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,184)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO LOAN AND SECURITY
AGREEMENT (the "Amendment"), dated as of
August 12, 1999, is entered into between
CONGRESS FINANCIAL CORPORATION (WESTERN), a
California corporation ("Lender"), and
GOTTSCHALKS INC., a Delaware corporation
("Borrower"), with its corporate office
located at 7 River Park Place East, Fresno,
California 93729.
RECITAL
A. Borrower and Lender have previously
entered into that certain Loan and Security
Agreement dated December 20, 1996, as amended
by the First Amendment to Loan and Security
Agreement, dated as of August 20, 1998, the
Second Amendment to Loan and Security
Agreement, dated as of September 1, 1998, the
Third Amendment to Loan and Security
Agreement, dated as of December 18, 1998, the
Fourth Amendment to Loan and Security
Agreement, dated as of January 29, 1999, and
the Fifth Amendment to Loan and Security
Agreement, dated as of March 1, 1999 (as
amended, supplemented or modified from time to
time, the "Loan Agreement"), pursuant to which
Lender has made certain loans and financial
accommodations available to Borrower. Terms
used herein without definition shall have the
meanings ascribed to them in the Loan
Agreement.
B. Lender and Borrower wish to further
amend the Loan Agreement under the terms and
conditions set forth in this Amendment.
Lender and Borrower are entering into this
Amendment with the understanding and agreement
that, except as specifically provided herein,
none of Lender's rights or remedies as set
forth in the Loan Agreement is being waived or
modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the
foregoing and the mutual covenants herein
contained, and for other good and valuable
consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties
hereby agree as follows:
1. Section 1.34 of the Loan Agreement
is hereby amended to read in its entirety as
follows:
1.34 "Interest Rate" shall mean, (a)
as to Prime Rate Loans, a rate of one quarter
of one (.25) percentage point per annum less
than the Prime Rate and, as to Eurodollar Rate
Loans, a rate of two (2.00) percentage points
per annum in excess of the Adjusted Eurodollar
Rate (based on the Eurodollar Rate applicable
for the Interest Period selected by Borrower
as in effect three (3) Business Days after the
date of receipt by Lender of the request of
Borrower for such Eurodollar Rate Loans in
accordance with the terms hereof, whether such
rate is higher or lower than any rate
previously quoted to Borrower); and (b) with
respect to Revolving Loans outstanding during
any period in which Borrower shall have
elected to use the advance rate option
provided for in Section 2.1(a)(i)(B) and in
which the sum of the Revolving Loans and
Letter of Credit Accommodations exceeds the
lesser of seventy percent (70%) of the Value
of the Eligible Inventory or thirty-five (35%)
of the Retail Sales Price of the Eligible
Inventory, a rate of two and one-quarter
(2.25) percentage points per annum in excess
of the Adjusted Eurodollar Rate; provided,
however, that (y) in the event Borrower's
pretax income for its fiscal year ending
January 31, 2000 (excluding extraordinary
gains and non-cash losses) exceeds Six Million
Dollars ($6,000,000) and (z) Borrower has
average Excess Availability for the ninety
(90) days preceding such date of not less than
Ten Million Dollars ($10,000,000), the
applicable Interest Rate provided for in the
preceding clause (a) of this Section 1.34
shall be reduced by one-eighth of one (.125)
percentage point, such reduction in the
applicable Interest Rate to be effective as of
the first day of the month immediately
following the date of receipt by Lender of
Borrower's audited annual financial
statements, as provided by Borrower to Lender
pursuant to Section 9.6(a)(iii) hereof,
indicating the required pretax income (and
such reduction shall continue to be in effect
for so long as the Excess Availability
requirement referred to in clause (z) above
continues to be met as measured on a quarterly
basis); and provided further, however, the
Interest Rate shall mean the rate of two and
one-quarter (2.25) percentage points per annum
in excess of the Prime Rate as to Prime Rate
Loans and the rate of four and one-half (4.50)
percentage points per annum in excess of the
Adjusted Eurodollar Rate as to Eurodollar Rate
Loans, at Lender's option, without notice, (a)
for the period on and after the date of
termination or non-renewal hereof, or the date
of the occurrence of any Event of Default or
event which with notice or passage of time or
both would constitute an Event of Default, and
for so long as such Event of Default or other
event is continuing as determined by Lender
and until such time as all Obligations are
indefeasibly paid in full (notwithstanding
entry of any judgment against Borrower) and
(b) on the Revolving Loans at any time
outstanding in excess of the amounts available
to Borrower under Section 2 (whether or not
such excess(es) arise or are made with or
without Lender's knowledge or consent and
whether made before or after an Event of
Default).
2. Section 1.39 of the Loan Agreement is
hereby amended to read in its entirety as
follows:
1.39 "Maximum Credit" shall mean, with
reference to the Revolving Loans and the
Letter of Credit Accommodations, the amount of
One Hundred Forty Million Dollars
($140,000,000).
3. Section 1.55 of the Loan Agreement is
hereby amended to read in its entirety as
follows:
1.55 "Seasonal Period" shall mean the
period from September 1 through January 31 of
each year.
4. Section 2.1(a) of the Loan Agreement is
hereby amended to read in its entirety as
follows:
2.1(a) Subject to, and upon the terms and
conditions contained herein, Lender agrees to
make Revolving Loans to Borrower from time to
time in amounts requested by Borrower up to
the amount equal to:
(i) either (A) the Lessor of: (I)
sixty-five percent (65%) (seventy percent
(70%) during the Seasonal Period) of the Value
of the Eligible Inventory, or (II) thirty-
three percent (33%) (thirty-five percent (35%)
during the Seasonal Period) of the Retail
Sales Price of the Eligible Inventory; or (B)
provided no Event of Default shall have
occurred and be continuing, then at Borrower's
option and upon one (1) day's written notice
to Lender, from November 1 through December 31
of each calendar year, the lesser of (I)
eighty percent (80%) of the Value of Eligible
Inventory, or (II) forty percent (40%) of the
Retail Sales Price of the Eligible Inventory,
which percentages shall remain in effect
through December 31 unless revoked by Borrower
upon one days' written notice to Lender;
provided, however, that advances against
Eligible Domestic In-Transit Inventory shall
not, at any one time, exceed Five Million
Dollars ($5,000,000); minus
(ii) the then undrawn amounts of
outstanding Letter of Credit Accommodations
multiplied by the applicable percentages as
provided for in Section 2.2(c) hereof; and
minus
(iii) any Availability Reserves.
5. Section 9.14 of the Loan Agreement is
hereby amended to read in its entirety as
follows:
9.14 Adjusted Net Worth. Borrower shall,
at all times, maintain Adjusted Worth of not
less than Ninety Million Dollars
($90,000,000); provided, however, Lender will
only test for Borrower's compliance with this
financial covenant on a monthly basis and then
only in the event that Borrower's Excess
Availability is less than Five Million Dollars
($5,000,000).
6. Effectiveness of this Amendment. Lender
must have received the following items, in
form and content acceptable to Lender, before
this Amendment is effective and before Lender
is required to extend any credit to Borrower
as provided for by this Amendment. The date
on which all of the following conditions have
been satisfied is the "Closing Date".
(a) Amendment. This Amendment fully
executed in a sufficient number of
counterparts for distribution to Lender and
Borrower.
(b) Authorizations. Evidence that the
execution, delivery and performance by
Borrower and each guarantor or subordinating
creditor of this Amendment and any instrument
or agreement required under this Amendment
have been duly authorized.
(c) Representations and Warranties. The
representations and warranties set forth
herein and in the Loan Agreement must be true
and correct.
(d) Effectiveness Fee. Lender shall
have received from Borrower a fee in the
amount of $112,500 for the processing and
approval of this Amendment.
(e) Other Required Documentation. All
other documents and legal matters in
connection with the transactions contemplated
by this Amendment shall have been delivered or
executed or recorded and shall be in form and
substance satisfactory to Lender.
7. Representations and Warranties. The
Borrower represents and warrants as follows:
(a) Authority. The Borrower and each
other Loan Party has the requisite corporate
power and authority to execute and deliver
this Amendment, as applicable, and to perform
its obligations hereunder and under the Loan
Documents (as amended or modified hereby) to
which it is a party. The execution, delivery
and performance by the Borrower of this
Amendment and by each other Loan Party of each
Loan Document (as amended or modified hereby)
to which it is a party have been duly approved
by all necessary corporate action of such Loan
Party and no other corporate proceedings on
the part of such Loan Party are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has
been duly executed and delivered by Borrower.
This Amendment and each Loan Document (as
amended or modified hereby) is the legal,
valid and binding obligation of each Loan
Party hereto or thereto, enforceable against
such Loan Party in accordance with its terms,
and is in full force and effect.
(c) Representations and Warranties. The
representations and warranties contained in
each Loan Document (other than any such
representations or warranties that, by their
terms, are specifically made as of a date
other than the date hereof) are correct on and
as of the date hereof as though made on and as
of the date hereof.
(d) No Default. No event has occurred
and is continuing that constitutes an Event of
Default.
8. Choice of Law. The validity of this
Amendment, its construction, interpretation
and enforcement, the rights of the parties
hereunder, shall be determined under, governed
by, and construed in accordance with the
internal laws of the State of California
governing contracts only to be performed in
that State.
9. Counterparts. This Amendment may be
executed in any number of counterparts and by
different parties and separate counterparts,
each of which when so executed and delivered,
shall be deemed an original, and all of which,
when taken together, shall constitute one and
the same instrument. Delivery of an executed
counterpart of a signature page to this
Amendment by telefacsimile shall be effective
as delivery of a manually executed counterpart
of this Amendment.
10. Due Execution. The execution, delivery
and performance of this Amendment are within
the power of Borrower, have been duly
authorized by all necessary corporate action,
have received all necessary governmental
approval, if any, and do not contravene any
law or any contractual restrictions binding on
Borrower.
11. Reference to and Effect on the Loan
Documents.
(a) Upon and after the effectiveness of
this Amendment, each reference in the Loan
Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to
the Loan Agreement, and each reference in the
other Loan Documents to "the Loan Agreement",
"thereof" or words of like import referring to
the Loan Agreement, shall mean and be a
reference to the Loan Agreement as modified
and amended hereby.
(b) Except as specifically amended
above, the Loan Agreement and all other Loan
Documents, are and shall continue to be in
full force and effect and are hereby in all
respects ratified and confirmed and shall
constitute the legal, valid, binding and
enforceable obligations of Borrower to Lender.
(c) The execution, delivery and
effectiveness of this Amendment shall not,
except as expressly provided herein, operate
as a waiver of any right, power or remedy of
Lender under any of the Loan Documents, nor
constitute a waiver of any provision of any of
the Loan Documents.
(d) To the extent that any terms and
conditions in any of the Loan Documents shall
contradict or be in conflict with any terms or
conditions of the Loan Agreement, after giving
effect to this Amendment, such terms and
conditions are hereby deemed modified or
amended accordingly to reflect the terms and
conditions of the Loan Agreement as modified
or amended hereby.
12. Ratification. Borrower hereby restates,
ratifies and reaffirms each and every term and
condition set forth in the Loan Agreement, as
amended hereby, and the Loan Documents
effective as of the date hereof.
13. Estoppel. To induce Lender to enter into
this Amendment and to continue to make
advances to Borrower under the Loan Agreement,
Borrower hereby acknowledges and agrees that,
after giving effect to this Amendment, as of
the date hereof, there exists no Event of
Default and no right of offset, defense,
counterclaim or objection in favor of Borrower
as against Lender with respect to the
Obligations.
IN WITNESS WHEREOF, the parties have
entered into this Amendment as of the date
first above written.
BORROWER
Gottschalks INC.,
a Delaware corporation
By: /s/ Michael S. Geele
Title: SVP/CFO
LENDER
CONGRESS FINANCIAL CORPORATION
(WESTERN), a California corporation
By: /s/ Kristine Metchikian
Title: Vice President
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement (the
"Agreement") is made and entered into as of
June 25th, 1999 by and between Gottschalks
Inc., a Delaware corporation (the "Company"),
and James Famalette, (the "Employee").
Recitals
A. Prior to the date of this Agreement,
Employee has held the position of
President and Chief Operating Officer of
the Company.
B. The Company desires to employ the
Employee from the date set forth in
Article 2.2 (the "Effective Date") until
expiration of the term of this Agreement,
and Employee is willing to be employed by
Company during that period, on the terms
and subject to the conditions set forth
in this Agreement.
In consideration of the mutual covenants
and promises of the parties, the Company and
Employee covenant and agree as follows:
1. Duties
During the term of this Agreement,
Employee will be employed by the Company to
serve as President and Chief Executive Officer
of the Company. The Employee will devote such
amount of business time to the conduct of the
business of the Company as may be reasonably
required to effectively discharge Employee's
duties under this Agreement and, subject to
the supervision and direction of the Company's
Board of Directors (the "Board"), will perform
those duties and have such authority and
powers as are customarily associated with the
offices of a President and Chief Executive
Officer of a company engaged in a business
that is similar to the business of the
Company, including (without limitation) (a)
the authority to direct and manage the day-to-
day operations and affairs of the Company, (b)
the authority to hire and discharge employees
of the Company, and (c) all other authority
and powers exercised by the Employee prior to
the Effective Date as President and Chief
Operating Officer of the Company.
2. Term of Employment
2.1 Definitions
For the purposes of this Agreement
the following terms have the following
meanings:
(a) "Termination for Cause" means
termination by Company of Employee's
employment (i) by reason of Employee's
willful dishonesty towards, fraud upon,
or deliberate injury or attempted injury
to, the Company, (ii) by reason of
Employee's material breach of this
Agreement, (iii) by reason of Employee's
gross negligence or intentional
misconduct with respect to the
performance of Employee's duties under
this Agreement, (iv) by reason of
Employee's breached or violation of any
fiduciary duty owed to Company or (v)
Employee has been personally dishonest,
or has willfully or negligently violated
any law, rule or regulation or has been
convicted of a felony or misdemeanor
(other than minor traffic violations and
similar offenses) provided, however, that
no such termination will be deemed to be
a Termination for Cause unless the
Company has provided Employee with
written notice of what it reasonably
believes are the grounds for any
Termination for Cause.
(b) "Termination Other than For
Cause" means termination by the Company
of Employee's employment by the Company
for reasons other than those which
constitute Termination for Cause.
(c) "Voluntary Termination" means
termination by the Employee of the
Employee's employment with the Company,
excluding termination by reason of
Employee's death or disability as
described in Sections 2.5 and 2.6.
2.2 Basic Term
The term of employment of Employee
by the Company will commence on the
Effective Date of June 24, 1999 and will
extend through the period ending on July
2, 2002, (the "Termination Date").
Company and Employee may extend the term
of this Agreement by mutual written
agreement.
2.3 Termination for Cause
Termination for Cause may be
effected by Company at any time during
the term of this Agreement and may be
effected by written notification to
Employee; provided, however, that no
Termination for Cause will be effective
unless Employee has been provided with
the prior written notice. Upon
Termination for Cause, Employee is to be
immediately paid all accrued salary,
incentive compensation to the extent
earned, vested deferred compensation
(other than pension plan or profit
sharing plan benefits, which will be paid
in accordance with the applicable plan),
and accrued vacation pay, all to the date
of termination, but Employee will not be
paid any severance compensation.
2.4 Termination Other Than for Cause
Notwithstanding anything else in
this Agreement, Company may effect a
Termination Other Than for Cause at any
time upon giving notice to Employee of
such Termination Other Than for Cause.
Upon any Termination Other Than for
Cause, Employee will immediately be paid
all accrued salary, all incentive
compensation to the extent earned,
severance compensation as provided in
Section 4, vested deferred compensation
(other than pension plan or profit
sharing plan benefits, which will be paid
in accordance with the applicable plan),
and accrued vacation pay, all to the date
of termination.
2.5 Termination Due to Disability
In the event that, during the term
of this Agreement, Employee should, in
the reasonable judgment of the Board,
fail to perform Employee'' duties under
this Agreement because of illness or
physical or mental incapacity
("Disability"), and such Disability
continues for a period of more than three
(3) consecutive months, Company will have
the right to terminate Employee's
employment under this Agreement by
written notification to Employee and
payment to Employee of all accrued salary
and incentive compensation to the extent
earned, severance compensation as
provided in Section 4, vested deferred
compensation (other than pension plan or
profit sharing plan benefits, which will
be paid in accordance with the applicable
plan), and all accrued vacation pay, all
to the date of termination. Any
determination by the Board with respect
to Employee's Disability must be based on
a determination of competent medical
authority or authorities, a copy of which
determination must be delivered to the
Employee at the time it is delivered to
the Board. In the event the Employee
disagrees with the determination
described in the previous sentence,
Employee will have the right to submit to
the Board a determination by a competent
medical authority or authorities of
Employee's own choosing to the effect
that the aforesaid determination is
incorrect and that Employee is capable of
performing Employee's duties under this
Agreement. If, upon receipt of such
determination, the Board wishes to
continue to seek to terminate this
Agreement under the provisions of this
section, the parties will submit the
issue of Employee's Disability to
arbitration in accordance with the
provisions of this Agreement.
2.6 Death
In the event of Employee's death
during the term of this Agreement,
Employee's employment is to be deemed to
have terminated as of the last day of the
month during which Employee's death
occurred, and Company will pay to
Employee's estate accrued salary,
incentive compensation to the extent
earned, vested deferred compensation
(other than pension plan or profit
sharing plan benefits, which will be paid
in accordance with the applicable plan),
and accrued vacation pay, all to the date
of termination.
2.7 Voluntary Termination
In the event of a Voluntary
Termination, Company will immediately pay
to Employee all accrued salary, all
incentive compensation to the extent
earned, vested deferred compensation
(other than pension plan or profit
sharing plan benefits, which will be paid
in accordance with the applicable plan),
and accrued vacation pay, all to the date
of termination, but Employee will not be
paid any severance compensation.
2.8 Effect of Termination on Option
Agreement
Notwithstanding anything to the
contrary contained in this Agreement, any
termination of Employee's employment by
the Company will have no effect on
Employee's rights under that certain
Nonqualified Stock Option Agreement
granted to Employee pursuant to the
Company's Employee-Shareholder
Performance Stock Option Plan, which
agreement was entered into between the
Employee and the Company as of April 14,
1997 and November 23, 1998 (the "Option
Agreement"). Those Agreements contain
their own terms concerning termination.
3. Salary, Benefits and Other Compensation
3.1 Base Salary
As payment for the services to be
rendered by Employee as provided in
Section 1 and subject to the terms and
conditions of Section 2, Company agrees
to pay to Employee a "Base Salary"
payable bi-weekly. The Base Salary
payable to Employee under this Section
will initially be $420,000. Employee
will be entitled to regular salary
reviews and raises during the term of
this Agreement in the same general manner
as other officers of the Company;
provided, however, that so long as the
Board first determines that Employee has
achieved satisfactory performance,
Employee will be entitled to receive a
minimum increase in Employee's Base
Salary during the second year of this
Agreement to $460,000, and subject to
that same determination, a minimum
increase in Employee's Base Salary during
the third year of this Agreement to
$500,000. Furthermore, the Company and
Employee acknowledge that, subject to the
actual financial performance of the
Company during the term of this
Agreement, during the term of this
Agreement it is the mutual intent of the
parties that the Base Salary may increase
to a level above those minimums provided
for above, provided such increase is
commensurate with the level of
compensation received by other chief
executive officers of other similarly
situated companies in the retail
department store business, or the general
retail business.
3.2 Incentive Bonus Plans
During the term of his employment
under this Agreement, the Employee will
be eligible to participate in all bonus
and incentive plans established by the
Board including, without limitation, the
Company's 1999 Management Bonus Plan
(which will be first paid during the year
2000). Said plan as it relates to
Employee shall provide the ability to
earn an annual bonus of at least 30% of
Base Salary if specific goals and
objectives adopted by the Board are
achieved.
3.3 Benefit Plans
Except as modified in this
Agreement, during the term of Employee's
employment under this Agreement, the
Employee is to be eligible to participate
in all employee benefit plans to the
extent maintained by the Company,
including (without limitation) any life,
disability, health, accident and other
insurance programs, paid vacations, and
similar plans or programs, subject in
each case to the generally applicable
terms and conditions of the plan or
program in question and to the
determinations of any committee
administering such plan or program. On
termination of the Employee for any
reason, the Employee will retain all of
Employee's rights to benefits that have
vested under such plan, but the
Employee's rights to participate in those
plans will cease on the Employee's
termination unless the termination is a
Termination Other Than for Cause, in
which case Employee's rights of
participation will continue for a period
of one (1) year following Employee's
termination.
3.4 Vacation
During the term of this Agreement,
Employee will be entitled to four weeks
paid vacation time per year.
3.5 Expenses
During the term of this Agreement,
Company will reimburse Employee for
Employee's reasonable out-of-pocket
expenses incurred in connection with
Company's business, including travel
expenses, food, and lodging while away
from home, subject to such policies as
Company may from time to time reasonably
establish for its employees. Company
shall pay Employee a car allowance of
$1,000 per month during the term of this
Agreement.
3.6 Life Insurance
During the term of Employee's
employment, the Company will pay for a
Term Life Insurance Policy, in the dollar
amount equal to Employee's then Base
Salary in the form designated by Employee
and approved by the Company's Board of
Directors, covering the life of Employee
and with proceeds payable to such
beneficiaries as Employee designates.
The foregoing is to be in addition to,
and not in place of, any rights to which
Employee's estate may be entitled under
this Agreement on Employee's death. Upon
any termination of Employee's employment,
the aforementioned insurance policy will
be assigned to the Employee and Employee
will assume responsibility for all
premium payments with respect the
insurance policy.
3.7 One-Time Grant
A one-time grant of 40,000 options
for shares upon being named Chief
Executive Officer.
3.8 Withholding of Taxes
The Employee understands that the
services to be rendered by Employee under
this Agreement will cause the Employee to
recognize taxable income, which is
considered under the Internal Revenue
Code of 1986, as amended, and applicable
regulations thereunder as compensation
income subject to the withholding of
income tax (and Social Security or other
employment taxes). The Employee hereby
consents to the withholding of such taxes
as are required by the Company.
4. Severance Compensation
4.1 Termination Other Than for Cause;
Payment in Lieu of Notice
In the event Employee's employment
is terminated in a Termination Other Than
for Cause, Employee will be paid as
severance pay Employee's Base Salary for
the period commencing on the date that
Employee's employment is terminated and
ending on the date this Agreement
terminates (but not less than 12 months
severance payments regardless of the
termination date of this Agreement), on
the dates specified in Section 3.1 for
payment of Employee's Base Salary.
4.2 Termination for Disability
In the event Employee's employment
is terminated because of Employee's
disability pursuant to Section 2.5,
Employee will be paid as severance pay
Employee's Base Salary for the period
commencing on the date that Employee's
employment is terminated and ending on
the date which is six months thereafter
(not to exceed the number of months left
in this Agreement or any extension
thereof), on the dates specified in
Section 3.1 for payment of Employee's
Base Salary.
4.3 Change in Ownership
In the event that there is a change
in ownership or control of the Company,
either by sale of all or substantially
all of the assets of the Company to
another entity, or by a sale of
controlling interest (50% or more of the
outstanding capital stock) of the
Company's common stock to another entity;
then in the event Employee is terminated
during the twenty-four (24) month period
thereafter, a severance benefit shall be
payable on a monthly basis to Employee
beginning on the notice of termination
date consisting of twenty-four (24)
months Base Salary, (or the proportional
amount of the remaining twenty-four (24)
months payments if such termination
occurs within the twenty-four (24) month
time period) determined at Employee's
annual base rate of pay in effect at the
time such notice is given (less standard
withholdings and authorized deductions).
Notwithstanding the provisions in
Article 4.3 above, in the event that the
total capitalization of the Company at
the time that a change of control or sale
occurs, is below eighty-five million
dollars, then Employee will be restricted
to twelve (12) months base salary instead
of twenty-four (24) as stated above if he
is terminated as provided.
4.4 Other Termination
In the event of a Voluntary
Termination, Termination for Cause or
Death, Employee or Employee's estate will
not be entitled to any severance pay.
5. Termination Without Compensation
Notwithstanding anything to the contrary
contained in this Agreement, Employee shall
not be entitled to continued compensation in
any form if Employee terminates his employment
from the Company, including without
limitation, (i) through retirement, or death;
(ii) Company sells all or part of its business
(or otherwise merges, divides, consolidates or
reorganizes), and Employee has the opportunity
to continue employment with the buyer (or with
one of the resulting entities in the event of
a merger, division, consolidation or
reorganization), at or above the Employee's
base compensation, provided the other terms
and conditions of Employee's employment after
such sale, division, consolidation or
reorganization are the same or substantially
the same as the terms and conditions of
Employee's employment with Company (i.e.,
Employee's duties, responsibilities, and
physical location geographically shall remain
the same, although the Company may be a
subsidiary of a larger entity); or (iii)
Employee is terminated for "cause."
6. Confidentiality
Because of Employee's employment by
Company, Employee will have access to trade
secrets and confidential information about
Company, its products, its customers, and its
methods of doing business (the "Confidential
Information"). During and after the
termination of Employee's employment by the
Company, Employee may not directly or
indirectly disclose or use any such
Confidential Information; provided, that
Employee will not incur any liability for
disclosure of information which (a) is
required in the course of Employee's
employment by the Company, (b) was permitted
in writing by the Board or (c) is within the
public domain or comes within the public
domain without any breach of this Agreement.
7. Assignment of Inventions
All processes, inventions, patents,
copyrights, trademarks and other intangible
rights (collectively the "Inventions") that
may be conceived or developed by Employee,
either along or with others, during the term
of Employee's employment, whether or not
conceived or developed during Employee's
working hours, and with respect to which the
equipment, supplies, facilities, or trade
secret information of Company was used, or
that relate at the time of conception or
reduction to practice of the Invention to the
business of the Company or to Company's actual
or demonstrably anticipated research and
development, or that result from any work
performed by Employee for Company, will be the
sole property of Company, and Employee hereby
assigns to the Company all of Employee's
right, title and interest in and to such
Inventions. Employee must disclose to Company
all inventions conceived during the term of
employment, whether or not the invention
constitutes property of Company under the
terms of the preceding sentence, but such
disclosure will be received by Company in
confidence. Employee must execute all
documents, including patent applications and
assignments, required by Company to establish
Company's rights under this Section.
8. Miscellaneous
8.1 Waiver
The waiver of any breach of any
provision of this Agreement will not
operate or be construed as a waiver of
any subsequent breach of the same or
other provision of this Agreement.
8.2 Entire Agreement; Modification
Except as otherwise provided in the
Agreement and in the Option Agreement,
this Agreement represents the entire
understanding among the parties with
respect to the subject matter of this
Agreement, and this Agreement supersedes
any and all prior understandings,
agreements, plans, and negotiations,
whether written or oral, with respect to
the subject matter hereof, including
without limitation, any understandings,
agreements, or obligations respecting any
past or future compensation, bonuses,
reimbursements, or other payments to
Employee from Company. All modifications
to the Agreement must be in writing and
signed by the party against whom
enforcement of such modification is
sought.
8.3 Notice
All notices and other communications
under this Agreement must be in writing
and must be given by personal delivery,
telecopier or telegram, or first class
mail, certified or registered with return
receipt requested, and will be deemed to
have been duly given upon receipt if
personally delivered, one (1) day after
mailing, if mailed, or twelve (12) hours
after transmission, if delivered by
facsimile or electronic transmission, to
the respective persons named below:
If to Company: Gottschalks Inc.
7 River Park Place East
Fresno, Ca. 93720
Attn: Chairman of the
Board
If to Employee: James Famalette
10198 N. Spanish Bay Dr.
Fresno, Ca. 93720
8.4 Headings
The Section headings of this
Agreement are intended for reference and
may not by themselves determine the
construction or interpretation of this
Agreement.
8.5 Governing Law
Except as this Agreement relates to
indemnity of Employee in Article 8.10,
this Agreement is to be governed by and
construed in accordance with the laws of
the State of California applicable to
contracts entered into and wholly to be
performed within the State of California
by California residents. Any controversy
or claim arising out of or relating to
this Agreement, or breach of this
Agreement (except any controversy or
claim with respect to Section 5 or 6), is
to be settled by arbitration in Fresno,
California in accordance with the
Commercial Arbitration Rules of the
American Arbitration Association, and
judgment on the award rendered by the
arbitrators may be entered in any court
having jurisdiction. There must be three
arbitrators, one to be chosen directly by
each party at will, and the third
arbitrator to be selected by the two
arbitrators so chosen. Each party will
pay the fees of the arbitrator he or she
selects and his or her own attorneys, and
the expenses of his or her witnesses and
all other expenses connected with
presenting his or her case. Other costs
of the arbitration, including the cost of
any record or transcripts of the
arbitration, administrative fees, the fee
of the third arbitrator, and all other
fees and costs, will be borne equally by
the parties. Notwithstanding anything in
this Agreement to the contrary, if any
controversy or claim arises between the
parties under Section 5 or 6 of this
Agreement, the Company will not be
required to arbitrate that controversy or
claim but the Company will have the right
to institute judicial proceedings in any
court of competent jurisdiction with
respect to such controversy or claim. If
such judicial proceedings are instituted,
the parties agree that such proceedings
will not be stayed or delayed pending the
outcome of any arbitration proceeding
under this Agreement.
8.6 Survival of Company's Obligations
This Agreement will be binding on,
and inure to the benefit of, the
executors, administrators, heirs,
successors, and assigns of the parties;
provided, however, that except as
expressly provided in this Agreement,
this Agreement may not be assigned either
by company or by Employee.
8.7 Counterparts
This Agreement may be executed in
one or more counterparts, all of which
taken together will constitute one and
the same Agreement.
8.8 Withholdings
All sums payable to Employee under
this Agreement will be reduced by all
federal, state, local, and other
withholdings and similar taxes and
payments required by applicable law.
8.9 Enforcement
If any portion of this Agreement is
determined to be invalid or
unenforceable, that portion of this
Agreement will be adjusted, rather than
voided, to achieve the intent of the
parties under this Agreement.
8.10 Indemnification
Subject to the laws of the State of
Delaware, and the Company's Articles and
Bylaws covering indemnity, the Company
agrees that it will indemnify and hold
the Employee harmless to the fullest
extent permitted by applicable law from
and against any loss, cost, expense or
liability resulting from or by reason of
the fact of the Employee's employment
hereunder, whether as an officer,
employee, agent, fiduciary, director or
other official of the Company.
IN WITNESS WHEREOF, the parties hereto
have executed this Agreement as of the day and
year first above written.
GOTTSCHALKS INC.
By: /s/ Joe Levy
Joe Levy
EMPLOYEE
By: /s/ James Famalette
James Famalette
WITNESS:
/s/ Warren Williams
Warren Williams
