UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934 (No Fee Required)
For The Fiscal Year Ended January 29, 2000
----------------
or
[ ] Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the transition period from _________ to _________
Commission File Number 1-09100
Gottschalks Inc.
______________________________________________________
(Exact name of Registrant as specified in
its charter)
Delaware 77-0159791
__________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code:
(559) 434-4800
Securities registered pursuant to Section 12(b) of
the Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of
the Act: None
Indicate by check mark whether the Registrant; (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to
file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in
definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held
by non-affiliates of the Registrant as of March 31,
2000:
Common Stock, $.01 par value: $38,237,000
On March 31, 2000 the Registrant had outstanding
12,596,837 shares of Common Stock.
Documents Incorporated By Reference: Portions of
the Registrant's definitive proxy statement with
respect to its Annual Stockholders' Meeting
scheduled to be held on June 22, 2000, which will
be filed pursuant to Regulation 14A, are
incorporated by reference into Part III of this
Form 10-K.
INDEX
PART I
PAGE NO.
Item 1. Business............................................ 1
Item 2. Properties.......................................... 14
Item 3. Legal Proceedings................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders.................................... 18
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 18
Item 6. Selected Financial Data............................. 19
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................. 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk......................................... 37
Item 8. Financial Statements and Supplementary Data......... 38
Item 9. Changes in and Disagreements with Accountants on
Auditing and Financial Disclosures.................. 38
PART III
Item 10. Directors and Executive Officers of the
Registrant.......................................... 38
Item 11. Executive Compensation.............................. 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 40
Item 13. Certain Relationships and Related Transactions...... 40
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K......................................... 40
Signatures.................................................... 90
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc. is a regional
department and specialty store chain based in
Fresno, California. The Company currently
operates forty-two full-line department
stores, including thirty-two "Gottschalks"
stores located throughout California, and in
Oregon, Washington and Nevada, and ten
"Harris/Gottschalks" stores located in the
Southern California area. The Company also
operates twenty "Gottschalks" and "Village
East" specialty apparel stores. (1). In fiscal
1999, the Company's sales totaled $539.4
million, a 13.1% increase from fiscal 1998
sales of $476.9 million. (2)
Gottschalks and Harris/Gottschalks
department stores typically offer a wide range
of moderate to better brand-name and private-
label merchandise, including men's, women's,
junior's and children's apparel; cosmetics,
shoes, fine jewelry and accessories; and home
furnishings including china, housewares,
domestics, small electric appliances and
furniture (in selected locations). The
majority of the Company's department stores
range from 50,000 to 150,000 in gross square
feet, and are generally anchor tenants of
regional shopping malls or strip centers.
Village East specialty stores, which offer
apparel for larger women, are located in the
same mall in which a Company department store
is located, or as a separate department within
some of the Company's larger stores. The
Company services all of its stores, including
its store locations outside California, from a
420,000 square foot distribution facility
centrally located in Madera, California.
The Company has operated
continuously for 96 years since it was founded
by Emil Gottschalk in 1904. The Company
initially offered its stock to the public in
1986, and most of its growth has occurred
since then. The Company is incorporated in the
state of Delaware.
Gottschalks Inc. has one wholly-
owned subsidiary, Gottschalks Credit
Receivables Corporation ("GCRC"). GCRC is a
qualified special purpose entity which was
formed in 1994 in connection with a
receivables securitization program. (See Note
3 to the Consolidated Financial Statements.)
_________________________
(1) The Company's specialty apparel sales
represent 3.7% of total fiscal 1999 sales.
(2) Total sales do not include leased
department sales totaling $29.0 million in
fiscal 1999 and $40.2 million in fiscal 1998.
Including leased department sales, total sales
in the Company's owned and leased departments
were $568.4 million in fiscal 1999 and $517.1
million in 1998.
BUSINESS ACQUISITIONS
Recent Developments.
On April 24, 2000, the Company entered into a
definitive asset purchase agreement with
Lamonts Apparel, Inc. ("Lamonts"), providing
for the Company to acquire all of Lamont's
department store leases and fixtures and
equipment. Lamonts is a Northwest-based
regional department store chain currently
operating thirty-eight department stores, with
twenty-three located in the state of
Washington, seven in Alaska, five in Idaho,
two in Oregon and one in Utah. Lamonts stores
generally carry an assortment of moderately
priced brand-name fashion apparel, accessories
and merchandise for the home. Lamonts filed a
voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code in January
2000, and the purchase is subject to approval
by the Bankruptcy Court. If approved, the
transaction is expected to close in late July
2000.
On August 20, 1998, the Company
acquired substantially all of the assets and
assumed certain liabilities of The Harris
Company ("Harris"), a wholly-owned subsidiary
of El Corte Ingles ("ECU") of Spain. Harris
operated nine full-line department stores
located in the Southern California area. As
planned, the Company closed one of the
acquired stores on January 31, 1999. The
Company operates the acquired stores as
"Harris/Gottschalks" stores. The Company also
converted two of its existing Gottschalks
department stores located in close proximity
to the acquired stores to Harris/Gottschalks
stores, bringing the total number of stores
operated as Harris/Gottschalks stores to ten
as of January 28, 2000. As a result of the
acquisition, Harris became a significant
stockholder of the Company. The Company also
leases three of the Harris/Gottschalks
locations from ECI. (See Note 2 to the
Consolidated Financial Statements).
OPERATING STRATEGY
Merchandising Strategy. The
Company's merchandising strategy is directed
at offering and promoting nationally
advertised, brand-name merchandise recognized
by its customers for style and value. Brand-
name merchandise is complemented with
offerings of private-label and other higher
and budget-priced merchandise. Brand-name
apparel, shoe, cosmetic and accessory lines
carried by the Company include Estee Lauder,
Lancome, Clinique, Chanel, Dooney & Bourke,
Nine West, Liz Claiborne, Carole Little,
Calvin Klein, Ralph Lauren (Polo and Chaps),
Guess, Nautica, Karen Kane, Tommy Hilfiger,
Esprit, Evan Picone, Haggar, Koret and Levi
Strauss. Brand-name merchandise carried for
the home includes Lenox, Krups, Calphalon,
Royal Velvet, Ralph Lauren, Tommy Hilfiger,
KitchenAid and Samsonite. The Company also
purchases merchandise from numerous other
suppliers. In no instance did purchases from
any single vendor amount to more than 5% of
the Company's net purchases in fiscal 1999. In
the Company's stores, brand-name merchandise
is prominently displayed, often using vendor
supplied fixtures and signage. The Company's
merchandising activities are conducted
centrally from its corporate offices in
Fresno, California.
The Company's merchandise mix as a
percentage of total sales is reflected in the
following table:
<TABLE>
<CAPTION>
Fiscal Years
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Women's Apparel 26.6% 27.0% 27.2% 26.3% 25.9%
Cosmetics, Shoes
& Accessories(1) 22.2 19.0 17.8 17.5 17.2
Men's Apparel 13.7 14.0 14.0 14.5 14.3
Junior's and Children's
Apparel 10.3 10.1 10.5 10.7 10.9
Shoes, Fine Jewelry
& Other Leased
Departments(1) 5.1 7.7 7.8 7.8 7.4
Home 22.1 22.2 22.7 23.2 24.3
Total Sales (2) 100.0% 100.0% 100.0% 100.0% 100.0%
_____________________
</TABLE>
(1) The increase in cosmetics, shoe and
accessory sales from fiscal 1998 to 1999, and
the corresponding decrease in leased
department sales, is primarily due to the
conversion of the shoe departments in twenty-
eight Gottschalks department stores from
leased departments to owned departments on
August 1, 1999. Prior to August 1, 1999, these
shoe departments were operated by an
independent lessee. The shoe departments in
the eight acquired Harris/Gottschalks
locations have been operated as owned
departments since the acquisition of those
stores in August 1998. The shoe departments in
the other two Harris/Gottschalks locations
were converted from leased to owned
departments in February 1999.
(2) Pursuant to Staff Accounting
Bulletin ("SAB") No. 101,
"Revenue Recognition in
Financial Statements", sales
amounts reported in the
Company's consolidated income
statements do not include sales
applicable to leased
departments. Leased department
sales are included in the table
above, however, in order to
facilitate an understanding of
the Company's sales relative to
its selling square footage.
Store Location and Expansion
Strategy. The Company's stores are located
primarily in diverse, growing, non-major
metropolitan areas in the western United
States. Management believes the Company has a
competitive advantage in offering moderate to
better brand-name merchandise and a high level
of service to customers in secondary markets
where there is strong demand and fewer
competitors offering such merchandise. The
Company has historically avoided expansion
into major metropolitan areas which are well
served by the Company's larger competitors.
Some of the Company's stores located in
California are in agricultural areas and cater
to mature customers with above average levels
of disposable income.
Most of the Company's department
stores are anchor tenants of regional shopping
malls. Other anchor tenants in the malls
generally complement the Company's goods with
a mixture of competing and non-competing
merchandise, and serve to increase customer
foot traffic within the mall. In recent years,
the Company has also opened new stores in
strategically located strip centers. With new
regional shopping mall construction on the
decline, management believes the Company has a
competitive advantage in being willing to
accommodate diverse locations into its
operation that may not be desired by its
larger competitors that adopt a more
standardized approach to expansion.
The Company generally seeks to open
two new department stores per year, although
more stores may be opened in any given year if
it is believed to be financially attractive to
the Company. As part of its expansion
strategy, the Company may also pursue
selective strategic acquisitions. (See Part I,
Item I, "Business Acquisitions Recent
Developments".) The Company has also continued
to invest in the renovation and refixturing of
its existing store locations in an attempt to
maintain and improve market share in those
market areas. Store renovation projects can
range from updating decor and improving in-
store lighting, fixturing, wall merchandising
and signage, to more extensive remodeling and
expansion projects. The Company sometimes
receives reimbursement from mall owners and
vendors for certain of its new store
construction costs and costs associated with
the renovation and refixturing of existing
store locations. Such contributions have
enhanced the Company's ability to enter into
attractive market areas that are consistent
with the Company's long-term expansion plans.
The following tables present
selected data related to the Company's stores
for the fiscal years indicated:
<TABLE>
<CAPTION>
Stores open at Fiscal Years
year-end: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Department stores 42 40(1) 34 32 31
Specialty stores (2) 20 22 25 27 29
-- -- -- -- --
TOTAL 62 62 59 59 60
== == == == ==
Gross store square
footage (in thousands):
Department stores 4,377 4,301 3,391 3,175 2,878
Specialty stores 77 83 94 101 106
----- ----- ----- ----- -----
TOTAL 4,454 4,384 3,485 3,276 2,984
===== ===== ===== ===== =====
_______________________________
</TABLE>
(1) The Company acquired nine
stores from Harris in August 1998,
Cosing one of the stores acquired on
January 31, 1999, as planned. Two of
the stores acquired are located in
malls with pre-existing Gottschalks
locations. The Company combines
separate locations within the same
mall for the purpose of determining
the total number of stores being
operated, resulting in a net
addition of six department stores in
fiscal 1998.
(2) The Company has continued
to close certain free-standing
Village East
stores as their leases expire and
incorporate those stores as separate
departments into nearby Gottschalks
department stores. Sales generated
by these departments are combined
with total specialty store sales for
reporting purposes.
As of the end of fiscal 1999, the
Company operated thirty-eight department
stores in California, two in Nevada and one
each in Oregon and Washington. Following is a
summary of the Company's department store
locations, by store size:
# of
stores
open
------
Larger than 200,000 gross square feet 3
150,000 - 199,000 gross square feet 7
100,000 - 149,999 gross square feet 8
50,000 - 99,000 gross square feet 19
25,000 - 49,000 gross square feet 5
---
TOTAL 42
===
Sales Promotion Strategy. The
Company's sales promotion strategy is based on
a multi-media approach, using newspapers,
television, radio, direct mail and catalogs to
highlight seasonal promotions, selected brand-
name merchandise and frequent storewide sales
events. Advertising efforts are focused on
communicating branded merchandise offered by
the Company, and the high levels of quality,
value and customer service available in the
Company's stores. In its efforts to improve
the effectiveness of its advertising
expenditures, the Company uses data captured
through its proprietary credit card and third
party credit cards to develop segmented
advertising and promotional events targeted at
specific customers who have established
purchasing patterns for certain brands,
departments or store locations.
The Company's sales promotion
strategy also focuses on special events such
as fashion shows, bridal shows and wardrobing
seminars in its stores and in the communities
in which they are located to convey fashion
trends to its customers. The Company receives
reimbursement for certain of its promotional
activities from some of its vendors.
The Company offers selected
merchandise, a complete Bridal Registry
service, and other general corporate
information on the World Wide Web at
http://www.gottschalks.com, and sells
merchandise through its mail order department.
Customer Service. Management
believes one way the Company can differentiate
itself from its competitors is to provide a
consistently high level of customer service.
The Company has a "Four Star" customer service
program, designed to continually emphasize and
reward high standards of customer service in
the Company's stores. Sales associates are
encouraged to keep notebooks of customers'
names, clothing sizes, birthdays, and major
purchases and to telephone customers about
promotional sales and send thank-you notes and
other greetings to their customers during
their normal working hours. Product seminars
and other training programs are frequently
conducted in the Company's stores and its
corporate headquarters to ensure that sales
associates will be able to provide useful
product information to customers. The Company
also offers opportunities for management
training and leadership classes for those
associates identified for promotion within the
Company. Various financial incentives are
offered to the Company's sales associates for
reaching sales performance goals.
In addition to providing a high
level of personal sales assistance, management
believes that well-stocked stores, a liberal
return and exchange policy, frequent sales
promotions and a conveniently located and
attractive shopping environment enhance the
customers' shopping experience and increase
customer loyalty. Management also believes
that maintaining appropriate staffing levels
in its stores, particularly at peak selling
periods, is essential for providing a high
level of customer service.
Distribution of Merchandise. The
Company's 420,000 square foot distribution
center is centrally located in Madera,
California and serves all of the Company's
store locations, including its store locations
outside California. The distribution center
presently has the capacity to process
merchandise for up to fifty-five department
store locations, but was designed to provide
for the future growth of the Company and the
expansion of its capacity beyond that amount.
The Company currently receives
substantially all of its merchandise at the
distribution center and makes daily
distributions to the stores. The Company has
continued to focus on the adoption of new
technology and operational best practices at
its distribution center with the goals of
receiving, processing and distributing
merchandise to stores at a faster rate and at
a lower cost per unit. The Company's
logistical system, installed in fiscal 1998,
has reduced the manual handling of a large
percentage of incoming merchandise, and
through the use of "cross docking" techniques,
enables the Company to process merchandise
through the distribution center and to the
stores in minutes and hours as compared to
several days in the past. Currently,
approximately 56% of merchandise is processed
using cross-docking techniques. In addition,
over 90% of merchandise received by the
Company is shipped by vendors which provide
the Company with an advance shipping notice
("ASN"), which is an electronic document
transmitted by a vendor that details the
contents of each carton in route to the
distribution center. These vendors ship only
floor-ready merchandise which arrives on
approved hangers pre-tagged with universal
product code ("UPC") tickets, a bar coded
price label containing item numbers, retail
prices and other information that can be
electronically translated into the Company's
inventory systems. The Company also has formal
guidelines for vendors with respect to
shipping, receiving and invoicing for
merchandise. Vendors that do not comply with
the guidelines for shipping merchandise using
ASN's and in floor-ready status are charged
specified fees depending upon the degree of
non-compliance. Such fees are intended to
offset higher costs associated with the
processing of such merchandise.
The Company is presently evaluating
several alternatives for the expansion of its
distribution center in the event the proposed
acquisition of Lamonts is approved. The
Company currently expects it will receive and
process merchandise for the Lamonts stores at
the Lamonts' distribution center, which is
located in Kent, Washington, and managed by an
independent operator. (See "Business
Acquisitions Recent Developments.")
Private-Label Credit Card. The
Company issues its own credit card, which
management believes enhances the Company's
ability to generate and retain market
acceptance and increase its sales and other
revenues. As described more fully in Note 3 to
the Consolidated Financial Statements, the
Company sells its customer credit card
receivables to its wholly-owned subsidiary,
GCRC, on an ongoing basis in connection with a
receivables securitization program. The
Company has continued to service and
administer the receivables under the program.
The following table represents a
summary of information related to the
Company's credit card receivable portfolio for
the fiscal years indicated:
<TABLE>
<CAPTION>
Fiscal Years
1999 1998 1997 1996 1995
----- ----- ---- ---- -----
(In thousands of dollars)
Average credit
card receivables
<S> <C> <C> <C> <C> <C>
serviced (1) $79,125 $69,143 $64,612 $64,162 $62,492
Service charge income 15,482 13,431 11,618 10,493 10,937
Credit sales as a
% of total sales 44.2% 43.1% 43.7% 43.1% 43.6%
_______________________
</TABLE>
(1) Includes receivables
sold, the retained interest in
receivables sold, and other
receivables, all of which are
serviced by the Company.
The Company has a variety of credit-
related programs which management believes
have improved customer service and have
increased service charge revenues. Such
programs include:
- an "Instant Credit" program,
through which successful credit
applicants receive a discount
ranging from 10% to 50%
(depending on the results of
the Instant Credit scratch-off
card) on the first day's
purchases made with the
Company's credit card;
- a "55-Plus" charge account
program, which offers
additional merchandise and
service discounts to customers
55 years of age and older;
- "Gold Card" and "55-Plus Gold
Card" programs, which offer
special services at a discount
for customers who have a
minimum net spending history on
their charge accounts of $1,000
per year; and
- The "Gottschalks Rewards"
program, which offers an annual
rebate certificate for up to 5%
of annual credit purchases on
the Company's credit card (up
to a maximum of $10,000 of
annual purchases) which can be
applied towards future
purchases of merchandise.
As of March 31, 2000, the Company
had approximately 650,000 active credit card
holders. Management believes holders of the
Company's credit card typically buy more
merchandise from the Company than other
customers.
Competition and Seasonality. See
Part I, Item I, "Risk Factors -- Competition"
and "Risk Factors -- Seasonality and Weather".
Employees. As of January 29, 2000,
the Company had 6,550 employees, including
1,950 employees working part-time (less than
20 hours per week on a regular basis). The
Company hires additional temporary employees
and increases the hours of part-time employees
during seasonal peak selling periods. None of
the Company's employees are covered by a
collective bargaining agreement. Management
considers its employee relations to be good.
Executive Officers of the
Registrant. Information relating to the
Company's executive officers is included in
Part III, Item 10 of this report and is
incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain
"forward-looking statements" regarding
activities, developments and conditions that
the Company anticipates may occur or exist in
the future relating to things such as:
- revenues and earnings;
- savings or synergies from
acquisitions;
- future capital expenditures;
- its expansion strategy;
- the impact of sales promotions
and customer service programs on
- consumer spending;
the utilization of consumer
credit programs.
Such forward-looking statements can be
identified by words such as: "believes",
"anticipates", "expects", "intends", "seeks",
"may", "will" and "estimates". The Company
bases its forward-looking statements on its
current views and assumptions. As a result,
those statements are subject to risks and
uncertainties that could cause actual results
to differ materially from those predicted.
Some of the factors that could cause the
Company's results to differ from those
predicted include the following risk factors.
The following list of important factors is not
exclusive and the Company does not undertake
to revise any forward-looking statement to
reflect events or circumstances that occur
after the statement is made.
RISK FACTORS
General Economic and Market
Conditions. The Company's stores are located
primarily in non-major metropolitan and
agricultural areas in the western United
States. A substantial portion of the stores
are located in California. The Company's
success depends upon consumer spending, which
may be materially and adversely affected by
any of the following events or conditions:
- a downturn in the national
economy or in the California
economy;
- a downturn in the local economies
where the stores are located;
- a decline in consumer confidence;
- an increase in interest rates;
- inflation or deflation;
- consumer credit availability;
- consumer debt levels;
- tax rates and policy; and
unemployment trends.
Seasonality and Weather. Seasonal
influences affect the Company's sales and
profits. The Company experiences its highest
levels of sales and profits during the
Christmas selling months of November and
December, and, to a lesser extent, during the
Easter holiday and Back-to-School seasons.
The Company has increased working capital
needs prior to the Christmas season to carry
significantly higher inventory levels and
generally increases its selling staff levels
to meet anticipated demands. Any substantial
decrease in sales during its traditional peak
selling periods could materially adversely
impact the Company's business, financial
condition and results of operations. Factors
that could cause results to vary include:
- the timing and level of sales
promotions;
- the weather;
- fashion trends;
- local unemployment levels; and
the overall health of the
national and local economies.
The Company depends on normal
weather patterns across its markets.
Historically, unusual weather patterns have
significantly impacted its business.
Consumer Trends. The Company's
success partially depends on its ability to
anticipate and respond to changing consumer
preferences and fashion trends in a timely
manner. However, it is difficult to predict
what merchandise consumers will demand,
particularly merchandise that is trend driven.
Failure to accurately predict constantly
changing consumer tastes, preferences and
spending patterns could adversely affect short
and long term results.
Expansion Strategy - Future Growth
and Recent Acquisitions. The Company's
expansion strategy involves remodeling and
expanding existing stores and acquiring or
opening new stores. The successful
implementation of such expansion plans
(including any potential acquisitions) depends
upon many factors, including the ability of
the Company to:
- identify, negotiate, finance,
obtain, construct, lease or
refurbish suitable store sites;
- hire, train and retain qualified
personnel; and
- integrate new stores into
existing information systems and
operations.
The Company cannot guarantee that it
will achieve its targets for remodeling or
expanding existing stores or for opening new
stores, or that such stores will operate
profitably when opened or acquired. If the
Company fails to effectively implement its
expansion strategy, it could materially and
adversely affect the Company's business,
financial condition and results of operations.
Competition. The retail business is
highly competitive. The Company's primary
competitors include national, regional and
local chain department and specialty stores,
general merchandise stores, discount and off-
price retailers and outlet malls. Increased
use and acceptance of the internet and other
home shopping formats also creates increased
competition. Some of these competitors offer
similar or better branded merchandise and have
greater financial resources to purchase larger
quantities of merchandise at lower prices.
The Company's success in counteracting these
competitive pressures depends on its ability
to:
- offer merchandise which reflects
the different regional and
local needs of its customers;
- differentiate and market itself
as a home-town, locally-oriented
store (as opposed to its more
- nationally focused competitors);
and continue to shift its
merchandise mix to a higher
proportion of better branded
merchandise.
Existing or new competitors,
however, may begin to carry such brand-name
merchandise or increase their offering of
better quality merchandise which may
negatively impact the Company's business,
financial condition and results of operations.
Vendor Relations. The Company
believes its close relationships with its key
vendors enhance its ability to purchase brand-
name merchandise at competitive prices. If
the Company loses key vendor support, is
unable to participate in group purchasing
activities or its vendors withdraw brand-name
merchandise, it could have a material adverse
effect on the Company's business, financial
condition and results of operations. The
Company cannot guarantee that it will be able
to acquire brand-name merchandise at
competitive prices or on competitive terms in
the future.
Leverage and Restrictive Covenants.
Due to the level of the Company's
indebtedness, any material adverse development
affecting the Company could significantly
limit its ability to withstand competitive
pressures and adverse economic conditions,
take advantage of expansion opportunities or
to meet its obligations as they become due.
The Company's existing debt agreements impose
operating and financial restrictions that
limit the Company's ability to make dividend
payments and grant liens, among other matters.
Interest Rate Risk. The Company's
borrowings under its revolving line of credit
facility bear a variable interest rate. If
interest rates increase significantly, the
Company's financial results could be
materially adversely affected. See Item 7A,
"Quantitative and Qualitative Disclosures
About Market Risk."
Consumer Credit Risks. The
Company's private-label credit card
facilitates sales and generates additional
revenue from credit card fees. Changes in
credit card use, default rates or in the laws
regulating the granting or servicing of credit
(including late fees and finance charges
applied to outstanding balances) could
materially adversely affect the Company's
business, financial condition and results of
operations. In addition, the Company cannot
guarantee that the credit card programs it has
implemented will increase or maintain customer
spending.
Securitization of Accounts
Receivable. The Company securitizes the
receivables generated under its private-label
credit card. Under the securitization program,
the Company sells such receivables to a wholly-
owned, special purpose entity which issues
securities representing interests in the
receivables to investors. The Company cannot
guarantee that it will continue to generate
receivables by credit card holders at the same
rate, or that it will establish new credit
card accounts at the rate it has in the past.
Any material decline in the generation of
receivables or in the rate of cardholder
payments on accounts could have a material
adverse effect on the Company's financial
condition and results of operations.
Dependence on Key Personnel. The
Company's success depends to a large extent on
its executive management team. The loss of the
services of certain of its executives could
have a material adverse effect on the Company.
The Company cannot guarantee that it will be
able to retain such key personnel or attract
additional qualified members to its management
team in the future.
Labor Conditions. The Company
depends on attracting and retaining a large
number of qualified employees to maintain and
increase sales and to execute its customer
service programs. Many of the employees are
in entry level or part-time positions with
historically high levels of turnover. The
Company's ability to meet its employment needs
is dependent on a number of factors,
including the following factors which affect
the Company's ability to hire or retain
qualified employees:
- unemployment levels;
- minimum wage legislation; and
changing demographics in the
local economies where stores are
located.
Item 2. PROPERTIES
Corporate Offices and Distribution
Center. The Company's corporate headquarters
are located in an office building in northeast
Fresno, California, constructed in 1991 by a
limited partnership in which the Company is
the sole limited partner holding a 36%
interest in the partnership and the building
constructed. The Company leases 89,000 square
feet of the 176,000 square foot building under
a twenty-year lease expiring in the year 2011.
The lease contains two consecutive ten-year
renewal options and the Company receives
favorable rental terms under the lease. The
Company believes that its current office space
is adequate to meet its long-term office space
requirements.
The Company's distribution center,
completed in 1989, was constructed and
equipped to meet the Company's long-term
merchandise distribution needs. The 420,000
square foot distribution facility is
strategically located in Madera, California to
economically service the Company's existing
store locations in the western United States
and its projected future market areas. The
Company leases the distribution facility from
an unrelated party under a 20-year lease
expiring in the year 2009, with six
consecutive five-year renewal options.
Store Leases and Locations. The
Company owns six of its forty-two department
stores, and leases the remaining thirty-six
department stores and all of its twenty
specialty stores. While there is no assurance
that the Company will be able to negotiate
further extensions of any particular lease,
management believes that satisfactory
extensions or suitable alternative store
locations will be available. Additional
information pertaining to the Company's store
leases is included in Note 8 to the
Consolidated Financial Statements.
The following table contains
specific information about each of the
Company's stores open as of the end of fiscal
1999. All locations are in the State of
California except as noted:
Expiration
Gross(1) Date of
Square Date Current Leased
Feet Opened Lease (2) or Owned
-------- ------ ---------- --------
DEPARTMENT STORES:
Northern Region (19 Gottschalks locations):
Antioch............. 80,000 1989 N/A (3) Owned
Auburn.............. 40,000 1995 2005 Leased
Carson City, Nevada. 68,000 1995 2005 Leased
Chico............... 85,000 1988 2017 Leased
Danville............ 42,200 1999 2009 Leased
Davis............... 34,000 1999 2020 Leased
Eureka.............. 96,900 1989 N/A (3) Owned
Klamath Falls,
Oregon............ 65,400 1992 2007 Leased
Modesto:
Vintage Faire.....161,500 1977 2007 Leased
Century Center.... 65,000 1984 2013 Leased
Reno, Nevada........138,000 1996 2016 Leased
Sacramento..........194,400 1994 2014 Leased
Santa Rosa..........131,300 1997 2017 Leased
Sonora.............. 59,800 1997 2017 Leased
Stockton............ 90,800 1987 2009 Leased
Tacoma, Washington..119,300 1992 2012 Leased
Tracy...............113,000 1995 2015 Leased
Woodland............ 57,300 1987 2017 Leased
Yuba City........... 80,000 1989 N/A(3) Owned
Central Region (13 Gottschalks locations):
Bakersfield,
Valley Plaza...... 90,000 1987 2017 Leased
Capitola............105,000 1990 2015 Leased
Clovis..............101,400 1988 2018 Leased
Fresno:
Fashion Fair......163,000 1970 2016 Leased
Fig Garden........ 36,000 1983 2005 Leased
Manchester........175,600 1979 2009 Leased
Hanford............. 98,800 1993 N/A(3) Owned
Merced.............. 60,000 1983 2013 Leased
Oakhurst............ 25,600 1994 2005 Leased
San Luis Obispo..... 99,300 1986 N/A(3) Owned
Santa Maria.........114,000 1976 2006 Leased
Visalia.............150,000 1995 2014 Leased
Watsonville......... 75,000 1995 2006 Leased
Southern Region (10 Harris/Gottschalks locations) (4):
Bakersfield, East
Hills:
Women's, Shoes and
Accessories.....105,000 1998 2008(5) Leased
Men's, Children's
and Home........ 92,900 1988 2009 Leased
Hemet............... 51,000 1998 2005 Leased
Indio............... 60,000 1998 2005 Leased
Moreno Valley.......153,000 1998 2008(5) Leased
Palmdale:
Women's, Shoes and
Accessories.....114,000 1998 2008(5) Leased
Men's, Children's
and Home........114,900 1990 N/A(3) Owned
Palm Springs........ 82,000 1991 2015 Leased
Redlands............106,000 1998 2007 Leased
Riverside...........208,000 1998 2002 Leased
San Bernardino......204,000 1995 2017 Leased
Victorville......... 71,000 1998 2006 Leased
Total Department
Store Square
Footage........ 4,377,400
SPECIALTY STORES:
Gottschalks:
Aptos............... 11,200 1988 2004 Leased
Redding............. 7,800 1993 Automatically Leased
renews every
60 days
Scotts Valley....... 11,200 1988 2001 Leased
Village East:
Antioch............. 2,100 1989 2005 Leased
Capitola............ 2,360 1991 2009 Leased
Carson City, Nevada. 3,400 1995 2005 Leased
Chico............... 2,300 1988 2005 Leased
Clovis.............. 2,300 1988 2009 Leased
Eureka.............. 2,820 1989 2004 Leased
Fresno, Fig Garden.. 2,800 1986 Monthly(6) Leased
Hanford............. 2,800 1993 2008 Leased
Modesto............. 2,730 1986 2005 Leased
Sacramento.......... 2,700 1994 2004 Leased
San Luis Obispo..... 2,500 1987 2011 Leased
Stockton............ 1,800 1989 Monthly(6) Leased
Tacoma, Washington.. 4,000 1992 2012 Leased
Tracy............... 3,400 1995 2006 Leased
Visalia............. 3,400 1975 2005 Leased
Woodland............ 2,000 1987 Monthly(6) Leased
Yuba City........... 3,200 1990 2000 Leased
Total Specialty Store
Square Footage.... 76,810
Total Square
Footage.........4,454,210
__________________________
(1) Reflects total store square footage,
including office space, storage,
service and other support space that
is not dedicated to direct
merchandise sales.
(2) Most of the Company's department
store leases contain renewal
options. Leases for specialty store
locations generally do not contain
renewal options.
(3) These stores are Company owned
and have been pledged as security
for various mortgage obligations of
the Company. (See Note 6 to the
Consolidated Financial Statements.)
(4) The Company acquired nine
stores from Harris in August 1998,
closing one of the acquired stores
in January 1999, as planned. The
Company also converted two of its
Gottschalks stores located in close
proximity to the Harris/Gottschalks
stores, bringing the total number of
Harris/Gottschalks stores operated
to ten as of January 29, 2000.
(5) These leases are with ECI, an
affiliate of the Company.
(6) These leases are renewable on a month-to-
month basis.
Item 3. LEGAL PROCEEDINGS
The Company is party to legal
proceedings and claims which have arisen
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES HOLDERS
No matters were submitted to a vote
of security holders of the Company during the
fourth quarter of the fiscal year covered in
this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed
for trading on both the New York Stock
Exchange ("NYSE") and the Pacific Stock
Exchange. The following table sets forth the
high and low sales prices per share of common
stock as reported on the NYSE Composite Tape
under the symbol "GOT" during the periods
indicated:
1999 1998
------------- ------------
Fiscal Quarters High Low High Low
---- --- ---- ---
1st Quarter 7 13/16 6 3/4 9 1/4 6 13/16
2nd Quarter 9 3/16 7 3/16 8 7/8 7 3/4
3rd Quarter 9 3/16 8 1/16 8 3/4 6 9/16
4th Quarter 9 1/16 6 13/16 7 15/16 6 7/8
On March 31, 2000, the Company had 835
stockholders of record, some of which were
brokerage firms or other nominees holding
shares for multiple stockholders. The sales
price of the Company's common stock as
reported by the NYSE on March 31, 2000 was $5
per share.
The Company has not paid a cash
dividend since its initial public offering in
1986. The Board of Directors has no present
intention to pay cash dividends in the
foreseeable future, and will determine whether
to declare cash dividends in the future
depending on the Company's earnings, financial
condition and capital requirements. In
addition, the Company's credit agreement with
Congress Financial Corporation prohibits the
Company from paying dividends without prior
written consent from that lender.
Item 6. SELECTED FINANCIAL DATA
The Company reports on a 52/53 week
fiscal year ending on the Saturday nearest to
January 31. The fiscal years ended January 29,
2000, January 30, 1999, January 31, 1998,
February 1, 1997, and February 3, 1996 are
referred to herein as fiscal 1999, 1998, 1997,
1996 and 1995, respectively. All fiscal years
noted include 52 weeks, except for fiscal
1995,which includes 53 weeks.
The selected financial data below
should be read in conjunction with Part II,
Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of
Operations," and the Consolidated Financial
Statements of the Company and related notes
included elsewhere herein. 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. In addition, effective fiscal 1999,
the Company adopted the provisions of SAB No.
101, which requires that leased department
sales no longer be combined with owned sales
for financial reporting purposes. The Company,
like most retailers, previously combined sales
from leased departments with owned sales, with
the related costs combined with cost of sales.
All prior year amounts have been reclassified
to conform with the required presentation.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS:
Fiscal Years
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars, except share data)
<S> <C> <C> <C> <C> <C>
Net sales $539,398 $476,925 $413,013 $389,378 $371,275
Net credit revenues 8,573 6,897 6,385 4,775 4,272
Net leased department
revenues (1) 4,209 5,944 5,135 4,198 4,896
------- ------- ------- ------- -------
Total revenues 552,180 489,766 424,533 398,351 380,443
Costs and expenses:
Cost of sales 353,660 313,074 274,514 259,158 253,333
Selling, general and
administrative
expenses 166,027 150,884 130,922 123,860 120,637
Depreciation and
amortization(2) 9,465 8,040 6,078 5,585 5,568
New store pre-opening costs 495 421 589 1,337 2,524
Asset impairment charge (3) 1,933
Acquisition related
expenses 859 673
------- ------- ------- ------- -------
Total costs and expenses 531,580 473,278 412,772 389,940 382,062
------- ------- ------- ------- -------
Operating income (loss) 20,600 16,488 11,757 8,411 (1,619)
Other (income) expense:
Interest expense 11,279 9,470 7,325 8,111 7,718
Miscellaneous income (1,555) (2,011) (1,955) (2,792) (726)
------- ------- ------- ------- -------
9,724 7,459 5,370 5,319 6,922
------- ------- ------- ------- -------
Income (loss) before
income tax expense
(benefit) 10,876 9,029 6,387 3,092 (8,611)
Income tax expense
(benefit) 4,240 3,747 2,657 1,258 (2,972)
------- ------- ------ ------ -------
Net income (loss) $ 6,636 $ 5,282 $ 3,730 $ 1,834 $ (5,639)
======= ======= ======= ======= =======
Net income (loss)
per common share -
basic and diluted $ 0.53 $ 0.46 $ 0.36 $ 0.18 $ (0.54)
======= ======= ======= ======= =======
Weighted-average
number of common
shares outstanding:
Basic 12,577 11,418 10,474 10,461 10,416
Diluted 12,616 11,449 10,491 10,461 10,416
</TABLE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA:
Fiscal Years
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars)
Retained interest in
<S> <C> <C> <C> <C> <C>
receivables sold $29,138 $ 37,399 $ 15,813 $ 20,871 $ 25,892
Credit card receivables,
net 3,508 15,675 3,085 1,818 1,575
Merchandise
inventories 130,028 123,118 99,294 89,472 87,507
Property and
equipment, net 120,393 113,645 99,057 87,370 89,250
Total assets 314,004 324,304 242,311 232,400 239,041
Working capital 104,719 96,231 67,579 70,231 42,904
Long-term obligations,
less current portion 80,674 74,114 62,420 60,241 34,872
Subordinated note
payable to affiliate 20,961 20,618 --- --- ---
Stockholders' equity 110,238 103,468 83,905 80,139 77,917
</TABLE>
<TABLE>
<CAPTION>
OTHER SELECTED DATA:
Fiscal Years
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars, except other selected data)
Sales growth:
<S> <C> <C> <C> <C> <C>
Total store sales 9.9% 15.4% 6.2% 5.3% 10.3%
Comparable store sales,
including leased
departments 4.8% 2.1% 3.3% 1.4% (3.1%)
Comparable store sales,
excluding leased
departments (4) 7.7% --- --- --- ---
Comparable stores data (5):
Sales per selling
square foot $ 168 $ 170 $ 160 $ 170 $ 181
Selling square
footage 2,758 2,621 2,642 2,161 1,892
Capital expenditures $16,059 $16,801 $14,976 $6,845 $12,773
Current ratio 2.42:1 1.98:1 2.01:1 2.10:1 1.45:1
_______________________________________
(1) Net leased department revenues consist of
sales totaling $29.0 million, $40.2 million,
$35.2 million, $32.8 million and $29.8 million
in fiscal 1999, 1998, 1997, 1996 and 1995,
respectively, less cost of sales.
(2) Depreciation and
amortization includes amortization
of goodwill totaling $536,000 in
fiscal 1999, $291,000 in fiscal 1998
and $116,000 in each of the fiscal
years 1997 through 1995.
(3) Represents a non-
recurring charge related to an
investment in a co-operative buying
group. Excluding this amount, net
income for fiscal 1999 was $7.8
million, or $0.62 per share.
(4) Comparable
store sales amounts for fiscal 1999
were materially affected by the
termination of the shoe department
leases in the twenty-eight
Gottschalks stores effective August
1, 1999, and by the implementation
of SAB No. 101, which requires the
Company to report sales in leased
departments separately from sales in
owned departments. Comparable store
sales data for fiscal years 1995 -
1998 would not be materially
affected by the exclusion of leased
department sales, due to the
consistency of the contribution of
those departments during those
years.
(5) Includes leased department sales in
order to facilitate an understanding
of the Company's sales relative to
its selling square footage.
Item 7. 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 Consolidated
Financial Statements. As described more fully
in Note 2 to the Consolidated Financial
Statements, 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. As
noted below, the acquisition has affected the
comparability of the Company's financial
results. In addition, effective fiscal 1999,
the Company implemented the provisions of SAB
No. 101, which requires that leased department
sales no longer be combined with owned sales
for financial reporting purposes. The Company,
like most retailers, previously combined sales
from leased departments with owned sales, with
the related costs combined with cost of sales.
All prior year amounts have been reclassified
to conform with the required presentation.
Results of Operations
The following table sets forth for
the periods indicated certain items from the
Company's Consolidated Income Statements,
expressed as a percent of net sales:
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Net credit revenues 1.6 1.5 1.5
Net leased department revenues 0.8 1.2 1.2
----- ----- -----
102.4 102.7 102.7
Costs and expenses:
Cost of sales 65.6 65.6 66.4
Selling, general and
administrative expenses 30.8 31.6 31.7
Depreciation and amortization 1.7 1.7 1.5
New store pre-opening costs 0.1 0.1 0.1
Asset impairment charge 0.4
Acquisition related costs 0.2 0.2
----- ----- -----
98.6 99.2 99.9
----- ----- -----
Operating income 3.8 3.5 2.8
Other (income) expense:
Interest expense 2.1 2.0 1.8
Miscellaneous income (0.3) (0.4) (0.5)
----- ----- -----
1.8 1.6 1.3
----- ----- -----
Income before income tax expense 2.0 1.9 1.5
Income tax expense 0.8 0.8 0.6
----- ----- -----
Net income 1.2% 1.1% 0.9%
===== ===== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales
Net sales increased by approximately
$62.5 million, or 13.1%, to $539.4 million in
fiscal 1999 as compared to $476.9 million in
fiscal 1998. This increase is primarily due to
additional sales volume generated by the eight
new Harris/Gottschalks locations which were
not open for the entire period in the prior
year, and by two new stores opened in Davis
and Danville, California in October and
November 1999, respectively. The increase is
also due to a 7.7% increase in comparable
store sales, resulting partially from the
conversion of the shoe departments in twenty-
eight Gottschalks locations from leased to
owned departments, effective August 1, 1999.
Pursuant to SAB No. 101, sales generated in
these shoe departments prior to the
termination of the lease on August 1, 1999 are
included in Net Leased Department Revenues, as
described below.
Net Credit Revenues
Net credit revenues associated with
the Company's private label credit card
increased by approximately $1.7 million, or
24.3%, in fiscal 1999 as compared to fiscal
1998. As a percent of net sales, net credit
revenues increased to 1.6% of net sales in
fiscal 1999 as compared to 1.5% in fiscal
1998. Net credit revenues consist of the
following:
<TABLE>
<CAPTION>
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Service charge revenues $15,482 $13,431
Interest expense on securitized
receivables (4,069) (3,314)
Charge-offs on receivables sold and
provision for credit losses on
receivables ineligible for sale (3,013) (3,175)
Gain (loss) on sale of receivables 173 (45)
------ ------
$ 8,573 $ 6,897
====== ======
</TABLE>
Service charge revenues increased by
approximately $2.1 million, or 15.3%, in
fiscal 1999 as compared to fiscal 1998. This
increase is primarily due to additional
service charge revenues generated by customer
credit card receivables acquired from Harris,
a change in the method of assessing service
charges to an average-daily balance method
effective April 1999 (previously assessed
based on the balance as of the end of a
billing period), and an increase in the volume
of late charge fees collected on delinquent
credit card balances. The Company's credit
sales as a percent of total sales increased to
44.2% in fiscal 1999 as compared to 43.1% in
fiscal 1998.
Interest expense on securitized
receivables increased by $755,000, or 22.8%,
in fiscal 1999 as compared to fiscal 1998.
This increase is primarily due to a higher
level of outstanding securitized borrowings
during the period, combined with a higher
weighted-average interest rate applicable to
such borrowings (7.59% in fiscal 1999 as
compared to 7.30% in fiscal 1998). Charge-offs
on receivables sold and the provision for
credit losses on receivables ineligible for
sale decreased by $162,000, or 5.1%, in fiscal
1999 as compared to 1998, primarily due to a
favorable trend in credit losses during the
period.
The Company accounts for the sale of
receivables pursuant to its securitization
program in accordance with Statement of
Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 has not materially
affected the Company's operating results since
its initial implementation in fiscal 1997.
Net Leased Department Revenues
Net rental income generated by the
Company's various leased departments decreased
by approximately $1.7 million, or 29.2%, to
$4.2 million in fiscal 1999 as compared to
$5.9 million in fiscal 1998. This decrease is
primarily due to the termination of the shoe
department leases in twenty-eight Gottschalks
locations effective August 1, 1999. Shoe
department sales in those locations after
August 1, 1999 are included in total sales for
financial reporting purposes.
As required by SAB No. 101, leased
department revenues are presented net of the
related costs for financial reporting
purposes. Sales generated by the Company's
leased departments, consisting primarily of
the shoe departments (prior to August 1,
1999), fine jewelry departments and the beauty
salons, totaled $29.0 million in fiscal 1999
and $40.2 million in fiscal 1998.
Cost of Sales
Cost of sales, which includes costs
associated with the buying, handling and
distribution of merchandise, increased by
approximately $40.6 million to $353.7 million
in fiscal 1999 as compared to $313.1 million
in fiscal 1998, an increase of 13.0%. These
increases are due to the increase in sales.
The Company's gross margin percentage remained
unchanged at 34.4% in fiscal 1999 and fiscal
1998.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses increased by approximately $15.1
million to $166.0 million in fiscal 1999 as
compared to $150.9 million in fiscal 1998, an
increase of 10.0%. As a percent of net sales,
selling, general and administrative expenses
decreased to 30.8% in fiscal 1999 as compared
to 31.6% in fiscal 1998, primarily due to
higher sales volume gained through the
acquisition of the Harris stores, combined
with on-going Company-wide cost reduction
efforts.
Depreciation and Amortization
Depreciation and amortization
expense increased by approximately $1.5
million to $9.5 million in fiscal 1998 as
compared to $8.0 million in fiscal 1998, an
increase of 17.7%. As a percent of net sales,
depreciation and amortization remained
unchanged at 1.7% in fiscal 1999 and fiscal
1998. The dollar increase is primarily due to
additional depreciation related to assets
acquired from Harris and capital expenditures
for the renovation of existing stores, and a
full year of amortization of ($421,000 in
fiscal 1999 as compared to $176,000 in fiscal
1998).
New Store Pre-Opening Costs
New store pre-opening costs of
$495,000 were recognized in fiscal 1999,
representing costs incurred in connection with
the opening of two new stores in Davis and
Danville, California in October and November
1999, respectively. New store pre-opening
costs incurred in fiscal 1998, totaling
$421,000, related to the amortization of costs
arising from two new store openings in fiscal
1997.
Non-Recurring Items
The Company recognized a non-
recurring asset impairment charge of $1.9
million in fiscal 1999 related to an
investment in a cooperative merchandise buying
group accounted for on the cost method.
Fiscal 1998 results include
acquisition related expenses of $859,000,
consisting primarily of costs incurred prior
to the elimination of duplicative operations
of Harris, including merchandising,
advertising, credit and distribution
functions. By the end of fiscal 1998, all
duplicative operations of Harris had been
eliminated.
Interest Expense
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $1.8 million to
$11.3 million in fiscal 1999 as compared to
$9.5 million in fiscal 1998, an increase of
19.1%. As a percent of net sales, interest
expense increased to 2.1% in fiscal 1999 as
compared to 2.0% in fiscal 1998. These
increases are primarily due to additional
interest associated with Subordinated Note
issued to Harris (see Note 7 to the
Consolidated Financial Statements), combined
with higher average outstanding borrowings
under the Company's working capital facility,
which were required to facilitate increased
inventory purchases for the newly owned shoe
departments and for new stores. These
increases were partially offset by a decrease
in the weighted-average interest rate
applicable to outstanding borrowings under the
Company's working capital facility (7.52% in
fiscal 1999 as compared to 7.88% in fiscal
1998), resulting primarily from a 1/4%
interest rate reduction effective March 1999.
Effective March 1, 2000, the Company
received a 1/8% reduction in the interest rate
on its working capital facility. It has been
reported in the media that interest rates may
increase during fiscal 2000. Any general
increase in interest rates could offset or
exceed the interest expense savings to the
Company resulting from the interest rate
reduction.
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,
decreased by approximately $400,000 to $1.6
million in fiscal 1999 as compared to $2.0
million in fiscal 1998. Miscellaneous income
in fiscal 1998 includes a credit of
approximately $350,000 to standardize the
amortization periods of certain donated
properties.
Income Taxes
The Company's effective tax rate
decreased to 39.0% in fiscal 1999 as compared
to 41.5% in fiscal 1998, primarily due to the
implementation of tax planning strategies.
(See Note 9 to the Consolidated Financial
Statements.)
Net Income
As a result of the foregoing, the
Company's net income increased by
approximately $1.3 million to $6.6 million in
fiscal 1999 as compared to $5.3 million in
fiscal 1998. On a per share basis (basic and
diluted), net income increased to $0.53 per
share in fiscal 1999 as compared to $0.46 per
share in fiscal 1998. Excluding the previously
described non-recurring asset impairment
charge, net income for fiscal 1999 was $7.8
million, or $0.62 per share.
Fiscal 1998 Compared to Fiscal 1997
Net Sales
Net sales in fiscal 1998 increased
by $63.9 million to $476.9 million as compared
to $413.0 million in fiscal 1997, a 15.5%
increase. This increase is primarily due to
additional sales volume generated by the nine
new Harris/Gottschalks locations, beginning
August 20, 1998, and by two new stores not
open for the entire year in fiscal 1997. As
planned, the Company closed one of the stores
acquired from Harris on January 31, 1999.
Comparable store sales increased by 2.1% in
fiscal 1998 as compared to the prior year,
despite unseasonably cold and wet weather
conditions caused by the El Nino weather
system.
Net Credit Revenues
Net credit revenues consist of the
following:
(In thousands of dollars) 1998 1997
- --------------------------------------------------
Service charge revenues $13,431 $11,618
Interest expense on securitized
receivables (3,314) (3,579)
Charge-offs on receivables sold
and provision for credit losses
on receivables ineligible for
sale (3,175) (2,704)
Gain (loss) on sale of receivables (45) 1,050
------ ------
$ 6,897 $ 6,385
====== ======
Net credit revenues increased by
$512,000, or 8.0%, in fiscal 1998 as compared
to fiscal 1997. As a percent of net sales, net
credit revenues remained unchanged at 1.5% of
net sales in fiscal 1998 and 1997.
Service charge revenues increased by
approximately $1.8 million, or 15.6%, in
fiscal 1998 as compared to fiscal 1997. This
increase is primarily due to additional
service charge revenues generated by customer
credit card receivables acquired from Harris,
combined with an increase in the volume of
late charge fees collected on delinquent
credit card balances. Credit sales as a
percent of total sales decreased to 43.1% in
fiscal 1998 as compared to 43.7% in fiscal
1997, primarily due to lower credit sales
volume in the newly acquired
Harris/Gottschalks locations than in the
Gottschalks locations.
Interest expense on securitized
receivables decreased by $265,000, or 7.4%, in
fiscal 1998 as compared to fiscal 1997. This
decrease relates to lower outstanding
borrowings against securitized receivables
during the period as a result of principal
reductions made under the program prior to its
refinancing on March 1, 1999. (See Note 3 to
the Consolidated Financial Statements.) Charge-
offs on receivables sold and the provision for
credit losses on receivables ineligible for
sale increased by $471,000, or 17.4%, in
fiscal 1998 as compared to 1997. As a percent
of sales, however, such amounts remained
unchanged at 0.6% in fiscal 1998 and 1997.
The gain on sale of receivables in
fiscal 1997 includes a non-recurring credit of
$898,000 related to a change in the estimate
for the allowance for doubtful accounts for
receivables which were ineligible for sale.
Net Leased Department Revenues
Net rental income generated by the
Company's various leased departments increased
by $809,000, or 15.8%, to $5.9 million in
fiscal 1999 as compared to $5.1 million in
fiscal 1998. This increase is primarily due to
increased revenues generated by the newly
acquired Harris/Gottschalks stores beginning
August 1998. Sales generated by the Company's
leased departments totaled $40.2 million in
fiscal 1998 and $35.2 million in fiscal 1997.
Cost of Sales
Cost of sales increased by
approximately $38.6 million to $313.1 million
in fiscal 1998 as compared to $274.5 million
in fiscal 1997, an increase of 14.0%. The
Company's gross margin percentage increased to
34.4% in fiscal 1998 as compared to 33.6% in
fiscal 1997, primarily due to increased sales
of higher gross margin merchandise categories
in certain of the Company's stores, combined
with lower costs associated with the
processing of merchandise at the Company's
distribution center.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses increased by approximately $20.0
million to $150.9 million in fiscal 1998 as
compared to $130.9 million in fiscal 1997, an
increase of 15.2%. As a percent of net sales,
selling, general and administrative expenses
decreased to 31.6% in fiscal 1998 as compared
to 31.7% in fiscal 1997, primarily due to
higher sales volume gained through the
acquisition of the Harris stores, lower rental
expense resulting from the modification of
certain store lease agreements and from the
refinancing and conversion of certain
operating equipment leases into capital
leases. This decrease was partially offset by
increased payroll and payroll related costs in
the Company's stores as a result of the
mandatory minimum wage increase in California
(from $5.15 to $5.75 per hour, an 11.7%
increase) effective March 1, 1998, and other
competitive wage adjustments. The Company also
increased advertising and credit solicitation
expenditures during the year in an attempt to
improve sluggish apparel sales during the
first half of the year caused by the El Nino
weather system and in connection with the
integration of the Harris stores.
Depreciation and Amortization
Depreciation and amortization
expense increased by approximately $1.9
million to $8.0 million in fiscal 1998 as
compared to $6.1 million in fiscal 1997, an
increase of 32.3%. As a percent of net sales,
depreciation and amortization increased to
1.7% in fiscal 1998 as compared to 1.5% in
fiscal 1997. These increases are primarily due
to additional depreciation related to capital
expenditures for new stores and for the
renovation of existing stores, new capital
lease obligations, and assets acquired from
Harris. These increases are also due to the
amortization of goodwill associated with the
August 1998 acquisition of the Harris stores.
New Store Pre-Opening Costs
The amortization of new store pre-
opening costs totaled $421,000 in fiscal 1998
as compared to $589,000 in fiscal 1997.
Non-Recurring Items
Fiscal 1998 results include
acquisition related expenses of $859,000,
consisting primarily of costs incurred prior
to the elimination of duplicative operations
of Harris, including merchandising,
advertising, credit and distribution
functions. By the end of fiscal 1998, all
duplicative operations of Harris had been
eliminated.
The Company had previously entered
into negotiations for the acquisition of
Harris in fiscal 1997. The parties were unable
to agree on the terms of the transaction,
however, and negotiations were discontinued.
Fiscal 1997 results include $673,000 of costs
related to the proposed transaction,
consisting primarily of legal, accounting and
investment banking fees.
Interest Expense
Interest expense increased by
approximately $2.2 million to $9.5 million in
fiscal 1998 as compared to $7.3 million in
fiscal 1997, an increase of 29.3%. As a
percent of net sales, interest expense
increased to 2.0% in fiscal 1998 as compared
to 1.8% in fiscal 1997. These increases are
primarily due to higher average outstanding
borrowings under the Company's working capital
facilities, and additional interest associated
with the Subordinated Note issued to Harris
(see Note 7 to the Consolidated Financial
Statements). These increases were partially
offset by a decrease in the weighted-average
interest rate applicable to outstanding
borrowings under the Company's working capital
facilities (7.88% in fiscal 1998 as compared
to 8.16% in fiscal 1997) resulting from
interest rate reductions during the year.
Miscellaneous Income
Miscellaneous income, which includes
the amortization of deferred income and other
miscellaneous income and expense amounts,
remained unchanged at approximately $2.0
million in fiscal 1998 and 1997. Miscellaneous
income in fiscal 1998 includes a credit of
approximately $350,000 to standardize the
amortization periods of certain donated
properties. Miscellaneous income in fiscal
1997 includes a credit to a deferred lease
incentive of $400,000, which resulted from the
revision of certain terms of the related
lease.
Income Taxes
The Company's effective tax rate was
41.5% in fiscal 1998 as compared to 41.6% in
fiscal 1997. (See Note 9 to the Consolidated
Financial Statements.)
Net Income
As a result of the foregoing, the
Company's net income increased by
approximately $1.6 million to $5.3 million in
fiscal 1998 as compared to $3.7 million in
fiscal 1997. On a per share basis (basic and
diluted), net income increased to $0.46 per
share in fiscal 1998 as compared to $0.36 per
share in fiscal 1997.
Liquidity and Capital Resources
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. Working
capital increased by approximately $8.5
million to $104.7 million in fiscal 1999 as
compared to $96.2 million in fiscal 1998. 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. The Company's
ratio of current assets to current liabilities
increased to 2.42:1 as of the end of fiscal
1999 as compared to 1.98:1 as of the end of
fiscal 1998.
Proposed Business Acquisition.
On April 24, 2000, the Company entered into a
definitive asset purchase agreement with
Lamonts, providing for the Company to acquire
all of Lamont's department store leases and
store fixtures and equipment for a cash
purchase price of $19.0 million. Lamonts is a
Northwest-based regional department store
chain currently operating thirty-eight
department stores, with twenty-three located
in the state of Washington, seven in Alaska,
five in Idaho, two in Oregon and one in Utah.
Lamonts filed a voluntary petition for
reorganization under Chapter 11 of the
Bankruptcy Code in January 2000, and the
purchase is subject to approval by the
Bankruptcy Court. If approved, the transaction
is expected to close in late July 2000. The
Company has obtained a commitment from
Congress Financial Corporation ("Congress") to
provide a short-term acquisition financing
facility for $10.0 million to finance a
portion of the purchase price, with the
remaining $9.0 million of the purchase price
to be funded with working capital. The Company
expects to repay the short-term financing, due
December 31, 2000, with proceeds from a newly
issued certificate under its receivables
securitization program. The new certificate,
which is expected to be issued by the end of
the third quarter of fiscal 2000, will be
collateralized by credit card receivables in
excess of required amounts in the Company's
current portfolio, and by new receivables
expected to be generated in the acquired
locations. The Company also expects to
receive a $40.0 million increase to its
working capital facility, effective upon court
approval of the transaction, to provide for
increased inventory requirements for the new
stores.
Revolving Line of Credit. The
Company has a $140.0 million revolving line of
credit facility with Congress through March
31, 2002. Borrowings under the arrangement are
limited to a restrictive borrowing base equal
to 75% of eligible merchandise inventories,
increasing to 80% of such inventories during
the period of November 1 through December 31
of each year to fund increased seasonal
inventory requirements. Interest under the
facility was charged at a rate of LIBOR plus
2.00% for substantially all of fiscal 1999
(reduced to LIBOR plus 1.875% on March 1,
2000), with no interest charged on the unused
portion of the line of credit. The Company had
$21.1 million of excess availability under the
credit facility as of January 29, 2000.
Receivables Securitization Program.
As described more fully in Note 3 to the
Consolidated Financial Statements, the Company
sells all 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 and the remaining funds were used
to purchase additional receivables from the
Company. The holder of the 1999-1 Series
certificate earns interest on a monthly basis
at a fixed interest rate of 7.66%, and the
outstanding principal balance of the
certificate, which is off-balance sheet for
financial reporting purposes, 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 fiscal 1999,
totaling $16.1 million, were primarily related
to tenant improvements and fixtures and
equipment for the two new department stores
opened during the year, and to the renovation
and refixturing of certain existing locations
and certain of the Company's new
Harris/Gottschalks locations. Commitments for
fiscal 2000 currently include the remodeling
and enlargement of the Company's existing
store in San Luis Obispo, California, and the
opening a new 45,000 square foot store in
Grants Pass, Oregon. While these projects are
expected to be completed by July and August
2000, respectively, there can be no assurance
that they will not be delayed due to a variety
of conditions precedent or other factors. The
remaining estimated cost of these projects as
of January 29, 2000 of approximately $4.3
million are expected to be funded through
existing capital resources.
As described more fully in Note 6 to
the Consolidated Financial Statements, the
Company has other long-term obligations with
total outstanding balances of $27.9 million at
January 29, 2000 ($30.2 million as of January
30, 1999). The loans mature at dates ranging
from 2001 to 2010, bear interest at fixed
rates ranging from 9.39% to 10.45%, and are
collateralized by various properties and
equipment of the Company. The scheduled annual
principal maturities on the Company's various
long-term obligations are $2.8 million, $2.5
million, $1.4 million, $1.4 million and
$620,000 for fiscal 2000 through 2004, with
$19.2 million due thereafter. In addition, in
fiscal 1998 the Company issued a $22.2 million
8% Subordinated Note in connection with the
Harris acquisition. The Subordinated Note is
due August 20, 2003, but may be extended to
August 2006 under certain circumstances.
On February 23, 2000, the Board of
Directors of the Company approved the
repurchase of up to $2.0 million of Company
common stock, in open market or private
transactions, for a period of up to twelve
months. Any shares that may be repurchased
will be held as treasury shares initially and
may be used in connection with the Company's
stock option program and for other general
corporate purposes or acquisitions. The
Company expects to finance the repurchases
from working capital. No shares have been
repurchased as of the date of this report.
The Company's revolving line of
credit agreement, and certain of its long-term
debt and lease arrangements contain various
restrictive covenants. The Company was in
compliance with all such restrictive covenants
as of January 29, 2000.
Management believes the previously
described sources of liquidity are adequate to
meet the Company's working capital, capital
expenditure and debt service requirements for
fiscal 2000. 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 they are necessary or deemed to
be advantageous.
Inflation
Although inflation has not been a
material factor in the Company's operations
during the past several years, the Company has
experienced increases in the costs of certain
of its merchandise, salaries, employee
benefits and other general and administrative
costs. The Company is generally able to offset
these increases by adjusting its selling
prices or by modifying its operations. The
Company's ability to adjust selling prices is
limited by competitive pressures in its market
areas.
The Company accounts for its
merchandise inventories on the retail method
using last-in, first-out (LIFO) cost based
upon the department store price indices
published by the Bureau of Labor Statistics.
Under this method, the cost of products sold
reported in the financial statements
approximates current costs and thus reduces
the impact of inflation on reported income due
to increasing costs.
Seasonality
The Company's business, like that of
most retailers, is subject to seasonal
influences, with the major portion of net
sales, gross profit and operating results
realized during the Christmas selling months
of November and December of each year, and to
a lesser extent, during the Easter and Back-to-
School selling seasons. The Company's results
may also vary from quarter to quarter as a
result of, among other things, the timing and
level of the Company's sales promotions,
weather, fashion trends and the overall health
of the economy, both nationally and in the
Company's market areas. Working capital
requirements also fluctuate during the year,
increasing substantially prior to the
Christmas selling season when the Company must
carry significantly higher inventory levels.
The following table sets forth
unaudited quarterly results of operations for
fiscal 1999 and 1998 (in thousands, except per
share data). (See Note 16 to the Consolidated
Financial Statements.)
<TABLE>
<CAPTION>
1999
--------------------------------------------
Quarter Ended May 1 July 31 October 30 January 29
------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales (1) $111,104 $118,718 $122,873 $186,703
Gross profit 37,647 41,000 43,980 63,111
Income (loss) before
income tax expense
(benefit)(2) (1,851) ( 180) 615 12,292
Net income (loss) (1,079) ( 105) 358 7,462
Net income (loss)
per common share -
basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59
Weighted-average
number of common
shares outstanding:
Basic 12,575 12,575 12,575 12,581
Diluted 12,575 12,575 12,646 12,615
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------
Quarter Ended May 2 August 1 October 31 January 30
----- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 87,389 $ 95,263 $113,880 $180,393
Gross profit 28,792 31,361 41,898 61,800
Income (loss) before
income tax expense
(benefit) (3,408) (2,310) 604 14,143
Net income (loss) (1,994) (1,352) 345 8,283
Net income (loss)
per common share -
basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
Weighted-average
number of common
shares outstanding(3):
Basic 10,479 10,479 12,138 12,575
Diluted 10,479 10,479 12,155 12,593
</TABLE>
(1) The Company's net sales by quarter have been
reclassified to exclude leased department sales, in
accordance with the requirements of SAB No. 101.
(2) Net income in the three month period ended January
29, 2000 includes a non-recurring, pre-tax charge
of $1,933,000 to reflect the impairment of an
investment accounted for under the cost method.
(3) The increase in the weighted-average
number of common shares outstanding during fiscal
1998 resulted from the issuance of 2,095,900 shares
of common stock to Harris on August 20, 1998 in
connection with a business acquisition (see Note 2
to the Consolidated Financial Statements.)
Recently Issued Accounting Standards
The Securities and Exchange Commission recently
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", which is effective for
fiscal 1999 and requires that leased department sales no
longer be combined with net sales for financial reporting
purposes, and that all prior periods presented be
reclassified to conform with the required presentation. The
Company, like most retailers, previously combined sales from
leased departments with owned sales, with the related costs
combined with cost of sales. The adoption of SAB No. 101 has
no impact on the Company's prior or future operating results
and relates only to financial statement presentation and
disclosure.
SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as deferred by SFAS No.
137, requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The
Company currently does not have any derivatives and therefore
does not expect that the adoption of this standard, effective
beginning fiscal 2001, will have a material impact on the
Company's financial position or the results of its
operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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. As of
January 29, 2000, line of credit borrowings subject to a
variable interest rate represented 38.6% of the Company's
total outstanding borrowings (both on and off-balance sheet).
The Company does not engage in financial transactions for
speculative or trading purposes, nor does the Company
purchase or hold any derivative financial instruments.
The interest payable on the Company's revolving line of
credit is based on a variable interest rate and is therefore
affected by changes in market interest rates. An increase of
80 basis points on existing line of credit borrowings (a 10%
change from the Company's weighted-average interest rate as
of January 29, 2000) would reduce the Company's pre-tax net
income and cash flow by approximately $500,000. This 80 basis
point increase in interest rates would not materially affect
the fair value of the Company's fixed rate financial
instruments. (See Note 1 to the Consolidated Financial
Statements.)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under Part
IV, Item 14, included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The information required by Item 10 of Form 10-K,
other than the following information required by Paragraph
(b) of Item 401 of Regulation S-K, is incorporated by
reference from those portions of the Company's definitive
proxy statement with respect to the Annual Stockholders'
Meeting scheduled to be held on June 22, 2000, to be filed
pursuant to Regulation 14A (the "2000 Proxy") under the
headings "Nominees for Election as Director" and "Section
16(a) Beneficial Ownership Reporting Compliance."
The following table lists the executive officers of
the Company:
Name Age(1) Position
- ------------ ----- ---------
Joe W. Levy 69 Chairman
James R. Famalette 48 President and Chief
Executive Officer
Gary L. Gladding 60 Executive Vice
President/General
Merchandise
Manager
Michael S. Geele 49 Senior Vice
President and
Chief Financial
Officer
Michael J. Schmidt 58 Senior Vice
President/
Director of
Stores
__________________________
(1) As of March 31, 2000
Joe W. Levy is Chairman of the Company. From 1986
to June 25, 1999, he was Chairman and Chief Executive Officer
of the Company. He first joined the Company in 1956. (1) He
serves on the Board of Directors of the National Retail
Federation and the Executive Committee of Frederick Atkins.
He was formerly Chairman of the California Transportation
Commission and has served on numerous other boards, state and
local commissions and public service agencies.
James R. Famalette became President and Chief
Executive Officer of the Company on June 25, 1999 after
serving as President and Chief Operating Officer of the
Company since April 14, 1997. Prior to joining the Company,
Mr. Famalette was President and Chief Executive Officer of
Liberty House, a department and specialty store chain based
in Honolulu, Hawaii, from 1993 through 1997, and served in a
variety of other positions with Liberty House from 1987
through 1993, including Vice President, Stores and Vice
President, General Merchandise Manager. From 1982 through
1987, he served as Vice President, General Merchandise
Manager and later as President of Village Fashions/Cameo
Stores in Philadelphia, Pennsylvania, and from 1975 to 1982
served as a Divisional Merchandise Manager for Colonies, a
specialty store chain, based in Allentown, Pennsylvania. Mr.
Famalette serves on the Board of Directors of the National
Retail Federation and Frederick Atkins.
Gary L. Gladding has been Executive Vice President
of the Company since 1987, and joined the Company as Vice
President/General Merchandise Manager in 1983. (1) Prior to
1983, he served in a variety of management positions with
Lazarus Department Stores, a division of Federated Department
Stores, Inc., and the May Department Stores Co.
Michael S. Geele became Senior Vice President and
Chief Financial Officer of the Company on January 21, 1999.
Prior to joining the Company, Mr. Geele was Chief Financial
Officer of Southwest Supermarkets in Phoenix, Arizona from
1995 to 1998. From 1991 to 1995, Mr. Geele served as Vice
President of Finance for Smitty's Super Valu in Phoenix,
Arizona, and from 1981 to 1991 served in various financial
positions with Smitty's, including Senior Director and
Corporate Controller. Mr. Geele is a Certified Public
Accountant.
Michael J. Schmidt became Senior Vice
President/Director of Stores of the Company in 1985 (1). From
1983 through 1985, he was Manager of the Gottschalks Fashion
Fair store. Prior to joining the Company, he held management
positions with Liberty House, Allied Corporation and R.H.
Macy & Co., Inc.
____________________________
(1) References to the Company prior to 1986 are more
specifically to the Company's predecessor and former
subsidiary, E. Gottschalk and Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is
incorporated by reference from those portions of the
Company's 2000 Proxy under the headings "Executive
Compensation" and "Director Compensation For Fiscal Year
1999."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is
incorporated by reference from the portion of the Company's
2000 Proxy under the heading "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is
incorporated by reference from the portion of the Company's
2000 Proxy under the heading "Certain Relationships and
Related Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS
ON FORM 8-K
(a)(1) The following consolidated financial statements of
Gottschalks Inc. and Subsidiary as required by
Item 8 are included in this Part IV, Item 14:
Consolidated balance sheets - As of January 29,
2000 and January 30, 1999
Consolidated income statements -- Fiscal years
ended January 29, 2000, January 30, 1999 and
January 31, 1998
Consolidated statements of stockholders' equity --
Fiscal years ended January 29, 2000, January 30,
1999 and January 31, 1998
Consolidated statements of cash flows -- Fiscal
years ended January 29, 2000, January 30, 1999 and
January 31, 1998
Notes to consolidated financial statements -- Three
years ended January 29, 2000
Independent auditors' report
(a)(2) The following financial statement schedule of
Gottschalks Inc. and Subsidiary is included in Item
14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission are included in the consolidated
financial statements, are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(a)(3) The following exhibits are required by Item 601 of
Regulation S-K and Item 14(c):
Incorporated by
Reference From
the
Exhibit Following
No. Description Document
- ------- ------------- -------------
3.1 Certificate of Incorporation Registration
of the Registrant, as amended Statement
on Form S-1 (File No.
33-3949)
3.2 By-Laws of the Registrant, Annual Report on
as amended Form 10-K for the
year ended February
3, 1996 (File No.
1-09100)
10.1 Agreement of Limited Partnership Annual Report on
dated March 16, 1990, by and Form 10-K for the
between River Park Properties I year ended February
and Gottschalks Inc. relating to 2, 1991 (File No.
the Company's corporate 1-09100)
headquarters
10.2 Gottschalks Inc. Retirement Registration
Savings Plan(*) Statement on Form
S-1 (File No. 33-3949)
10.3 Participation Agreement dated Annual Report on
as of December 1, 1988 among Form 10-K for the
Gottschalks Inc., General Foods year ended January
Credit Investors No. 2 Corporation 29, 1994 (File No.
and Manufacturers Hanover Trust 1-09100)
Company of California relating to
the sale-leaseback of the Stockton
and Bakersfield department stores
and the Madera distribution facility
10.4 Lease Agreement dated December 1, AnnualReport on
1988 by and between Manufacturers Form 10-K for the
Hanover Trust Company of California year ended January
and Gottschalks Inc. relating to 29, 1994 (File No.
the sale-leaseback of department 1-09100)
stores in Stockton and Bakersfield,
California and the Madera
distribution facility
10.5 Ground Lease dated December 1, Annual Report on
1988 by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback 1-09100)
of the Bakersfield department store
10.6 Memorandum of Lease and Lease Annual Report on
Supplement dated July 1, 1989 by Form 10-K for the
and between Manufacturers Hanover year ended January
Trust Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Stockton
department store
10.7 Ground Lease dated August 17, Annual Report on
1989 by and between Gottschalks Form 10-K for the
Inc. and Manufacturers Hanover year ended January
Trust Company of California 29, 1994 (File No.
relating to the sale-leaseback of 1-09100)
the Madera distribution facility
10.8 Lease Supplement dated as of Annual Report on
August 17, 1989 by and between Form 10-K for the
Manufacturers Hanover Trust year ended January
Company of California and 29, 1994 (File No.
Gottschalks Inc. relating to the 1-09100)
sale-leaseback of the Madera
distribution facility
10.9 Tax Indemnification Agreement Annual Report on
dated as of August 1, 1989 by Form 10-K for the
and between Gottschalks Inc. year ended January
and General Foods Credit 29, 1994 (File No.
Investors No. 2 Corporation 1-09100)
relating to the sale-leaseback
of the Stockton and Bakersfield
department stores and the
Madera distribution facility
10.10 Lease Agreement dated as of Annual Report on
March 16, 1990 by and between Form 10-K for the
Gottschalks Inc. and River year ended January
Park Properties I relating to the 29, 1994 (File No.
Company's corporate headquarters 1-09100)
10.11 Consulting Agreement dated Quarterly Report on
May 27, 1994 by and between Form 10-Q for the
Gottschalks Inc. and Gerald quarter ended April
H. Blum(*) 30, 1994 (File No.
1-09100)
10.12 Form of Severance Agreement Annual Report on
dated March 31, 1995 by and Form 10-K for the
between Gottschalks Inc. and year ended January
the following senior executives 28, 1995 (File No.
of the Company: Joseph W. Levy, 1-09100)
Gary L. Gladding and Michael
J. Schmidt(*)
10.13 1994 Key Employee Incentive Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54789)
10.14 1994 Director Nonqualified Registration
Stock Option Plan(*) Statement on Form
S-8 (File #33-54783)
10.15 Promissory Note and Security Annual Report on
Agreement dated December 16, Form 10-K for the
1994 by and between year ended January
Gottschalks Inc. and 28, 1995 (File No.
Heller Financial, Inc. 1-09100)
10.16 Agreement of Sale dated June 27, Quarterly Report on
1995, by and between Gottschalks Form 10-Q for the
Inc. and Jack Baskin relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.17 Lease and Agreement dated June 27, Quarterly Report on
1995, by and between Jack Baskin Form 10-Q for the
and Gottschalks Inc. relating to quarter ended July
the sale and leaseback of the 29, 1995 (File No.
Capitola, California property 1-09100)
10.18 Promissory Notes and Security Quarterly Report on
Agreements dated October 4, 1995 Form 10-Q for the
and October 10, 1995 by and quarter ended
between Gottschalks Inc. and October 28, 1995
Midland Commercial Funding (File No. 1-09100)
10.19 Promissory Note and Security Quarterly Report on
Agreement dated October 2, Form 10-Q for the
1996, by and between Gottschalks year ended November
Inc. and Heller Financial, Inc. 2, 1996 (File No.
1-09100)
10.20 Loan and Security Agreement dated Annual Report on
December 29, 1996, by and between Form 10-K for the
Gottschalks Inc. and Congress year ended February
Financial Corporation 1, 1997 (File No.
1-09100)
10.21 Gottschalks Inc. 1998 Stock Registration
Option Plan(*) Statement on Form
S-8 (File #33-61471)
10.22 Gottschalks Inc. 1998 Registration
Employee Stock Purchase Statement on Form
Plan(*) S-8 (File #33-61473)
10.23 Asset Purchase Agreement dated Current Report on
as of July 21, 1998 among Form 8-K dated July
Gottschalks Inc., The Harris 21, 1998 (File No.
Company and El Corte Ingles, 1-09100)
S. A. together with all
Exhibits thereto
10.24 Non-Negotiable, Extendable, Current Report on
Subordinated Note due Form 8-K dated
August 20, 2003 issued to August 20, 1998
The Harris Company (File No. 1-09100)
10.25 Registration Rights Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.26 Employee Lease Agreement between Current Report on
The Harris Company and Gottschalks Form 8-K dated
Inc. dated August 20, 1998 August 20,1998
(File No. 1-09100)
10.27 Tradename License Agreement Current Report on
between The Harris Company and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 (File No. 1-09100)
10.28 Stockholders' Agreement among Current Report on
El Corte Ingles, S. A., Gottschalks Form 8-K dated
Inc., Joseph Levy and Bret Levy August 20, 1998
dated August 20, 1998 (File No. 1-09100)
10.29 Standstill Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20,1998
August 20, 1998 (File No. 1-09100)
10.30 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: East Hills (File No. 1-09100)
Mall, Bakersfield, California
10.31 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Moreno (File No. 1-09100)
Valley Mall at Towngate,
Moreno Valley, California
10.32 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Antelope (File No. 1-09100)
Valley Mall at Palmdale, California
10.33 Store Lease Agreement between Current Report on
El Corte Ingles, S. A., and Form 8-K dated
Gottschalks Inc. dated August 20, 1998
August 20, 1998 re: Carousel (File No.1-09100)
Mall at San Bernardino, California
10.34 Form of Severance Agreement Annual Report on
dated January 21, 1999 by Form 10-K for the
and between Gottschalks Inc. year ended January
and Michael S. Geele (*) 30,1999 (File No.
1-09100)
10.35 Receivables Purchase Annual Report on
Agreement dated March 1, 1999 Form 10-K for the
By and between Gottschalks year ended January
Credit Receivables Corporation 30, 1999 (File No.
and Gottschalks Inc. 1-09100)
10.36 Pooling and Servicing Annual Report on
Agreement dated as of March 1, Form 10-K for the
1999 by and among Gottschalks year ended January
Credit Receivables Corporation, 30, 1999 (File No.
Gottschalks Inc. and Bankers 1-09100)
Trust Company
10.37 Series 1999-1 Supplement to Annual Report on
Pooling and Servicing Form 10-K for the
Agreement dated March 1, 1999 year ended January
by and among Gottschalks Credit 30, 1999 (File No.
Receivables Corporation, 1-09100)
Gottschalks Inc. and Bankers
Trust Company
10.38 Sixth Amendment to Loan and Quarterly Report on
Security Agreement dated August Form 10-Q for the
12, 1999, by and between Gottschalks quarter ended July 31,
Inc. and Congress Financial 1999 (File No. 1-
Corporation (Western). 09100_
10.39 Employment Agreement dated June Quarterly Report on
25, 1999 by and between Form 10-Q for the
Gottschalks Inc. and James R. quarter ended July
Famalette(*). 31, 1999 (File No.
1-09100)
10.40 Seventh Amendment to Loan and Filed electronically
Security Agreement dated March herewith
27,2000, by and between
Gottschalks Inc. and Congress
Financial Corporation (Western).
10.41 Asset Purchase Agreement dated Filed electronically
April 24, 2000 by and between herewith
Gottschalks Inc. and Lamonts
Apparel, Inc.
21. Subsidiary of the Registrant Annual Report on
Form 10-K for the
year ended January
28, 1995 (File No.
1-09100)
23. Independent Auditors' Consent Filed electronically
herewith
27. Financial Data Schedule Filed electronically
herewith
(*) Management contract, compensatory plan or
arrangement.
______________________________________________
(b) Reports on Form 8-K -- The
Company did not file any
Reports on Form 8-K during the
fourth quarter of fiscal 1999.
(c) Exhibits -- The response to
this portion of Item 14 is
submitted as a separate section
of this report.
(d) Financial Statement Schedule--
The response to this portion of
Item 14 is submitted as a
separate section of this
report.
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) and (2), (c) and (d)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED JANUARY 29, 2000
GOTTSCHALKS INC. AND SUBSIDIARY
FRESNO, CALIFORNIA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Gottschalks Inc.
Fresno, California
We have audited the accompanying consolidated
balance sheets of Gottschalks Inc. and
Subsidiary as of January 29, 2000 and January
30, 1999, and the related consolidated
statements of income, stockholders' equity and
cash flows for each of the three years in the
period ended January 29, 2000. Our audits also
included the financial statement schedule
listed in the Index at Item 14(a)(2). These
financial statements and financial statement
schedule are the responsibility of the
Company's management. Our responsibility is to
express an opinion on these financial
statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial
statements present fairly, in all material
respects, the financial position of
Gottschalks Inc. and Subsidiary as of January
29, 2000 and January 30, 1999, and the results
of their operations and their cash flows for
each of the three years in the period ended
January 29, 2000 in conformity with generally
accepted accounting principles. Also, in our
opinion, such financial statement schedule,
when considered in relation to the basic
financial statements taken as a whole,
presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fresno, California
February 23, 2000 (April 24, 2000 as to Note
15)
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 29, January 30,
ASSETS 2000 1999
- ------- ----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,901 $ 1,693
Retained interest in receivables sold 29,138 37,399
Receivables - net 7,597 18,645
Merchandise inventories 130,028 123,118
Other 9,666 13,116
------- -------
Total current assets 178,330 193,971
PROPERTY AND EQUIPMENT - net 120,393 113,645
OTHER ASSETS:
Goodwill - net 8,708 9,244
Other 6,573 7,444
-------- --------
15,281 16,688
------- --------
$314,004 $324,304
======= =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 29, January 30,
2000 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued
<S> <C> <C>
expenses $ 58,976 $ 68,563
Revolving line of credit 5,479 20,273
Current portion of long-term obligations 4,479 4,434
Deferred income taxes 4,677 4,470
-------- -------
Total current liabilities 73,611 97,740
LONG-TERM OBLIGATIONS, less current portion 80,674 74,114
DEFERRED INCOME AND OTHER 20,911 24,111
DEFERRED INCOME TAXES 7,609 4,253
SUBORDINATED NOTE PAYABLE TO AFFILIATE - net 20,961 20,618
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.10 per share;
2,000,000 shares authorized; none issued
Common stock, par value of $.01 per share;
30,000,000 shares authorized; 12,596,837
and 12,575,565 issued 126 126
Additional paid-in capital 70,760 70,626
Retained earnings 39,352 32,716
------- -------
110,238 103,468
------- -------
$314,004 $324,304
======= =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Net sales $539,398 $476,925 $413,013
Net credit revenues 8,573 6,897 6,385
Net leased department revenues 4,209 5,944 5,135
Total revenues 552,180 489,766 424,533
Costs and expenses:
Cost of sales 353,660 313,074 274,514
Selling, general and
administrative expenses 166,027 150,884 130,922
Depreciation and amortization 9,465 8,040 6,078
New store pre-opening costs 495 421 589
Asset impairment charge 1,933
Acquisition related expenses 859 673
------- ------- -------
Total costs and expenses 531,580 473,278 412,776
------- ------- -------
Operating income 20,600 16,488 11,757
Other (income) expense:
Interest expense 11,279 9,470 7,325
Miscellaneous income (1,555) (2,011) (1,955)
------- ------ ------
9,724 7,459 5,370
------- ------ ------
Income before income tax expense 10,876 9,029 6,387
Income tax expense 4,240 3,747 2,657
------- ------- -------
Net income $ 6,636 $ 5,282 $ 3,730
======= ======= =======
Net income per common share -
basic and diluted $ 0.53 $ 0.46 $ 0.36
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
----------------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997 10,472,915 $105 $56,330 $23,704 $ 80,139
Net income 3,730 3,730
Shares issued under
stock option plan 5,500 36 36
---------- ----- ------ ------ ------
BALANCE, JANUARY 31, 1998 10,478,415 105 56,366 27,434 83,905
Net income 5,282 5,282
Shares issued for
business acquisition 2,095,900 21 14,252 14,273
Shares issued under
stock option plan 1,250 8 8
---------- ---- ------ ------ ------
BALANCE, JANUARY 30, 1999 12,575,565 126 70,626 32,716 103,468
Net income 6,636 6,636
Shares issued under
stock purchase plan 21,272 134 134
---------- --- ------ ------ ------
BALANCE, JANUARY 29, 2000 12,596,837 $126 $70,760 $39,352$110,238
========== === ====== ====== =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 6,636 $ 5,282 $ 3,730
Adjustments:
Depreciation and amortization 9,960 8,461 6,667
Deferred income taxes 3,562 633 2,557
Amortization of deferred items (3,201) (950) (888)
Provision for credit losses 982 992 470
Net loss (gain) from sale of assets 86 26 (72)
Asset impairment charge 1,933
Other non-cash items, net 343 (106) (1,170)
Decrease (increase) in assets, excluding
effect of business acquisition:
Receivables (2,643) (972) (1,346)
Merchandise inventories (6,117) (4,524) (9,227)
Other current and long-term assets 2,268 2,678 2,594
Increase (decrease) in liabilities,
excluding effect of business acquisition:
Trade accounts payable and accrued
expenses (7,868) (2,571) 1,873
Other current and long-term
liabilities (136) 2,545 (1,546)
------- ------- -------
Net cash provided by operating
activities 5,805 11,494 3,642
INVESTING ACTIVITIES:
Available-for-sale securities:
Maturities (305,926)(262,357) (230,433)
Purchases 304,795 256,571 235,491
Purchases of property and equipment (16,059) (16,801) (14,976)
Acquisition of business (1,369)
Proceeds from property and equipment
sales 123 680 365
Other 194 198 229
------- ------- -------
Net cash used in investing
activities (16,873) (23,078) (9,324)
FINANCING ACTIVITIES:
Net proceeds (repayments) under
revolving line of credit (4,794) 29,506 (8,137)
Proceeds from issuance of 1999-1
Series certificates 53,000
Proceeds from long-term obligations 500 3,214
Principal payments on retired
certificates (30,900) (15,800)
Principal payments on long-term
obligations (4,515) (4,065) (3,054)
Changes in cash management liability
and other (2,015) 2,035 13,764
------- ------- -------
Net cash provided by financing
activities 11,276 11,676 5,787
------- ------- -------
INCREASE IN CASH 208 92 105
CASH AT BEGINNING OF YEAR 1,693 1,601 1,496
------- ------- -------
CASH AT END OF YEAR $ 1,901 $ 1,693 $ 1,601
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
ACTIVITIES:
INVESTING ACTIVITIES:
Consideration for acquisition of
business:
Issuance of 2,095,900 shares of
common stock $14,273
Issuance of 8% Subordinated Note 20,467
------
$34,740
FINANCING ACTIVITIES: ======
Acquisition of equipment under
capital leases $ 620 $ 1,273 $ 3,562
======= ====== =======
See notes to consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT
ACCOUNTING POLICIES
Gottschalks Inc. is a regional department and
specialty store chain based in Fresno, California,
currently consisting of forty-two full-line
department stores, including thirty-two
"Gottschalks" and ten "Harris/Gottschalks"
department stores, and twenty specialty apparel
stores. 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.
Use of Estimates - The preparation of the financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
periods. Such estimates and assumptions are subject
to inherent uncertainties which may cause actual
results to differ from reported amounts.
Principles of Consolidation - The accompanying
financial statements include the accounts of
Gottschalks Inc., and its wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation
("GCRC"), (collectively, the "Company"). All
significant intercompany transactions and balances
have been eliminated in consolidation.
Fiscal Year - The Company's fiscal year ends on the
Saturday nearest January 31. Fiscal years 1999,
1998 and 1997, which ended on January 29, 2000,
January 30, 1999 and January 31, 1998,
respectively, each consist of 52 weeks.
Revenue Recognition - Net retail sales are recorded
at the point-of-sale and include sales of
merchandise, net of estimated returns and exclusive
of sales tax. Profits on special order sales are
recognized when the merchandise is delivered to the
customer and has been paid for in its entirety. The
Company does not sell merchandise on layaway.
Net leased department revenues consist of rental
income from lessees and sub-lessees. Sales
generated in such leased departments totaled
$29,028,000, $40,215,000 and $35,179,000 in 1999,
1998 and 1997, respectively.
Transfers and Servicing of Financial Assets - The
Company accounts for the transfer of receivables
pursuant to its receivables securitization program
in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125
requires the Company to recognize gains and losses
on transfers of financial assets (securitizations)
that qualify as sales and to recognize as assets
certain financial components that are retained as a
result of such sales, which consist primarily of
the retained interest in receivables sold (Note 3),
the retained rights to future interest income from
the serviced assets in excess of the contractually
specified servicing fee, and the right to service
the receivables sold. The retained right to future
interest income totaled $182,000 at January 29,
2000 and $237,000 at January 30, 1999. The
estimated cost to service the assets is equal to
the contractually specified servicing fee,
resulting in no servicing asset or liability in
1999 or 1998.
The certificated portion of the retained interest
is considered readily marketable and is classified
as available-for-sale in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt
and Equity Securities." Due to the short-term
revolving nature of the credit card portfolio, the
carrying value of the Company's retained interest
approximates its fair value, resulting in no
unrealized gains or losses.
Receivables - Receivables consist primarily of
customer credit card receivables that do not meet
certain eligibility requirements of the Company's
receivables securitization program and vendor
claims (Note 3). The credit card receivables are
not certificated and include revolving charge
accounts with terms which, in some cases, provide
for payments with terms in excess of one year. In
accordance with usual industry practice such
receivables are included in current assets.
The Company maintains reserves for possible credit
losses on such receivables which are based on their
expected collectibility.
Concentrations of Credit Risk - The Company
extends credit to individual customers based on
their credit worthiness and generally requires no
collateral from such customers. Concentrations of
credit risk with respect to the Company's credit
card receivables are limited due to the large
number of customers comprising the Company's
customer base.
Merchandise Inventories - Inventories, which
consist of merchandise held for resale, are valued
by the retail method and are stated at last-in,
first-out (LIFO) cost, which is not in excess of
market. Current cost, which approximates
replacement cost, under the first-in, first-out
(FIFO) method is equal to the LIFO value of
inventories at January 29, 2000 and January 30,
1999.
The Company includes in inventory the
capitalization of certain indirect purchasing,
merchandise handling and inventory storage costs to
better match sales with these related costs.
Store Pre-Opening Costs - New store pre-opening
costs are expensed as incurred.
Property and Equipment - Property and equipment is
stated on the basis of cost or appraised value as
to certain contributed land. Depreciation and
amortization is computed by the straight-line
method for financial reporting purposes over the
estimated useful lives of the assets, which range
from 20 to 40 years for buildings and leasehold
improvements and 3 to 15 years for furniture,
fixtures and equipment. The amortization of
buildings and equipment under capital leases is
computed by the straight-line method over the term
of the lease or the estimated economic life of the
asset, depending on the criteria used to classify
the lease, and such amortization is combined with
depreciation in the accompanying income statements.
Software Development Costs - Effective the
beginning of fiscal 1999, costs associated with the
acquisition or development of software for internal
use that meet the criteria of AICPA Statement of
Position No. 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for
Internal Use" are capitalized and amortized over
the expected useful life of the software, which
generally ranges from 3 to 10 years. No material
software development costs were capitalized in
1999.
Goodwill - Goodwill, net of accumulated
amortization of $2,091,000 at January 29, 2000 and
$1,554,000 at January 30, 1999, represents the
excess of acquisition costs over the fair value of
the net assets acquired, amortized on a straight-
line basis over 20 years. Amortization of goodwill,
totaling $536,000, $291,000 and $116,000 in 1999,
1998 and 1997, respectively, is included in
depreciation and amortization in the accompanying
income statements.
The Company periodically analyzes the value of net
assets acquired to determine whether any impairment
in the value of such assets has occurred. The
primary indicators of recoverability used by the
Company are current or forecasted profitability of
the related acquired assets as compared to their
carrying values.
Cash Management Liability - Under the Company's
cash management program, checks issued by the
Company and not yet presented for payment
frequently result in overdraft balances for
accounting purposes. Such amounts represent
interest-free, short-term borrowings by the
Company. (See Note 5).
Deferred Income - Deferred income consists
primarily of donated land and cash incentives
received to construct a store and enter into a
lease arrangement. Land contributed to the Company
is included in land and recorded at appraised fair
market values. Donated income is amortized to
income over the average depreciable life of the
related fixed assets built on the land for
locations that are owned by the Company, and over
the minimum lease periods of the related building
leases with respect to locations that are leased by
the Company, ranging from 10 to 32 years. Deferred
income, net of accumulated amortization, totaled
$15,344,000 as of January 29, 2000 and $16,347,000
as of January 30, 1999.
Deferred Lease Payments - Certain of the Company's
department store operating leases provide for rent
abatements and scheduled rent increases during the
lease terms. The Company recognizes rental expense
for such leases on a straight-line basis over the
lease term and records the difference between
rental expense and amounts payable under the leases
as deferred lease payments. Deferred lease payments
totaled $5,058,000 at January 29, 2000 and
$6,850,000 at January 30, 1999.
Advertising Costs - Advertising costs, totaling
$24,042,000, $22,270,000 and $17,489,000 in 1999,
1998 and 1997, are expensed when the related
advertisement first takes place.
Income Taxes - Deferred tax assets and liabilities
are generally recognized for the expected future
tax consequences of events that have been included
in the financial statements or tax returns,
determined based on the differences between the
financial statement and tax basis of assets and
liabilities and net operating loss and tax credit
carryforwards, and by using enacted tax rates in
effect when the differences are expected to
reverse.
Fair Value of Financial Instruments - The carrying
value of the Company's cash and cash management
liability, receivables, notes receivable, trade
payables and other accrued expenses, revolving line
of credit and stand-by letters of credit
approximate their estimated fair values because of
the short maturities or variable interest rates
underlying those instruments. The retained
interest in receivables sold, the retained right to
future interest income and the Subordinated Note
are carried at their estimated fair values. The
following methods and assumptions were used to
estimate the fair value for each remaining class of
financial instruments:
Long-Term Obligations - The fair values of the
Company's mortgage loans and notes payable are
estimated using discounted cash flow analysis,
based on the Company's current incremental
borrowing rates for similar types of borrowing
arrangements. Borrowings with aggregate
carrying values of $27,937,000 and $30,216,000
at January 29, 2000 and January 30, 1999, had
estimated fair values of $28,664,000 and
$27,809,000 at January 29, 2000 and January
30, 1999, respectively.
Off-Balance Sheet Financial Instruments - The
Company's off-balance sheet financial
instruments consist primarily of certificates
issued under the securitization program. The
aggregate estimated fair values of the
certificates outstanding as of year end, based
on similar issues of certificates at current
rates for the same remaining maturities, with
aggregate face values of $53,000,000 at
January 29, 2000 and $30,667,000 at January
30, 1999 are $50,469,000 and $30,154,000,
respectively.
Stock-Based Compensation - The Company accounts for
stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees".
Accordingly, no compensation expense has been
recognized in the 1999, 1998 or 1997 financial
statements for employee stock arrangements. Pro
forma information regarding net income and earnings
per share, as calculated under the provisions of
SFAS No. 123, "Accounting for Stock Based
Compensation", is disclosed in Note 11.
Long-Lived Assets - The Company periodically
evaluates the carrying value of long-lived assets
to be held and used, including goodwill and other
intangible assets, when events and circumstances
warrant such a review. When the anticipated
undiscounted cash flow from a long-lived asset is
less than its carrying value, a loss is recognized
based on the amount by which its carrying value
exceeds its fair market value. Fair market value is
determined primarily using the anticipated cash
flows discounted at a rate commensurate with the
risks involved. In 1999, the Company recognized a
non-recurring asset impairment charge of $1,933,000
related to an investment in a cooperative
merchandise buying group that is accounted for
under the cost method. The Company recognized no
impairment losses in 1998 or 1997.
Segment Reporting - The Company operates in one
reportable segment, which includes the Company's
proprietary credit card operation. The proprietary
credit card operation is considered an integral
component of the Company's retail store segment, as
its primary purpose is to support and enhance this
segment's retail operations.
Comprehensive Income - There were no items of
comprehensive income in 1999, 1998 or 1997, and
therefore net income is equal to comprehensive
income for each of those years.
Recently Issued Accounting Standards - The
Securities and Exchange Commission recently issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", which is
effective for fiscal 1999 and requires that sales
from leased department sales no longer be combined
with owned sales for financial reporting purposes,
and that all prior periods presented be
reclassified to conform with the required
presentation. The Company, like most retailers,
previously combined sales from leased departments
with owned sales, with the related costs combined
with cost of sales, for financial reporting
purposes. The adoption of SAB No. 101 has no impact
on the Company's prior or future operating results
and relates only to financial statement
presentation and disclosure.
SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as deferred by
SFAS No. 137, requires an entity to recognize all
derivatives as either assets or liabilities in the
statement of financial position and measure those
instruments at fair value. The Company currently
does not have any derivatives and therefore does
not expect that the adoption of this standard,
effective beginning fiscal 2001, will have a
material impact on the Company's financial position
or the results of its operations.
Reclassifications - Certain amounts in the
accompanying 1998 and 1997 consolidated financial
statements have been reclassified to conform with
the 1999 presentation.
2. BUSINESS ACQUISITION
On August 20, 1998, the Company completed the
acquisition of substantially all of the assets and
business of The Harris Company ("Harris"), pursuant
to an Asset Purchase Agreement entered into with
Harris and El Corte Ingles, S. A. ("ECI") of Spain,
the parent company of Harris. 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 trade accounts payable, 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
the issuance of an 8% Non-Negotiable, Extendable,
Subordinated Note (the "Subordinated Note") in the
principal amount of $22,179,000 (see Note 7).
Direct fees and expenses incurred in the
transaction consisted primarily of investment
banking, legal and accounting fees, severance and
costs associated with the closure of the former
Harris store located in San Bernardino. The
acquisition (hereinafter referred to as the "Harris
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 purchase price has been allocated to the
acquired assets and assumed liabilities on the
basis of their fair values as of the date of the
acquisition, as follows (in thousands):
Fair value of Subordinated Note (discounted to
an effective interest rate of 10%) $20,467
Fair value of common stock issued to Harris
(discounted by 20%) 14,273
Total direct fees and expenses 1,369
------
Total purchase price $36,109
======
Merchandise inventories $18,570
Customer credit card and other receivables 11,827
Leaseholds, fixtures and other equipment 5,731
Other current and long-term assets 3,809
Trade accounts payable and other current
liabilities (11,713)
Deferred income taxes (515)
Excess of purchase price over the fair value of
identifiable net assets acquired 8,400
------
Total purchase price $36,109
======
Unaudited Pro Forma Financial Information.
The following unaudited pro forma financial
information for the Company gives effect to the
acquisition as if it had occurred at the beginning
of fiscal 1998 and 1997, and includes certain
adjustments, including the amortization of
goodwill, interest expense associated with
acquisition debt, adjustments to rental expense to
reflect new store leases, adjustments to
depreciation expense to reflect the fair value of
assets acquired and the related income tax effects.
These pro forma results have been prepared for
comparative purposes only and are not necessarily
indicative of what would have occurred if the
acquisition had been completed as of those dates.
In addition, pro forma information is not intended
to be a projection of future results nor does it
reflect expected cost savings or synergies expected
to result from the integration of the Harris stores
into the Company's business.
(In thousands, except per share data) 1998 1997
- -------------------------------------------------------------
Net sales $565,745 $545,595
Net income (loss) $ 870 $ (2,771)
Net income (loss) per common share -
basic and diluted $ 0.07 $ (0.22)
Weighted-average number of
common shares outstanding -
basic and diluted 12,575 12,569
Acquisition Related Expenses.
Acquisition related expenses of $859,000 were
incurred in fiscal 1998, consisting primarily of
costs incurred prior to the elimination of certain
duplicative operations of Harris, including certain
merchandising, advertising, credit and distribution
functions. All duplicative operations of Harris
were eliminated by the end of fiscal 1998.
The Company had previously entered into
negotiations for the acquisition of the stores from
Harris in fiscal 1997. The parties were unable to
agree on the terms of the transaction, however, and
negotiations were discontinued during that year.
Fiscal 1997 results include $673,000 of costs
related to the proposed acquisition, consisting
primarily of legal, accounting and investment
banking fees.
3. RECEIVABLES
Receivable Securitization Program.
The Company's receivables securitization program
provides the Company with a source of 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 its wholly-
owned subsidiary, GCRC, and those receivables that
meet certain eligibility requirements of the
program are simultaneously conveyed to Gottschalks
Credit Card Master Trust ("GCC Trust"), to be used
as collateral for securities issued to investors.
GCC Trust is a qualified special purpose entity and
is not consolidated in the Company's financial
statements under SFAS No. 125. Accordingly, all
transfers of receivables to GCC Trust are accounted
for as sales for financial reporting purposes and
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.
On March 1, 1999, GCC Trust 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 $26,950,000 as of that date,
and the remaining funds were used to purchase
additional receivables from the Company. The holder
of the 1999-1 Series certificate earns interest on
a monthly basis at a fixed interest rate of 7.66%.
The outstanding principal balance of the
certificate, which is 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. The portfolio performance has
exceeded such standards since the issuance date.
Subject to certain conditions, the master trust
permits further expansion of the program to meet
future receivables growth.
Receivables.
Receivables consist of the following:
January 29, January 30,
(In thousands) 2000 1999
- --------------------------------------------------------------
Credit card receivables $3,995 $17,331
Vendor claims 4,089 2,970
----- ------
Less allowance for doubtful
accounts ( 487) (1,656)
----- ------
$7,597 $18,645
===== ======
Credit card receivables as of January 30, 1999
included $12,708,000 of receivables acquired from
Harris which were incorporated into the
securitization program in early fiscal 1999.
Net Credit Revenues.
Net credit revenues associated with the Company's
credit card receivable portfolio, including
securitized receivables, consists of the following:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------
Service charge revenues $15,482 $13,431 $11,618
Gain (loss) on sale of receivables 173 (45) 1,050
Interest expense on securitized
receivables (4,069) (3,314) (3,579)
Charge-offs on receivables sold and
provision for credit losses on
receivables ineligible for sale (3,013) (3,175) (2,704)
------ ------ ------
$ 8,573 $ 6,897 $ 6,385
====== ====== ======
The Company adopted the provisions of SFAS No. 125
in fiscal 1997. The gain on sale of receivables of
$1,050,000 in 1997 includes a credit of $898,000
related to a change in estimate for the allowance
for doubtful accounts for receivables which were
ineligible for sale.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
January 29, January 30,
(In thousands) 2000 1999
- --------------------------------------------------------------------
Furniture, fixtures and equipment $ 86,155 $ 77,060
Buildings and leasehold improvements 69,196 62,561
Land 15,108 15,102
Buildings and equipment under
capital leases 12,768 12,148
Construction in progress 892 909
------ -------
184,119 167,780
Less accumulated depreciation
and amortization 63,726 54,135
------ -------
$120,393 $113,645
======= =======
5. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Trade accounts payable and accrued expenses consist
of the following:
January 29, January 30,
(In thousands) 2000 1999
- -------------------------------------------------------------------
Trade accounts payable $15,617 $23,061
Cash management liability 10,027 12,176
Taxes, other than income taxes 11,141 11,078
Accrued expenses 9,958 10,654
Accrued payroll and related
liabilities 6,861 6,416
Federal and state income taxes payable 5,372 5,178
------ ------
$58,976 $68,563
====== ======
6. DEBT
Revolving Line of Credit.
The Company has a $140.0 million revolving line of
credit facility with Congress Financial Corporation
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% during the period of
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 on outstanding borrowings under the
facility is currently charged at a rate of LIBOR
plus 2.00% (7.84% at January 29, 2000), with no
interest charged on the unused portion of the line
of credit. The interest rate will be reduced to
LIBOR plus 1.875% on March 1, 2000. The maximum
amount available for borrowings under the line of
credit was $76,581,000 as of January 29, 2000, of
which $55,479,000 was outstanding as of that date.
Of that amount, $50,000,000 has been classified as
long-term in the accompanying financial statements
as of January 29, 2000 ($40,000,000 as of January
30, 1999) 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 January 29, 2000.
Long-Term Obligations.
Long-term obligations consist of the following:
January 29, January 30,
(In thousands) 2000 1999
- -------------------------------------------------------------------
Revolving line of credit $50,000 $40,000
9.39% mortgage loans payable,
due 2010 18,958 19,242
9.97% mortgage loan payable,
due 2004 3,643 4,429
10.45% mortgage loan payable,
due 2002 1,900 2,850
10% notes payable, due 2001 824 1,384
Capital lease obligations 7,216 8,332
Other notes payable 2,612 2,311
------ ------
5,153 78,548
Less current portion 4,479 4,434
------ ------
$80,674 $74,114
====== ======
The mortgage loans and notes payable are
collateralized by certain real property, assets or
equipment.
The scheduled annual principal maturities of the
Company's mortgage loans and notes payable are
$2,814,000, $2,489,000, $1,380,000, $1,432,000 and
$620,000 for 2000 through 2004, with $19,202,000
payable thereafter.
Deferred debt issuance costs related to the
Company's various financing arrangements are
included in other current and long-term assets and
are charged to income as additional interest
expense on a straight-line basis over the life of
the related indebtedness. Such costs, net of
accumulated amortization, totaled $1,552,000 at
January 29, 2000 and $1,263,000 at January 30,
1999.
Interest paid, net of amounts capitalized, was
$14,536,000 in 1999, $12,063,000 in 1998 and
$10,302,000 in 1997. Capitalized interest expense
was $188,000 in 1999, $134,000 in 1998 and $114,000
in 1997. The weighted-average interest rate charged
on the Company's revolving line of credit was 7.52%
in 1999, 7.88% in 1998 and 8.16% in 1997.
Certain of the Company's long-term financing
arrangements include various restrictive covenants.
The Company was in compliance with all such
covenants as of January 29, 2000.
7. SUBORDINATED NOTE PAYABLE TO AFFILIATE
As described more fully in Note 2, the Company
issued the Subordinated Note to Harris on August
20, 1998 in consideration for the Harris
acquisition. The Subordinated Note, discounted to
an effective interest rate of 10% at issuance,
bears interest at a fixed rate of 8%, payable semi-
annually. The principal portion of the Subordinated
Note is due and payable on August 20, 2003, unless
such payment would result in a default on any of
the Company's other credit facilities, whereby its
maturity would be extended by three years to August
2006. The Subordinated Note is unsecured, contains
no restrictive financial covenants and is
subordinate to the payment of all debt, including
trade credit, of the Company. The discount on the
Subordinated Note is being amortized as additional
interest expense over the five year term of the
note. The unamortized discount totaled $1,218,000
as of January 29, 2000 and $1,561,000 as of January
30, 1999. Interest paid to Harris totaled
$2,117,000 in 1999 and $935,000 in 1998.
8. LEASES
The Company leases certain retail department
stores, specialty apparel stores, land, furniture,
fixtures and equipment under capital and
noncancellable operating leases that expire in
various years through 2021. Certain of the leases
provide for the payment of additional contingent
rentals based on a percentage of sales, require the
payment of property taxes, insurance and
maintenance costs and have renewal options for one
or more periods ranging from five to twenty years.
The Company also leases three of its department
stores from ECI, an affiliate of the Company. Rent
paid to ECI, which reflects current market rates,
totaled $900,000 in 1999 and $391,000 in 1998.
Future minimum lease payments as of January 29,
2000, by year and in the aggregate, under capital
leases and noncancellable operating leases with
initial or remaining terms in excess of one year
are as follows:
Capital Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------
2000 $ 2,317 $ 17,917
2001 1,123 17,325
2002 1,085 16,991
2003 988 16,634
2004 752 16,177
Thereafter 5,389 120,539
------ -------
Total minimum lease payments $11,654 $205,583
=======
Amount representing interest (4,438)
------
Present value of minimum lease payments 7,216
Less current portion (1,665)
------
$ 5,551
======
Rental expense consists of the following:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------
Operating leases:
Buildings:
Minimum rentals $15,441 $14,395 $13,099
Contingent rentals 2,461 2,236 1,911
Fixtures and equipment 3,158 3,275 4,358
------ ------ ------
$21,060 $19,906 $19,368
====== ====== ======
One of the Company's lease agreements contains a restrictive covenant
pertaining to the debt to tangible net worth ratio with which the Company
was in compliance at January 29, 2000.
9. INCOME TAXES
The components of income tax expense are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------
Current:
Federal $ 219 $2,737 $ 92
State 459 377 8
----- ----- -----
678 3,114 100
Deferred:
Federal 3,337 210 1,976
State 225 423 581
----- ------ -----
3,562 633 2,557
----- ------ -----
$4,240 $3,747 $2,657
===== ===== =====
The principal components of deferred tax assets and liabilities
are as follows (in thousands):
January 29, January 30,
2000 1999
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------- ----------- ------ -----------
Current:
Accrued employee benefits $ 1,213 $ 1,019
Credit losses 132 658
State income taxes 267 125
LIFO inventory reserve $ (2,958) $ (3,636)
Supplies inventory (1,035) (1,340)
Workers' compensation (542) (760)
Gain on sale of receivables (120) (65)
Other items, net 183 (1,817) 322 (793)
------ ------- ------- -------
1,795 (6,472) 2,124 (6,594)
Long-Term:
Net operating loss and tax
credit carryforwards 5,906 7,985
State income taxes 580 504
Depreciation expense (10,716) (9,221)
Accounting for leases 805 (3,253) 945 (3,364)
Deferred income 1,291 (2,571) 1,495 (2,313)
Other items, net 973 (624) 724 (1,008)
------- -------- ------- --------
9,555 (17,164) 11,653 (15,906)
------- -------- ------- --------
$11,350 $(23,636) $13,777 $(22,500)
======= ======== ======= ========
Income tax expense varies from the amount computed by applying the statutory
federal income tax rate to the income before income taxes. The reasons for this
difference are as follows:
1999 1998 1997
- --------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 4.2 5.8 5.9
General business credits (2.2) (1.7) (1.2)
Amortization of goodwill .4 .4 .6
Other items, net 1.6 2.0 1.3
---- ----- -----
Effective rate 39.0% 41.5% 41.6%
==== ===== =====
The Company paid income taxes, net of refunds,
of $109,000 in 1999 and $138,000 in 1998. At
January 29, 2000, the Company has, for federal
tax purposes, net operating loss carryforwards
of approximately $7,354,000 which expire in
the years 2008 through 2018, general business
credits of approximately $1,158,000 which
expire in the years 2009 through 2019, and
alternative minimum tax credits of
approximately $749,000 which may be used for
an indefinite period. At January 29, 2000, the
Company has, for state tax purposes,
enterprise zone credits of approximately
$1,345,000 and alternative minimum tax credits
of approximately $153,000 which may be used
for an indefinite period. These carryforwards
are available to offset future taxable income
and are expected to be fully utilized.
10. EARNINGS PER SHARE
Net earnings per common share is computed by
dividing net income by the weighted-average
number of common shares outstanding during the
year. Stock options represent potential common
shares and are included in computing diluted
earnings per share when the effect is
dilutive. A reconciliation of the weighted-
average shares used in the basic and diluted
earnings per share calculation is as follows:
(Shares in thousands) 1999 1998 1997
- ----------------------------------------------------------
Weighted average number of
shares - basic 12,577 11,418 10,474
Effect of assumed option
exercises 39 31 17
------ ------ ------
Weighted average number of
shares - diluted 12,616 11,449 10,491
====== ====== ======
Options with an exercise price greater than
the average market price of the Company's
common stock during the period are excluded
from the computation of the weighted-average
number of shares on a diluted basis as such
options are anti-dilutive. Anti-dilutive
options outstanding totaled 511,861, 426,698
and 136,510 as of the end of 1999, 1998 and
1997, respectively.
11. STOCK OPTION PLANS
The Company has stock option plans for
directors, officers and key employees which
provide for the grant of non-qualified and
incentive stock options. Under the plans, the
option exercise price may not be lower than
100% of the fair market value of such shares
at the date of the grant. Options granted
generally vest on a cumulative basis over five
years and expire ten years from the date of
the grant. At January 29, 2000, options for
601,000 shares were available for future
grants under the plans.
Option activity under the plans is as follows:
1999 1998 1997
-------------- --------------- ---------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------ -------
Options outstanding
at beginning of year 771,000 $8.45 500,500 $9.05 509,000 $9.36
Granted 209,000 8.45 329,000 7.73 74,000 5.87
Exercised (1,250) 5.75 (5,500) 6.55
Cancelled (27,000) 8.10 (57,250) 9.46 (77,000) 9.46
------- ----- ------- ----- ------- -----
Options outstanding
at end of year 953,000 $8.47 771,000 $8.45 500,500 $9.05
======= ===== ======= ===== ======= =====
Options exercisable
at end of year 465,750 $9.01 366,000 $9.50 298,500 $9.72
======= ===== ======= ===== ======= =====
Additional information regarding options outstanding as of January 29, 2000 is
as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Avg.
Remaining
Range of Number Contractual Weighted-Avg. Number Exercise
Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price
- --------------- ---------- ----------- -------------- ----------- --------
$5.38 to $10.87 953,000 7.05 yrs. $8.47 465,750 $9.01
If the Company had elected to follow the
measurement provisions of SFAS No. 123 in
accounting for stock options, compensation
expense would be recognized based on the fair
value of the options at the date of grant. To
estimate compensation expense which would be
recognized under SFAS No. 123, the Company
used the Black-Scholes options pricing model
with the following weighted-average
assumptions:
1999 1998 1997
---- ----- -----
Risk-free interest rate 6.7% 4.6% 5.41%
Expected dividend yield --- --- ---
Expected volatility 47.95% 51.08% 51.09%
Expected option life (years) 5 5 5
Fair value of options granted $5.10 $4.38 $4.26
Had the computed fair values of the 1999, 1998
and 1997 awards been amortized to expense over
the vesting period of the awards, pro-forma
net income and earnings per share (in
thousands, except per share data) would have
been as follows:
1999 1998 1997
---- ----- -----
Pro forma net income $6,237 $5,176 $3,693
Pro forma net income per share -
basic and diluted $ 0.50 $ 0.45 $ 0.35
12. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Savings Plan
("Plan") which qualifies as an employee
retirement plan under Section 401(k) of the
Internal Revenue Code. Full-time employees
meeting certain requirements are eligible to
participate in the Plan and may elect to have
up to 20% of their annual eligible
compensation, subject to certain limitations,
deferred and deposited with a qualified
trustee. Participants in the Plan may receive
an employer matching contribution of up to 4%
of the participants' eligible compensation,
depending on the Company's quarterly and
annual financial performance. The Company
recognized $541,000, $424,000 and $875,000 in
expense related to the Plan in 1999, 1998 and
1997, respectively.
The Company also has a statutory Employee
Stock Purchase Plan, which provides for its
employees to purchase Company common stock at
a 15% discount. Employees can make
contributions to the Plan through payroll
deductions ranging from 1% to 10% of their
annual compensation, up to a maximum of
$21,250 per year. A total of 500,000 shares
were originally registered under the Plan,
with 21,272 shares issued through January 29,
2000.
13. COMMITMENTS AND CONTINGENCIES
The Company is party to legal proceedings and
claims which have arisen 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 arranges for the issuance of
letters of credit in the ordinary course of
business. As of January 29, 2000, the Company
had outstanding letters of credit amounting to
$7.7 million.
The Company is in the process of remodeling
one of its existing store locations, and also
expects to open a new 45,000 square foot store
in Grants Pass, Oregon in August 2000. The
remaining estimated cost of the projects as of
January 29, 2000 is approximately $4.3
million, and such costs are expected to be
funded through existing capital resources.
14. STOCK REPURCHASE PROGRAM
On February 23, 2000, the Board of Directors
of the Company approved the repurchase of up
to $2.0 million of Company common stock, in
open market or private transactions, for a
period of up to twelve months. Any shares
repurchased will be held as treasury shares
initially and may be used in connection with
the Company's stock option program and for
other general corporate purposes or
acquisitions. The Company expects to finance
the repurchases from working capital.
15. SUBSEQUENT EVENT
On April 24, 2000, the Company entered into a
definitive asset purchase agreement with
Lamonts Apparel, Inc. ("Lamonts"), providing
for the Company to acquire all Lamont's
department store leases and fixtures and
equipment for a cash purchase price of $19.0
million. Lamonts is a regional department
store chain based in Kirkland, Washington,
currently operating thirty-eight department
stores, with twenty-three located in the State
of Washington, seven in Alaska, five in Idaho,
two in Oregon and one in Utah. Lamonts filed a
voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code in January
2000, and the purchase is subject to approval
by the Bankruptcy Court. If approved, the
transaction is expected to close in late July
2000.
16. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
The following is a summary of the unaudited
quarterly results of operations for 1999 and
1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
1999
---------------------------------------------
Quarter Ended May 1 July 31 October 30 January 29
- ------------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales (1) $111,104 $118,718 $122,873 $186,703
Gross profit 37,647 41,000 43,980 63,111
Income (loss) before
income tax expense
(benefit)(2) (1,851) ( 180) 615 12,292
Net income (loss) (1,079) ( 105) 358 7,462
Net income (loss)
per common share -
basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59
Weighted-average
number of common
shares outstanding:
Basic 12,575 12,575 12,575 12,581
Diluted 12,575 12,575 12,646 12,615
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
Quarter Ended May 2 August 1 October 31 January 30
- -------------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 87,389 $ 95,263 $113,880 $180,393
Gross profit 28,792 31,361 41,898 61,800
Income (loss) before
income tax expense
(benefit) (3,408) (2,310) 604 14,143
Net income (loss) (1,994) (1,352) 345 8,283
Net income (loss)
per common share -
basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
Weighted-average
number of common
shares outstanding (3):
Basic 10,479 10,479 12,138 12,575
Diluted 10,479 10,479 12,155 12,593
</TABLE>
(1) The Company's net sales by quarter have
been reclassified to exclude leased
department sales, in accordance with the
requirements of SAB No. 101.
(2) Net income in the three month period
ended January 29, 2000 includes a non-
recurring, pre-tax charge for $1,933,000
to reflect the impairment of an
investment accounted for under the cost
method.
(3) The increase in the weighted-average
number of common shares outstanding
during fiscal 1998 resulted from the
issuance of 2,095,900 shares of common
stock to Harris on August 20, 1998 in
connection with a business acquisition
(see Note 2 to the Consolidated Financial
Statements.)
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC. AND SUBSIDIARY
________________________________________________________________________________
COL. A COL. B COL. C COL. D COL. E COL. F
________________________________________________________________________________
ADDITIONS
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
DESCRIPTION of Period Expenses Describe Describe Period
Year ended January 29, 2000:
- ---------------------------
Allowance for
doubtful
<S> <C> <C> <C> <C> <C>
accounts... $1,535,165 $ 982,260(1) $ (177,000)(2) $(1,933,737)(3)$406,688
========= ========= ========= ========== =======
Allowance for vendor
claims
receivable. $ 120,700 $ ( 40,700)(4)$ 80,000
========= ========= ========= ========== =======
Year ended January 30, 1999:
Allowance for
doubtful
accounts... $ 437,179 $ 991,523(1) $ 881,759(5) $(775,296)(3)$1,535,165
========= ========= ======== ======== =========
Allowance for
vendor
claims
receivable. $ 80,000 $ 40,700(6) $ 120,700
========= ========= ======== ======== =========
Year ended January 31, 1998:
Allowance for
doubtful
accounts... $1,322,107 $ 469,935(1) $( 898,000)(2) $(456,863)(3)$ 437,179
========= ========= ========= ======== =========
Allowance for vendor
claims
receivable.. $ 80,000 $ $ 80,000
========= ========= ========= ======== =========
</TABLE>
Notes:
(1) Represents the provision for
credit losses on receivables
ineligible for sale.
(2) Represents a change
in estimate for the allowance for
doubtful accounts related to
receivables which were ineligible
for sale. (See Note 3 to the
Consolidated Financial
Statements.) These amounts are
included in net credit revenues in
the fiscal 1999 and 1997
consolidated income statements,
respectively.
(3) Represents
uncollectible accounts written
off, net of recoveries, pertaining
to receivables ineligible for sale
and for receivables acquired from
Harris.
(4) Represents
uncollectible accounts written
off, net of recoveries, pertaining
to vendor claims receivable
acquired from Harris.
(5) Represents the allowance
for doubtful accounts applicable
to the receivables acquired from
Harris (see Note 2 to the
Consolidated Financial
Statements).
(6) Represents the
allowance for vendor claims
receivable applicable to the
outstanding vendor claims acquired
from Harris (see Note 2 to the
Consolidated Financial
Statements.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: April 28, 2000 GOTTSCHALKS INC.
By: \s\ James R. Famalette
James R. Famalette
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ----------- ------ -------------
/s/ Joseph W. Levy Chairman April 28, 2000
President, Chief
Executive Officer April 28, 2000
/s/ James R. Famalette and Director (principal
executive officer)
Senior Vice President
and Chief Financial
Officer (principal April 28, 2000
financial and
/s/ Michael S. Geele accounting officer)
/s/ O. James Woodward III Director April 28, 2000
/s/ Bret W. Levy Director April 28, 2000
/s/ Sharon Levy Director April 28, 2000
/s/ Joseph J. Penbera Director April 28, 2000
/s/ Fred Ruiz Director April 28, 2000
/s/ Max Gutmann Director April 28, 2000
/s/ Isidoro Alvarez Alvarez Director April 28, 2000
/s/ Jorge Pont Sanchez Director April 28, 2000
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference
in Registration Statements No. 33-54783, 33-
54789, 33-61471, and 33-61473 of Gottschalks
Inc. on Form S-8 of our report dated February
23, 2000 (April 24, 2000 as to Note 15),
appearing in this Annual Report on Form 10-K
of Gottschalks Inc. for the year ended January
29, 2000.
/s/ DELOITTE & TOUCHE LLP
Fresno, California
April 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T
AND INCLUDES SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 1,901
<SECURITIES> 29,138
<RECEIVABLES> 7,986
<ALLOWANCES> 389
<INVENTORY> 130,028
<CURRENT-ASSETS> 178,330
<PP&E> 184,119
<DEPRECIATION> 63,726
<TOTAL-ASSETS> 314,004
<CURRENT-LIABILITIES> 73,610
<BONDS> 101,635
0
0
<COMMON> 126
<OTHER-SE> 110,113
<TOTAL-LIABILITY-AND-EQUITY> 314,004
<SALES> 539,398
<TOTAL-REVENUES> 552,180
<CGS> 353,660
<TOTAL-COSTS> 353,660
<OTHER-EXPENSES> 9,465
<LOSS-PROVISION> 3,013
<INTEREST-EXPENSE> 11,279
<INCOME-PRETAX> 10,876
<INCOME-TAX> 4,240
<INCOME-CONTINUING> 6,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,636
<EPS-BASIC> .53
<EPS-DILUTED> .53
</TABLE>
SEVENTH AMENDMENT TO LOAN AND SECURITY
AGREEMENT
THIS SEVENTH AMENDMENT TO LOAN AND
SECURITY AGREEMENT (the "Amendment"), dated as
of March 27, 2000, 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 93720.
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, the
Fifth Amendment to Loan and Security
Agreement, dated as of March 1, 1999 and the
Sixth Amendment to Loan and Security
Agreement, dated as of August 12, 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. Definitions.
(a) Section 1.59 is hereby added to
the Loan Agreement and reads in its entirety
as follows:
"1.59 "Net Income" shall
mean, with respect to any Person, for any
period, the aggregate of the net income
(loss) of such Person and its
Subsidiaries, on a consolidated basis,
for such period (excluding to the extent
included therein any extraordinary or one-
time gains or losses) after deducting all
charges which should be deducted before
arriving at the net income (loss) for
such period and after deducting the
Provision for Taxes for such period, all
as determined in accordance with GAAP."
(b) Section 1.60 is hereby added to
the Loan Agreement and reads in its entirety
as follows:
"1.60 "Provision for Taxes"
shall mean an amount equal to all taxes
imposed on or measured by net income,
whether Federal, State or local, whether
current or deferred, and whether foreign
or domestic, that are paid or payable by
any Person and its Subsidiaries in
respect of such fiscal year on a
consolidated basis in accordance with
GAAP."
2. Interest Rate. 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 least of seventy five percent
(75%) of the Value of the Eligible
Inventory, thirty-eight and one half
percent (38.5%) of the Retail Sales Price
of the Eligible Inventory, or eighty-five
percent (85%) of the Appraised Value 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 Net Income
for its fiscal year ending January 29,
2000 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) and
Twenty Million Dollars ($20,000,000)
thereafter (it being understood that
Lender may reduce such Excess
Availability amount upon the completion
of an acquisition of another entity
permitted by Lender), 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 is
not less than Twenty Million Dollars
($20,000,000) (it being understood that
Lender may reduce such Excess
Availability amount upon the completion
of an acquisition of another entity
permitted by Lender) and 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)."
3. Revolving Loans. Section 2.1(a)(i)
of the Loan Agreement is hereby amended to
read in its entirety as follows:
"(i) either (A) the least of: (I)
seventy-five percent (75%) of the Value
of the Eligible Inventory, (II) eighty-
five percent (85%) of the Appraised Value
of the Eligible Inventory, or (III)
thirty-seven and one-half percent (37.5%)
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 prior written notice
to Lender, from November 1 through
December 31 of each calendar year, the
least of (I) eighty percent (80%) of the
Value of Eligible Inventory, (II) eighty-
five percent (85%) of the Appraised Value
of the Eligible Inventory, or (III)
thirty-nine percent (39%) of the Retail
Sales Price of the Eligible Inventory,
which percentages shall remain in effect
through December 31 unless revoked by
Borrower upon one (1) day's prior 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"
4. Inventory Covenants. Section 7.3(d)
of the Loan Agreement is hereby amended to
read in its entirety as follows:
"(d) upon Lender's request, Borrower
shall, at its expense, no more than once
in any calendar quarter, but at any time
or times as Lender may request upon the
occurrence and during the continuance of
an Event of Default, deliver or cause to
be delivered to Lender written reports or
appraisals as to the Inventory in form,
scope and methodology reasonably
acceptable to Lender by an appraiser
reasonably acceptable to Lender,
addressed to Lender or upon which Lender
is expressly permitted to rely (with the
understanding that Lender may revise the
definition of "Eligible Inventory"
hereunder or establish Availability
Reserves as Lender may deem advisable in
good faith based upon the results of such
updated appraisals), but in any event, at
least two of such appraisals delivered in
any calendar year shall be conducted to
include the full scope of Inventory and
at least two other of such appraisals
shall be conducted to include gross
recovery updates of the Inventory;"
5. Adjusted Net Worth. Section 9.14 of
the Loan Agreement is hereby amended to read
in its entirety as follows:
"Borrower shall, at all times,
maintain Adjusted Net Worth of not less
than One Hundred Fifteen Million Dollars
($115,000,000) and beginning with fiscal
January 31, 2002, One Hundred Fifteen
Million Dollars ($115,000,000) plus fifty
percent (50%) of Borrower's Net Income;
provided, however, Lender will only test
for Borrower's compliance with this
financial covenant only in the event that
Borrower's Excess Availability is less
than Ten Million Dollars ($10,000,000)."
6. Term. Lender and Borrower hereby
agree to renew the term of the Loan Agreement
and the other Financing Agreements pursuant to
Section 12.1(a) of the Loan Agreement. The
Loan Agreement and the other Financing
Agreements shall continue in force and effect
for a term ending on March 31, 2002.
7. Consent to Acquisition Financing.
Notwithstanding Sections 9.8 and 9.9 of the
Loan Agreement, Lender hereby consents to
Borrower obtaining acquisition financing for
the purpose of acquiring all of the assets or
stock of an entity up to the amount of Twenty
Million Dollars ($20,000,000) on terms and
conditions reasonably acceptable to Lender in
its sole discretion. Lender's consent is
contingent upon its receipt of certain
documentation as reasonably required by
Lender, including without limitation a
subordination agreement, intercreditor
agreement and access agreement, delivered to
Lender and reasonably satisfactory to Lender
in form and substance.
8. 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 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) Accommodation Fee. Lender
shall have received from Borrower a fee
in the amount of Seventy Five Thousand
Dollars ($75,000) 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
the 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: Senior Vice President/CFO
"LENDER"
CONGRESS FINANCIAL CORPORATION
(WESTERN), a California corporation
By:/s/Kristine Metchikian
Title: Vice President
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT dated
as of April 24, 2000 by and between LAMONTS
APPAREL, INC., a Delaware corporation
("Seller"), in its capacity as debtor-in-
possession in Case No. 00-00045 (TTG) (the
"Bankruptcy Case") in the United States
Bankruptcy Court for the Western District of
Washington (the "Bankruptcy Court"), and
GOTTSCHALKS INC., a Delaware corporation
("Buyer").
W I T N E S S E T H
WHEREAS, subject to the terms and
conditions of this Agreement, Buyer desires to
purchase, acquire and accept from Seller, and
Seller desires to sell, assign, and transfer
to Buyer, certain assets of Seller used in
Seller's department store business and certain
associated liabilities.
NOW THEREFORE, in consideration of
the mutual promises and covenants contained
herein, and other good and valuable
consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending
to be legally bound, Seller and Buyer do
hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 General Provisions. For all purposes of
this Agreement, except as otherwise expressly
provided:
(a) The terms defined in this Article I have
the meanings assigned to them in this
Article I and include the plural as well as
the singular.
(b) All accounting terms used herein have the
meanings assigned to them under generally
accepted accounting principles.
(c) All references in this Agreement to
designated "Articles," "Sections" and other
subdivisions and to "Exhibits," the
"Disclosure Schedule" and the "Buyer
Disclosure Schedule" are to the designated
Articles, Sections and other subdivisions of
the body of this Agreement and to the
Exhibits, the Disclosure Schedule and the
Buyer Disclosure Schedule to this Agreement.
(d) Pronouns of either gender or neuter shall
include, as appropriate, the other pronoun
forms.
(e) The words "herein," "hereof" and
"hereunder" and other words of similar import
refer to this Agreement as a whole and not to
any particular Article, Section or other
subdivision hereof, unless otherwise expressly
stated.
1.2 Specific Provisions. As used in this
Agreement the following definitions shall
apply:
(1) "Acquisition Proposal" means an inquiry,
offer or proposal regarding any of the
following (other than the transactions
contemplated by this Agreement) involving
Seller or its subsidiaries: (a) any merger,
reorganization, consolidation, share exchange,
recapitalization, business combination,
liquidation, dissolution or other similar
transaction, or any sale, lease, exchange,
mortgage, pledge, transfer or other
disposition of any portion of the Purchased
Assets or equity securities of Seller or any
of its subsidiaries, in each instance whether
in a single transaction or a series of related
transactions, or any other transaction which
could reasonably be expected to interfere with
the consummation of the transactions
contemplated by this Agreement, (b) any tender
offer or exchange offer for the outstanding
shares of capital stock of Seller or the
filing of any registration statement in
connection therewith, or (c) any public
announcement of a proposal, plan or intention
to do any of the foregoing or any agreement to
engage in any of the foregoing.
(2) "Action" means any action, complaint,
petition, investigation, suit or other
proceeding, whether civil or criminal, in law
or in equity, by or before any arbitrator or
Governmental Entity, other than the Bankruptcy
Case.
(3) "Agreement" means this Asset Purchase
Agreement, including all Exhibits hereto, the
Disclosure Schedule and the Buyer Disclosure
Schedule, as it may be amended, supplemented
or otherwise modified from time to time in
accordance with its terms.
(4) "Approval" means any approval,
authorization, consent, qualification or
registration, or any waiver of any of the
foregoing, required to be obtained from, or
any notice, statement or other communication
required to be filed with or delivered to, any
Governmental Entity or any other person.
(5) "Approval Motion" means a motion pursuant
to Sections 363 and 365 of the Bankruptcy Code
for the approval by the Bankruptcy Court of
the execution, delivery and performance of
this Agreement by Seller and the consummation
of the transactions contemplated hereby,
including, but not limited to, the sale of the
Purchased Assets by Seller to Buyer in
accordance with the terms and conditions of
this Agreement.
(6) "Approval Order" means a final,
unappealable order of the Bankruptcy Court
granting the Approval Motion which order has
not been amended, modified or stayed.
(7) "Assumed Contracts" means the contracts,
agreements and leases of equipment, machinery,
installations and other personal property
listed in Section 1.2(7) of the Disclosure
Schedule.
(8) "Assumed Liabilities" is defined in
Section 2.2.
(9) "Assumed Mall Agreements" means the Mall
Agreements listed in Section 1.2(9) of the
Disclosure Schedule.
(10) "Bankruptcy Case" is defined in the
preamble hereto.
(11) "Bankruptcy Code" means Title 11 of the
United States Code.
(12) "Bankruptcy Court" is defined in the
preamble hereto.
(13) "Business" means the department store
business of Seller.
(14) "Business Day" means any day other than a
Saturday, Sunday or a day on which banks in
the State of Washington are generally closed
for regular banking business.
(15) "Cash Portion" is defined in Section 3.1.
(16) "Closing" is defined in Section 3.2.
(17) "Closing Date" means the date of the
Closing.
(18) "Code" means the Internal Revenue Code of
1986, as amended.
(19) "Employee Plan" is defined in Section
4.10(a).
(20) "Encumbrance" means any lien, mortgage,
pledge, assignment, security interest, charge
or encumbrance of any kind (including any
conditional sale or other title retention
agreement, any lease in the nature thereof,
and any agreement to give any security
interest) and any option, trust or other
preferential arrangement having the practical
effect of any of the foregoing.
(21) "ERISA" means the Employee Retirement
Income Security Act of 1974, as amended, and
related regulations and published
interpretations.
(22) "Excluded Assets" is defined in Section
2.3.
(23) "Excluded Liabilities" is defined in
Section 2.3.
(24) "Governmental Entity" means any
government or any agency, bureau, board,
commission, court, department, official,
political subdivision, tribunal or other
instrumentality of any government, whether
federal, state or local, domestic or foreign.
(25) "Hart-Scott-Rodino Act" means the Hart-
Scott-Rodino Antitrust Improvements Act of
1976, as amended, and related regulations and
published interpretations.
(26) "Hazardous Substance" means (but shall
not be limited to) substances that are defined
or listed in, or otherwise classified pursuant
to, any applicable Laws as "hazardous
substances," "hazardous materials," "hazardous
wastes" or "toxic substances," or any other
formulation intended to define, list or
classify substances by reason of deleterious
properties such as ignitibility, corrosivity,
reactivity, radioactivity, carcinogenicity,
reproductive toxicity or "EP toxicity," and
petroleum and drilling fluids, produced waters
and other wastes associated with the
exploration, development, or production of
crude oil, natural gas or geothermal energy.
(27) "Law" means any constitutional provision,
statute, ordinance or other law, rule,
regulation, or interpretation of any
Governmental Entity and any Order.
(28) "Leases" means the leases of real
property listed in Section 1.2(28) of the
Disclosure Schedule.
(29) "Letter of Intent" means that certain
letter agreement dated April 12, 2000 by and
between Buyer and Seller.
(30) "Loss" means any claim, cost, damage,
expense, judgment, liability, loss,
obligation, penalty or settlement including,
but not limited to, penalties and reasonable
legal, accounting and other professional fees
and expenses incurred in the investigation,
collection, prosecution and defense of claims
and amounts paid in settlement.
(31) "Mall Agreement" means any reciprocal
easement agreement, development agreement,
agreement of covenants, conditions and
restrictions, or other such agreement among
(or binding on) tenants or owners of portions
of any mall, shopping center or other
development at which real property leased
under the Leases is located which is binding
on or benefits Seller.
(32) "Minimum Overbid Proposal" means a bona
fide Acquisition Proposal (or combination of
Acquisition Proposals) for the acquisition of
not less than 75% (in number) of the Leases
that offers cash consideration at least
$1,900,000 in excess of the Cash Portion, and
is otherwise on terms and conditions
(including, but not limited to, conditions to
closing and timing of closing) substantially
the same as, and in any event no less
favorable to Seller than, those set forth in
this Agreement.
(33) "Order" means any decree, injunction,
judgment, order, ruling, assessment or writ
issued by any Governmental Entity.
(34) "Permit" means any license, permit,
franchise, certificate of authority, or order,
or any waiver of the foregoing, required to be
issued by any Governmental Entity.
(35) "Purchased Assets" is defined in Section
2.1.
(36) "Stores" means Seller's department
stores, all of which are listed in Section
1.2(36) of the Disclosure Schedule.
(37) "Tax" or "Taxes" means all federal,
state, local or foreign income, gross
receipts, windfall profits, severance,
property, production, sales, use, license,
business and occupation, excise, franchise,
employment, withholding, transfer, payroll,
goods and services, value-added or minimum
tax, or any other tax, custom, duty,
governmental fee, or other like assessment or
charge of any kind whatsoever, together with
any interest or any penalty, addition to tax
or additional amount imposed by any
Governmental Entity.
(38) "Total Purchase Price" is defined in
Section 3.1.
(39) "WARN Act" means the Worker Adjustment
and Retraining Notification Act of 1988.
ARTICLE II
PURCHASE AND SALE OF ASSETS; ASSUMPTION OF
LIABILITIES
2.1 Purchase and Sale of Assets. Subject to
the terms and conditions of this Agreement, at
the Closing, Seller shall sell, assign,
transfer and deliver to Buyer, and Buyer shall
purchase, acquire and accept from Seller, all
of Seller's right, title and interest in and
to each of the following assets (the
"Purchased Assets"):
(a) Except for such as constitute inventory
held for sale in the ordinary course of
business consistent with past practice and
except for materials and supplies that are
consumed during the period between the date
hereof and the Closing Date in the ordinary
course of business consistent with past
practice, all of Seller's machinery,
equipment, installations, furniture, tools,
spare parts, supplies, maintenance equipment
and supplies, materials, deposits relating to
the foregoing and other items of personal
property of every kind and description owned
by Seller and located, as of the date hereof,
at the Stores including, but not limited to,
those items listed in Section 2.1(a) of the
Disclosure Schedule.
(b) The Leases.
(c) All of Seller's store fixtures, shelving
and business fixtures and all storage and
office facilities owned by Seller and located
on the real property leased under the Leases.
(d) The Assumed Contracts.
(e) The Assumed Mall Agreements.
(f) All of Seller's licenses, permits,
variances, interim permits, permit
applications, approvals, consents,
certifications, qualifications and other
authorizations under any law, statute, rule,
regulation, order or ordinance applicable to
the Business or otherwise required by any
Governmental Entity in connection with the
Business or operations of the Business that
may be assigned or transferred by Seller.
(g) All claims of Seller under any insurance
policies (and proceeds therefrom) covering any
of the Purchased Assets or any of the Assumed
Liabilities.
(h) Originals or copies, at Seller's
election, of Seller's information, books and
records relating to the Business (other than
customer lists and files), including but not
limited to all product files, software,
confidential information (to the extent that
the same may be disclosed to Buyer under
applicable Law), price lists, marketing
information, sales records, property and
excise tax, historical and financial records
and files, all blueprints, building
specifications and "as built" plans, all
personnel and labor relations records relating
to Seller's employees hired by Buyer (to the
extent that the same may be transferred to
Buyer under applicable Law), all environmental
control, monitoring and test records, all
facility cost records, all maintenance and
production records, all plats and surveys of
the real property leased under the Leases and
all plans and designs of buildings,
structures, fixtures and equipment.
2.2 Assumed Liabilities. Subject to the
terms and conditions of this Agreement, at the
Closing, Buyer shall assume only the following
liabilities and obligations (the "Assumed
Liabilities"):
(a) Seller's obligations to perform under the
Leases, but only if and to the extent that the
same arise after the Closing Date.
(b) Seller's obligations to perform under the
Assumed Mall Agreements, but only if and to
the extent that the same arise after the
Closing Date.
(c) Seller's obligations to perform under the
Assumed Contracts, but only if and to the
extent that the same arise after the Closing
Date or are required to be discharged by Buyer
under the terms of Section 3.5.
2.3 No Other Assets Purchased or Liabilities
Assumed. Buyer shall not purchase, acquire or
accept from Seller any assets of Seller other
than the Purchased Assets (all such other
assets of Seller being the "Excluded Assets").
Buyer shall not assume, shall not take subject
to and shall not be liable for any liabilities
or obligations of any kind or nature
whatsoever, whether absolute, contingent,
accrued, known or unknown, of Seller other
than the Assumed Liabilities (all such other
liabilities of Seller being the "Excluded
Liabilities").
ARTICLE III
PURCHASE PRICE; CLOSING
3.1 Total Purchase Price; Cash Portion;
Allocation. The total purchase price (the
"Total Purchase Price") to be paid to Seller
by Buyer for the Purchased Assets shall be (a)
the assumption of the Assumed Liabilities,
plus (b) $19,000,000 in cash (the "Cash
Portion"). Buyer and Seller agree that the
Total Purchase Price , including amounts
attributable to the Assumed Liabilities, shall
be allocated in accordance with the
requirements of Section 1060(a) of the Code,
which allocation shall be made in good faith
by Buyer as prescribed by the Code and
Treasury Regulations thereunder and followed
by both Buyer and Seller in the preparation of
their respective Tax returns.
3.2 Closing. The consummation of the
purchase and sale of the Purchased Assets and
the assumption of the Assumed Liabilities
pursuant to this Agreement (the "Closing")
shall be held at the offices of Ryan, Swanson
& Cleveland, PLLC, 1201 Third Avenue, Suite
3400, Seattle, Washington 98101-3034, on July
24, 2000; provided, however, that if any of
the conditions specified in Articles VII, VIII
and IX (other than conditions that can only be
satisfied on the Closing Date) shall not have
been satisfied at such date, the Closing shall
be held on the fifth Business Day following
the first date on which such conditions shall
have been satisfied, or such other date as
Seller and Buyer may agree.
3.3 Items to be Delivered at the Closing by
Seller. At the Closing, Seller shall deliver
or cause to be delivered to Buyer:
(a) An executed Bill of Sale and Assignment
in the form of Exhibit A.
(b) Subject to the provisions of Section 3.5,
an executed Assignment and Assumption
Agreement with respect to the Assumed
Contracts and the Assumed Mall Agreements in
the form of Exhibit B.
(c) An executed Lease Assignment and
Assumption Agreement with respect to the
Leases in the form of Exhibit C.
(d) If and to the extent obtained, executed
landlord consent and estoppel statements,
landlord lien waivers and subordination,
nondisturbance and attornment agreements with
respect to each of the Leases and the Assumed
Mall Agreements, as described in Section
6.4(b).
(e) Such other instruments of transfer
necessary or appropriate to transfer to and
vest in Buyer all of Seller's right, title and
interest in and to the Purchased Assets.
(f) Such other certificates and other
documents as are specified herein as then
deliverable by Seller.
3.4 Items to be Delivered at the Closing by
Buyer. At the Closing, Buyer shall deliver or
cause to be delivered to Seller:
(a) The Cash Portion, by wire transfer of
immediately available funds to an account
designated by Seller.
(b) Subject to the provisions of Section 3.5,
an executed Assignment and Assumption
Agreement with respect to the Assumed
Contracts and the Assumed Mall Agreements in
the form of Exhibit B.
(c) An executed Lease Assignment and
Assumption Agreement with respect to the
Leases in the form of Exhibit C.
(d) Such other certificates and other
documents as are specified herein as then
deliverable by Buyer.
3.5 Circumstances Under Which Certain Assumed
Contracts May Be Excluded.
(a) Section 4.2(a) of the Disclosure Schedule
includes a list of Seller defaults under or
with respect to the Assumed Contracts. Buyer
has agreed, pursuant to Section 6.4(d), if the
Closing occurs, to make the payments to the
parties and in the amounts specified with
respect to each of the Assumed Contracts
listed in Section 4.2(a) of the Disclosure
Schedule immediately prior to the Closing in
order to cure such defaults so that such
Assumed Contract may be assumed by Seller and
assigned to Buyer at the Closing.
(b) If and as received by Seller, Seller
shall promptly provide to Buyer copies of each
Statement of Default (as defined in the
Approval Motion) with respect to an Assumed
Contract that alleges any defaults that are
greater than those disclosed with respect to
such Assumed Contract in Section 4.2(a) of the
Disclosure Schedule. Notwithstanding any
other provision of this Agreement, in the
event that any such Statement of Default with
respect to an Assumed Contract is received,
then Buyer may, in its sole discretion, by
notice to Seller given not less than one
Business Day prior to the date of the hearing
on the Approval Motion, elect to exclude such
Assumed Contract from the Closing, in which
event such Assumed Contract shall no longer be
an Assumed Contract within the meaning of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as otherwise indicated in the
Disclosure Schedule by specific reference to
the Section and statement intended to be
qualified, Seller represents and warrants to
Buyer as follows:
4.1 Organization and Related Matters. Seller
is a corporation duly organized, validly
existing and in good standing under the laws
of the State of Delaware. Seller has all
necessary corporate power and, upon receipt of
the Approval Order, will have all necessary
corporate authority to execute, deliver and
perform this Agreement and any related
agreements to which it is a party.
4.2 Leases, Mall Agreements and Assumed
Contracts.
(a) Each of the Mall Agreements known to
Seller is listed in Section 1.2(9) of the
Disclosure Schedule. True, correct and
complete copies of each of the Leases, the
Assumed Mall Agreements and the Assumed
Contracts, including any and all amendments,
modifications or supplements thereto, have
been provided to Buyer. Each Lease, each
Assumed Mall Agreement and each Assumed
Contract is valid and in full force and
effect, Seller has duly performed all of its
obligations thereunder to the extent that such
obligations to perform have accrued, and, with
respect to the Assumed Contracts, no breach or
default, alleged breach or default, or event
which would (with the passage of time, notice
or both) constitute a breach or default
thereunder by Seller has occurred or will
occur as a result of the execution, delivery
and performance of this Agreement, and, with
respect to the Leases and the Assumed Mall
Agreements, at and upon the Closing there will
be no breach or default, alleged breach or
default, or event which would (with the
passage of time, notice or both) constitute a
breach or default by Seller thereunder. To
Seller's best knowledge, no breach or default,
alleged breach or default, or event which
would (with the passage of time, notice or
both) constitute a breach or default under any
Lease, Assumed Mall Agreement or Assumed
Contract by any party thereto other than
Seller has occurred or will occur as a result
of the execution, delivery and performance of
this Agreement. Assuming the Approval Order
is obtained, the consummation of the
transactions contemplated by this Agreement
will not (and will not give any person a right
to) terminate or modify any rights of, or
accelerate or augment any obligation of,
Seller under any Lease, Assumed Mall Agreement
or Assumed Contract.
(b) Section 1.2(28) of the Disclosure
Schedule accurately sets forth the term of
each Lease. Except as indicated in Section
1.2(28) of the Disclosure Schedule, there are
no deposits held by the landlord under any of
the Leases. Seller has accepted possession of
each property leased under a Lease and is in
actual possession thereof and has not sublet,
assigned or hypothecated its leasehold
interest thereunder. Except for proofs of
claim filed in the Bankruptcy Case, no lessor
has asserted a defense to, or offset or claim
against, its obligations under any Lease, and
all such defenses, offsets and claims will be
remedied or cured upon receipt of the Approval
Order. Seller has not paid any rent under any
Lease more than one month in advance. All
space and improvements leased by Seller have
been fully and satisfactorily completed and
furnished in accordance with the provisions of
each Lease. There are no brokerage or leasing
fees or commissions or other compensation that
will be due or payable by Buyer on an absolute
or contingent basis to any person, firm,
corporation, or other entity, with respect to
or on account of any of the Leases and no such
fees, commissions or other compensation shall,
by reason of any existing agreement, become
due during the terms of any of the Leases or
with respect to any renewal or extension
thereof or the leasing of additional space by
Seller. There are no outstanding contracts
made by or on behalf of Seller for the
construction or repair of any improvements to
any of the properties leased under the Leases
(including, without limitation, tenant
improvements) that have not been fully paid
for.
4.3 Title. Seller has good and marketable
title to each of the Purchased Assets, free
and clear of any Encumbrances. Assuming that
the Approval Order is obtained, Seller has all
right, power and authority to sell, convey,
assign, transfer and deliver the Purchased
Assets to Buyer in accordance with the terms
of this Agreement. At the Closing, Buyer will
acquire good title to and complete ownership
of the Purchased Assets, free and clear of any
Encumbrances.
4.4 Authorization; No Conflicts. The
execution, delivery and performance of this
Agreement and any related agreements by Seller
have been duly and validly authorized by the
Board of Directors of Seller and by all other
necessary corporate action on the part of
Seller. Upon issuance of the Approval Order,
this Agreement and any related agreements will
constitute the legally valid and binding
obligation of Seller, enforceable against it
in accordance with their terms except as such
enforceability may be limited by general
principles of equity, including, without
limitation, concepts of materiality,
reasonableness, good faith and fair dealing
and the possible unavailability of specific
performance or injunctive relief, regardless
of whether considered in a proceeding in
equity or at law. Assuming issuance of the
Approval Order, the execution, delivery and
performance of this Agreement by Seller and
the execution, delivery and performance of any
related agreements by Seller will not (a)
violate or constitute a breach or default
(whether upon lapse of time and/or the
occurrence of any act or event or otherwise)
under, the Certificate of Incorporation and
Bylaws of Seller, (b) constitute a breach or
default (whether upon lapse of time and/or the
occurrence of any act or event or otherwise)
under any Lease, Assumed Mall Agreement or
Assumed Contract or result in the imposition
of any Encumbrance against any of the
Purchased Assets or (c) violate any Law
applicable to Buyer. Section 4.4 of the
Disclosure Schedule lists all Approvals and
Permits required to be obtained by Seller to
consummate the transactions contemplated by
this Agreement. Except for matters indicated
in Section 4.4 of the Disclosure Schedule as
requiring that certain actions be taken by or
with respect to a third party or Governmental
Entity, the execution and delivery of this
Agreement by Seller and the performance of
this Agreement and any related agreements by
Seller will not require any notice to, filing
or registration with, or the issuance of any
Permit by, any third party or Governmental
Entity under the terms of any applicable Laws,
the Leases, the Assumed Mall Agreements or the
Assumed Contracts.
4.5 Condition of Property. Each of the
Purchased Assets that is an item of personal
property of Seller, and all of the personal
property leased to Seller pursuant to any
Assumed Contract, is in all material respects
in a reasonable and prudent state of
maintenance and repair, has in all material
respects been regularly and appropriately
maintained, repaired and replaced, and is not
in any material respect defective except for
ordinary wear and tear. All of the real
property leased to Seller pursuant to the
Leases is in all material respects in a
reasonable and prudent state of maintenance
and repair and has no material physical,
structural, or mechanical defects (including,
without limitation, material defects in the
plumbing, heating, sprinkler, air
conditioning, ventilation and electrical
systems and roof). In all material respects,
each of the Purchased Assets that is an item
of personal property of Seller, all personal
property or equipment leased to Seller under
any Assumed Contract and all store fixtures
located on the real property leased under any
of the Leases are located on or at premises
leased under one or more of the Leases.
4.6 Legal Proceedings; Labor Matters.
Section 4.6 of the Disclosure Schedule sets
forth a true and complete list of all Actions
(other than routine collection matters in the
ordinary course of business consistent with
past practice) to which Seller is a party.
Seller is not in default under any Order.
There is no organized labor strike, dispute,
slowdown or stoppage, or collective bargaining
or unfair labor practice claim, pending or to
the best knowledge of Seller threatened,
against or affecting Seller or the Business.
4.7 Insurance. Section 4.7 of the Disclosure
Schedule sets forth a true and complete list
of all insurance policies and all self-
insurance arrangements administered by Seller
covering the ownership and operations of the
Purchased Assets.
4.8 Permits. Section 4.8 of the Disclosure
Schedule sets forth a true and complete list
of all Permits owned or held by Seller in
connection with the ownership of the Purchased
Assets, all of which are in effect and in good
standing.
4.9 Compliance with Law; Environmental
Matters. Seller is organized and has
conducted the Business in accordance with
applicable Laws, including environmental Laws.
Seller has not received any communication from
a Governmental Entity that alleges that Seller
is not in compliance with all applicable Laws,
including environmental Laws. To Seller's
best knowledge, no Hazardous Substances are
located on any of the real property leased to
Seller under the Leases. Seller has not
generated, used, transported, treated, stored,
released or disposed of, or has suffered or
permitted anyone else to generate, use,
transport, treat, store, release or dispose of
any Hazardous Substance which is regulated or
prohibited by any Law, or has created or might
reasonably be expected to create any liability
under any Law or which would require reporting
to or notification of any Governmental Entity.
There has not been any generation, use,
transportation, treatment, storage, release or
disposal of any Hazardous Substance in
connection with the conduct of the Business or
Seller's use of any real property leased to
Seller under the Leases or to the best
knowledge of Seller any nearby or adjacent
properties that is regulated or prohibited by
any Law, or has created or might reasonably be
expected to create any liability under any Law
or which would require reporting to or
notification of any Governmental Entity. To
Seller's best knowledge, no asbestos, lead-
based paint or polychlorinated biphenyl or
storage tank (aboveground or underground) is
contained in or located at any of the real
property leased to Seller under the Leases.
4.10 Employee Benefits.
(a) Section 4.10(a) of the Disclosure
Schedule lists (by employer or by plan
sponsor, as applicable) all employee benefit
plans and collective bargaining, employment,
retention or severance agreements and other
similar arrangements to which Seller is a
party or contributes that are (a) profit-
sharing, deferred compensation, bonus, stock
option, stock purchase, pension, retainer,
consulting, retirement, severance, welfare or
incentive plans, agreements or arrangements,
(b) plans, agreements or arrangements
providing for material "fringe benefits" or
perquisites to employees, including but not
limited to benefits relating to company
automobiles, clubs, vacation, child care,
parenting, sabbatical, sick leave, workers'
compensation, medical, dental,
hospitalization, life insurance and other
types of insurance, (c) employment agreements
not terminable on 30 days (or less) written
notice or terminable at will by the employer
without penalty, or (d) other "employee
benefit plans" (within the meaning of
Section 3(3) of ERISA) (each of the foregoing
being a "Employee Plan").
(b) Seller has provided to Buyer true and
complete copies of all documents and summary
plan descriptions with respect to the Employee
Plans, including, but not limited to the plan
and trust documents or summary descriptions of
any Employee Plans not otherwise in writing,
Form 5500 for the most recent three years
filed for each Employee Plan subject to such
filing requirement, including all required
schedules, and the most recent Internal
Revenue Service determination letter for each
Employee Plan which is intended to constitute
a qualified plan under Section 401 of the
Code.
(c) There are no negotiations, demands or
proposals that are pending or have been made
which concern matters now covered, or that
would be covered, by the Employee Plans.
(d) Except as required under Section 4980B of
the Code, Seller has no obligation to provide
health or other welfare benefits to any
employee following termination of employment.
Section 4.10(d) of the Disclosure Schedule
sets forth (i) a list (including the name,
gender, age and, where applicable,
relationship to or with the employee or former
employee) of all "qualified beneficiaries" as
defined in Section 4980B of the Code, (ii)
such additional information as would be
required to be provided to an insurance
carrier in order for Buyer to obtain health
insurance coverage for such individuals, and
(iii) Seller's total actual costs incurred for
claims under COBRA continuation coverage
during the preceding three years.
(e) Except as otherwise provided herein, no
event has occurred that will result in
liability to Buyer under or with respect to
any Employee Plan.
(f) Seller has classified all individuals who
perform services for Seller correctly under
the Employee Plans, ERISA and the Code as
common law employees, independent contractors
or leased employees.
(g) No Employee Plan is a "multi employer
plan" within the meaning of Section 3(37) of
ERISA. Neither Seller nor any ERISA Affiliate
has ever had an obligation to contribute to a
"multiemployer plan" within the meaning of
Section 3(37) of ERISA. The term "ERISA
Affiliate" means any trade or business
(whether or not incorporated) that is or was a
member of a group of which the Seller is or
was a member and which is or was under common
control or treated as a single employer with
Seller within the meaning of Section 414 (b),
(c), (m) or (o) of the Code.
4.11 Year 2000 Compliance. Seller has taken
steps to review identify and analyze its
computer software and hardware used in the
conduct of the Business to determine its year
2000 compliance. Such computer software and
hardware is year 2000 compliant. As used
herein, the term "year 2000 compliance" means
the ability unambiguously to handle date
information before, at and after January 1,
2000 and to function without interruption
before, at and after January 1, 2000.
4.12 No Brokers or Finders. No agent, broker,
finder, or investment or commercial banker, or
other person or firm engaged by or acting on
behalf of Seller in connection with the
negotiation, execution or performance of this
Agreement or the transactions contemplated by
this Agreement, is or will be entitled to any
brokerage or finder's or similar fee or other
commission as a result of this Agreement or
such transactions except for The Buxbaum
Group, whose fees and expenses will be paid by
Seller.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as otherwise indicated in the
Buyer Disclosure Schedule by specific
reference to the Section and matter intended
to be qualified, Buyer represents and warrants
to Seller as follows:
5.1 Organization and Related Matters. Buyer
is a corporation duly organized, validly
existing and in good standing under the laws
of the State of Delaware. Buyer has all
necessary corporate power and authority to
execute, deliver and perform this Agreement
and any related agreements to which it is a
party.
5.2 Authorization; No Conflicts. The
execution, delivery and performance of this
Agreement and any related agreements by Buyer
have been duly and validly authorized by the
Board of Directors of Buyer and by all other
necessary corporate action on the part of
Buyer. This Agreement and any related
agreements constitute the legally valid and
binding obligation of Buyer, enforceable
against it in accordance with their terms
except as such enforceability may be limited
by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or
affecting creditors' rights generally
(including, without limitation, fraudulent
conveyance laws) and by general principles of
equity, including, without limitation,
concepts of materiality, reasonableness, good
faith and fair dealing and the possible
unavailability of specific performance or
injunctive relief, regardless of whether
considered in a proceeding in equity or at
law. The execution, delivery and performance
of this Agreement by Buyer and the execution,
delivery and performance of any related
agreements by Buyer will not (a) violate or
constitute a breach or default (whether upon
lapse of time and/or the occurrence of any act
or event or otherwise) under, the Certificate
of Incorporation and Bylaws of Buyer,
(b) constitute a breach or default (whether
upon lapse of time and/or the occurrence of
any act or event or otherwise) under any
contract, lease or other agreement to which
Buyer is a party or by which it is bound or
(c) violate any Law applicable to Buyer.
Section 5.2 of the Buyer Disclosure
Schedule lists all Approvals and Permits
required to be obtained by Buyer to consummate
the transactions contemplated by this
Agreement. Except for matters indicated in
Section 5.2 of the Buyer Disclosure
Schedule as requiring that certain actions be
taken by or with respect to a third party or
Governmental Entity, the execution and
delivery of this Agreement by Buyer and the
performance of this Agreement and any related
agreements by Buyer will not require any
notice to, filing or registration with, or the
issuance of any Permit by, any third party or
Governmental Entity under the terms of any
applicable Laws or any contract, lease or
other agreement to which Buyer is a party or
by which it is bound.
5.3 Ability to Perform. No Action or Order
is outstanding, pending or, to the best
knowledge of Buyer, threatened against Buyer
or its business or assets that reasonably
could be expected to affect Buyer's right,
capacity or ability to carry out the terms of
and perform its obligations under this
Agreement. Buyer has received commitment
letters (copies of which have been provided to
Seller) from lenders with respect to the
financing of Buyer's payment of the Cash
Portion. Receipt of the consent of Congress
Financial Corporation described in Paragraph
2, Section 5.2 of the Buyer Disclosure
Schedule is not a requirement of or condition
to Closing.
5.4 No Brokers or Finders. No agent, broker,
finder, or investment or commercial banker, or
other person or firm engaged by or acting on
behalf of Buyer or any of its Affiliates in
connection with the negotiation, execution or
performance of this Agreement or the
transactions contemplated by this Agreement,
is or will be entitled to any brokerage or
finder's or similar fee or other commission as
a result of this Agreement or such
transactions except for Lehman Brothers Inc.,
whose fees and expenses will be paid by Buyer.
ARTICLE VI
INTERIM COVENANTS
6.1 Access. Seller will authorize and permit
Buyer and its representatives (which term
shall be deemed to include its independent
accountants and outside legal counsel) to have
reasonable access during normal business hours
to all of the books and records of the
Business and all other information with
respect to the conduct of the Business as
Buyer may from time to time reasonably request
for the purposes of familiarizing itself with
the Business, the Purchased Assets or the
Assumed Liabilities and obtaining any
necessary Approvals or Permits required for
the consummation of the transactions
contemplated by this Agreement.
6.2 Notice of Certain Developments. Each of
Seller and Buyer shall promptly notify the
other of them in writing of all events,
circumstances, facts and occurrences, whether
arising prior to or subsequent to the date of
this Agreement, that will or are reasonably
likely to result in any breach of a
representation or warranty or covenant made by
the notifying party in this Agreement or any
failure to be satisfied of any condition to
the obligations of the party receiving such
notice under this Agreement.
6.3 Conduct of Business. Seller shall not,
without the prior written consent of Buyer:
(a) Amend, terminate, fail to renew or
renegotiate any Lease, Assumed Mall Agreement
or Assumed Contract or default (or take or
omit to take any action that with or without
the giving of notice or passage of time or
both, would constitute a default) in any of
its obligations under any Lease, Assumed Mall
Agreement or Assumed Contract.
(b) Sell, transfer, mortgage, encumber or
otherwise dispose of any of the Purchased
Assets.
(c) Terminate or fail to renew any existing
insurance coverage covering any of the
Purchased Assets or any of the Assumed
Liabilities.
(d) Terminate, amend or fail to renew or
preserve any Permits.
(e) Fail to maintain or repair any Purchased
Asset in accordance with reasonable and
prudent maintenance and repair procedures.
(f) Agree to or make any commitment to take
any action that is or would be prohibited by
this Section 6.3.
(g) Fail to make any and all
payments required of Seller under the Leases,
the Assumed Contracts and the Assumed Mall
Agreements for the period between the filing
of the petition initiating the Bankruptcy Case
to the Closing.
6.4 Permits and Approvals; Lease and Mall
Agreement Cure Payments.
(a) Each of the parties shall, as promptly as
practicable (except with respect to filings
required under the Hart-Scott-Rodino Act,
which each of the parties shall prepare,
submit and file promptly following receipt of
the Approval Order), prepare, submit and file
(or cause to be prepared, submitted and filed)
all applications, notices and requests for,
and shall use all reasonable efforts to obtain
as promptly as practicable, all Permits and
Approvals of all Governmental Entities that,
with respect to Seller, are listed in Section
4.4 of the Disclosure Schedule, and with
respect to Buyer, are listed in Section 5.2 of
the Buyer Disclosure Schedule, and will
cooperate fully with each other in promptly
seeking to obtain all such Permits and
Approvals. Without limiting the foregoing,
Seller shall, not later than three Business
Days after receipt of Buyer's approval
thereof, file the Approval Motion with the
Bankruptcy Court.
(b) Seller shall prepare and give promptly
all such notices to third parties and use all
commercially reasonable efforts to obtain such
third party Approvals as are listed in
Section 4.4 of the Disclosure Schedule. Buyer
shall prepare and give promptly all such
notices to third parties and use all
commercially reasonable efforts to obtain such
third party Approvals as are listed in
Section 5.2 of the Buyer Disclosure Schedule.
Seller shall use commercially reasonable
efforts to obtain executed lessor estoppel
certificates, in the form of Exhibit D hereto,
and executed landlord agreements, in the form
of Exhibit E hereto, from each lessor under a
Lease, and executed estoppel certificates, in
the form of Exhibit F hereto, from each person
which is known by Seller to be a party to an
Assumed Mall Agreement other than Seller.
Seller shall use commercially reasonable
efforts to obtain executed subordination,
nondisturbance and attornment agreements, in
the form of Exhibit G hereto, with respect to
all Leases executed by the person holding the
subject encumbrance and the lessor under the
subject Lease. Seller shall use commercially
reasonable efforts to obtain and furnish to
Buyer any and all certificate(s) of occupancy
or similar documents required from any
Governmental Entity in connection with Buyer's
possession of the real property leased under
the Leases. Buyer acknowledges that for
purposes of this Section 6.4(b) "all
commercially reasonable efforts" do not
include making out-of-pocket money payments,
granting of concessions or accommodations or
provision of other out-of-pocket
consideration.
(c) Buyer shall pay the fees of any Hart-
Scott-Rodino Act filing. Each of the parties
shall bear its own costs and expenses incurred
or other fees paid to Governmental Entities to
obtain the Approvals and Permits referred to
in this Section 6.4.
(d) Seller shall be responsible for, and at
or prior to the Closing shall take all actions
necessary to cure all breaches or defaults
under the Leases and the Assumed Mall
Agreements that are required by the Approval
Order to be cured. Subject to the provisions
of Section 3.5, if the Closing occurs, Buyer
shall be responsible for, and at or prior to
the Closing shall take all actions necessary
to cure the defaults under the Assumed
Contracts that are required by the Approval
Order to be cured.
(e) The parties acknowledge and agree that
neither of them shall comply with any of the
requirements of any bulk sales or transfer
law.
6.5 Prorations; Sales and Transfer Taxes.
(a) At the Closing, any and all real estate,
leasehold and personal property taxes paid or
payable in 2000, payments made by or due from
Seller under the Leases, the Assumed Contracts
and the Assumed Mall Agreements for the period
between the filing of the petition initiating
the Bankruptcy Case to the Closing, and
utility, water, sewer and similar charges,
shall be apportioned and prorated between
Seller and Buyer as of the Closing Date, with
Seller to pay and be responsible for all of
the foregoing as relate to periods ending on
or prior to the Closing Date, and Buyer to pay
and be responsible for all of the foregoing as
relate to periods beginning after the Closing
Date.
(b) Seller shall pay and be responsible for
any and all real property excise or transfer
Taxes, if any, and Buyer shall pay and be
responsible for any and all sales, use,
personal property excise, leasehold, personal
property transfer or other similar Taxes, if
any, imposed on or in connection with the sale
or transfer of the Purchased Assets to, and
the assumption of the Assumed Liabilities by,
Buyer pursuant to this Agreement. Any and all
registration, filing or recording fees or
costs, if any, shall be paid by and be the
responsibility of Buyer.
6.6 Certain Employee Matters.
(a) Not later than May 14, 2000, Buyer shall
deliver to Seller a list of those employees of
Seller to whom Buyer desires to offer
employment on the Closing Date. On the
Closing Date, Buyer shall offer employment
commencing on the first Business Day after the
Closing Date and on an "at will" basis to
those employees listed in such notice.
(b) Seller shall comply with the provisions
of the WARN Act with respect to any
termination of its employees, and shall
provide terminated employees with all legally
required notices relating to the Employee
Plans.
(c) Buyer agrees to offer "COBRA Continuation
Coverage" under a group health plan or
insurance policy maintained by or issued to
Buyer to each "M&A Qualified Beneficiary" of
Seller beginning on the later of the Closing
Date or the date the "Selling Group" which
includes Seller ceases to provide any group
health plan to any employee. The term "COBRA
Continuation Coverage" shall have the meaning
set forth in Treasury Regulations Section
54.4980B-5 Q&A-1. The terms "M&A Qualified
Beneficiary" and "Selling Group" shall have
the meanings set forth in Proposed Treasury
Regulations Sections 54.4980B-9 Q&A-4 and Q&A-
3 respectively.
6.7 Acquisition Proposals; Minimum Overbid
Proposals; Expense Reimbursement. Seller
shall immediately cease and cause to be
terminated any existing activities,
discussions, or negotiations with any parties
regarding any Acquisition Proposal. From the
date of this Agreement until the Closing Date
or the termination of this Agreement pursuant
to Section 10.1, Seller shall not and shall
not permit any of its subsidiaries, or any of
its or their officers, directors, employees,
representatives, agents, or affiliates,
including, without limitation, any investment
banker, attorney or accountant retained by
Seller or any of its subsidiaries
(collectively, "Representatives"), to,
directly or indirectly, (i) initiate, solicit,
encourage or otherwise facilitate (except by
way of furnishing information, but then only
by Seller's special reorganization counsel),
any inquiries or the making of any proposal or
offer that constitutes, or may reasonably be
expected to lead to an Acquisition Proposal
(as defined below), or (ii) enter into or
maintain or continue discussions or negotiate
with any person in furtherance of such
inquiries or to obtain an Acquisition
Proposal, or (iii) agree to, approve,
recommend, or endorse any Acquisition
Proposal, or authorize or permit any of its
subsidiaries or Representatives to take any
such action, and Seller shall promptly notify
Buyer of any such inquiries and proposals
received by Seller or any of its subsidiaries
or Representatives, relating to any of such
matters; provided, however, that Seller may,
if and only Seller has complied with the
provisions of subsection 6.7(i) above, in
response to a Minimum Overbid Proposal,
furnish information to, or engage in
discussions or negotiations with, the
proponent of such Minimum Overbid Proposal.
Prior to furnishing any information to any
person, Seller shall cause Seller's special
reorganization counsel to give written notice
to Buyer to the effect that it intends to
furnish information to such person, which
notice shall identify the recipient and
describe the information to be provided.
Prior to entering into discussions or
negotiations with any person concerning any
Acquisition Proposal, Seller shall give
written notice to Buyer to the effect that it
intends to enter into discussions or
negotiations with such person, which notice
shall describe in detail the nature and terms
of the Acquisition Proposal. Seller shall
keep Buyer fully and timely informed of the
status of any discussions or negotiations
relating to any Acquisition Proposal.
ARTICLE VII
GENERAL CONDITIONS TO OBLIGATIONS OF THE
PARTIES
7.1 General Conditions. The obligations of
the parties to effect the Closing shall be
subject to the following conditions unless
waived in writing by all parties:
(a) No Orders; Legal Proceedings. No Law or
Order shall have been enacted, entered,
issued, promulgated or enforced by any
Governmental Entity, nor shall any Action have
been instituted and remain pending by any
Governmental Entity at what would otherwise be
the Closing Date, that prohibits or restricts
or would (if successful) prohibit or restrict
the transactions contemplated by this
Agreement. No Governmental Entity shall have
notified any party to this Agreement that
consummation of the transactions contemplated
by this Agreement would constitute a violation
of any Laws of any jurisdiction or that it
intends to commence proceedings to restrain or
prohibit such transactions or force
divestiture or rescission, unless such
Governmental Entity shall have withdrawn such
notice and abandoned any such proceedings
prior to the otherwise timely Closing.
(b) Governmental Approvals. The Approval
Order and all other Permits from and Approvals
of Governmental Entities that are listed in
Section 4.4 of the Disclosure Schedule and
Section 5.2 of the Buyer Disclosure Schedule
shall have been received or obtained on or
prior to the Closing Date, and any applicable
waiting period under the Hart-Scott-Rodino Act
shall have expired or been terminated, in each
instance without the imposition of any
material condition or restriction upon Buyer.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
8.1 Conditions to Obligations of Buyer. The
obligations of Buyer to effect the Closing
shall be subject to the following conditions
except to the extent waived in writing by
Buyer:
(a) Representations and Warranties and
Covenants of Seller. The representations and
warranties of Seller set forth in Section 4.5
shall be true and correct and the other
representations and warranties of Seller set
forth in Article IV shall be true and correct
in all material respects at the Closing Date
with the same effect as though made at such
time, Seller shall have in all material
respects performed all obligations and
complied with all covenants and conditions
required by this Agreement to be performed or
complied with by it at or prior to the Closing
Date, and Seller shall have delivered to Buyer
a certificate of Seller dated the Closing Date
and signed by the Chief Executive Officer of
Seller to such effect.
(b) Condition of Stores. The Stores shall be
in suitable condition for possession to be
transferred to Buyer. The Stores shall be in
all material respects free of dirt, rubbish
and debris.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF SELLER
9.1 Conditions to Obligations of Seller. The
obligations of Seller to effect the Closing
shall be subject to the following conditions,
except to the extent waived in writing by
Seller:
(a) Representations and Warranties and
Covenants of Buyer. The representations and
warranties of Buyer set forth in Article V
shall be true and correct in all material
respects at the Closing Date with the same
effect as though made at such time, Buyer
shall have in all material respects performed
all obligations and complied with all
covenants and conditions required by this
Agreement to be performed or complied with by
it at or prior to the Closing Date, and Buyer
shall have delivered to Seller a certificate
of Buyer dated the Closing Date and signed by
the Chief Executive Officer of Buyer.
ARTICLE X
TERMINATION OF OBLIGATIONS; SURVIVAL
10.1 Termination of Agreement. Anything
herein to the contrary notwithstanding, this
Agreement and the transactions contemplated by
this Agreement shall terminate at the close of
business on August 31, 2000 unless extended by
mutual consent in writing of the parties and
may otherwise be terminated at any time before
the Closing as follows and in no other manner:
(a) Mutual Consent. By mutual consent in
writing of the parties.
(b) Conditions to Buyer's Performance
Impossible. By Buyer upon written notice to
Seller if any event occurs which would render
impossible the satisfaction of one or more
conditions to the obligations of Buyer to
consummate the transactions contemplated by
this Agreement as set forth in Article VII or
VIII.
(c) Conditions to Seller' Performance
Impossible. By Seller upon written notice to
Buyer if any event occurs which would render
impossible the satisfaction of one or more
conditions to the obligations of Seller to
consummate the transactions contemplated by
this Agreement as set forth in Article VII or
IX.
(d) Material Breach. By Buyer on the one
hand, and Seller on the other hand, by written
notice to the other of them, if there has been
a material misrepresentation or material
breach on the part of the other in its
representations, warranties or covenants set
forth herein; provided, however, that with
respect to any misrepresentation or breach of
any provision of this Agreement other than
Section 6.7, if such misrepresentation or
breach is susceptible to cure, the breaching
party shall have ten Business Days after
receipt of notice from the other party of its
intention to terminate this Agreement pursuant
to this Section 10.1 if such misrepresentation
or breach continues in which to cure such
misrepresentation or breach before the other
party may so terminate this Agreement.
(e) Acquisition Proposal. By Buyer by
written notice to Seller if Seller shall have
entered into any agreement with respect to an
Acquisition Proposal, or Seller shall have
engaged in discussions or negotiations with
the proponent of any Acquisition Proposal and
such discussions or negotiations shall have
continued for more than 15 Business Days.
10.2 Effect of Termination. In the event that
this Agreement shall be terminated pursuant to
Section 10.1, all further obligations of the
parties under this Agreement shall terminate
without further liability of any party to
another except as set forth in this Section
10.2. The obligations of the parties
contained in this Section 10.2 shall survive
any termination of this Agreement pursuant to
Section 10.1. A termination under
Section 10.1 shall not relieve any party of
any liability for a breach of any provision of
this Agreement, or be deemed to constitute a
waiver of any available remedy (including
specific performance if available) for any
such breach.
10.3 Survival of Representations and
Warranties. The representations and
warranties of Seller and of Buyer contained in
this Agreement shall expire upon the Closing.
ARTICLE XI
GENERAL
11.1 Amendments; Waivers. This Agreement and
any Schedule or Exhibit attached hereto may be
amended only by agreement in writing of all
parties. No waiver of any provision nor
consent to any exception to the terms of this
Agreement or any agreement contemplated hereby
shall be effective unless in writing and
signed by the party to be bound and then only
to the specific purpose, extent and instance
so provided.
11.2 Disclosure Schedule; Buyer Disclosure
Schedule; Exhibits; Integration. The
Disclosure Schedule, the Buyer Disclosure
Schedule and each Exhibit delivered pursuant
to the terms of this Agreement shall be in
writing and shall constitute a part of this
Agreement, although the Disclosure Schedule
and the Buyer Disclosure Schedule need not be
attached to each copy of this Agreement. This
Agreement, together with the Disclosure
Schedule, the Buyer Disclosure Schedule and
such Exhibits, constitutes the entire
agreement among the parties pertaining to the
subject matter hereof and supersedes all prior
agreements and understandings of the parties
in connection therewith including, but not
limited to, the Letter of Intent.
11.3 Best Efforts; Further Assurances; Power
of Attorney. Each party will use its best
efforts to cause all conditions to its
obligations hereunder to be timely satisfied
and to perform and fulfill all obligations on
its part to be performed and fulfilled under
this Agreement, to the end that the
transactions contemplated by this Agreement
shall be effected substantially in accordance
with its terms as soon as reasonably
practicable. Each party shall execute and
deliver both before and after the Closing such
further certificates, agreements and other
documents and take such other actions as may
be reasonably necessary to consummate or
implement the transactions contemplated hereby
or to evidence such events or matters.
11.4 Governing Law. This Agreement and the
legal relations between the parties shall be
governed by and construed in accordance with
the laws of the State of Washington applicable
to contracts made and performed in such State
and without regard to conflicts of law
doctrines. Each of the parties recognizes and
consents to the continuing jurisdiction of the
Bankruptcy Court over any Action, controversy,
claim or dispute arising out of or relating to
this Agreement or the transactions
contemplated hereby.
11.5 No Assignment. Neither this Agreement
nor any related agreements nor any rights or
obligations under any of them shall be
assignable by any of the parties hereto.
Notwithstanding the foregoing, Buyer may
assign its rights and obligations hereunder to
any wholly owned subsidiary of Buyer, provided
that Buyer shall nevertheless remain liable to
Seller for the performance of Buyer's
obligations hereunder.
11.6 Headings. The descriptive headings of
the articles, sections and subsections of this
Agreement are for convenience only and do not
constitute a part of this Agreement.
11.7 Counterparts. This Agreement and any
amendment hereto or any other agreement (or
document) delivered pursuant hereto may be
executed in one or more counterparts and by
different parties in separate counterparts,
all of which shall constitute one and the same
agreement (or other document).
11.8 Publicity and Reports. The parties shall
coordinate all publicity relating to the
transactions contemplated by this Agreement,
and no party shall issue any press release,
publicity statement or other public notice
relating to this Agreement, or the
transactions contemplated by this Agreement
without obtaining the prior consent of both
Seller and Buyer (which consent shall not be
unreasonably withheld or delayed), except to
the extent that independent legal counsel to
Seller or Buyer, as the case may be, shall
have advised its client that a particular
action is required by applicable Law.
11.9 Parties in Interest. This Agreement
shall be binding upon and inure to the benefit
of each party and its successors and permitted
assigns, and nothing in this Agreement,
express or implied, is intended to confer upon
any other person any rights or remedies of any
nature whatsoever under or by reason of this
Agreement. Nothing in this Agreement is
intended to relieve or discharge the
obligation of any third person to any party to
this Agreement.
11.10 Notices. Any notice or other
communication hereunder must be given in
writing and (a) delivered in person,
(b) transmitted by telex, telefax or
telecommunications mechanism, provided that
any notice so given is also mailed or sent as
provided in clause (c), or (c) mailed by
certified or registered mail, postage prepaid,
receipt requested or sent by reputable
overnight courier as follows:
If to Buyer, addressed to:
Gottschalks Inc.
7 River Park Place East
P.O. Box 28920
Fresno, CA 93729
Telecopy: 559-434-4666
Attention: Warren L. Williams, Esq.
With copies to:
O'Melveny & Myers LLP
400 South Hope St., 15th Floor
Los Angeles, CA 90071-2899
Telecopy: 213-430-6407
Attention: Avery R. Brown, Esq.
Charles C. Wolf, Esq.
If to Seller, addressed to:
Lamonts Apparel, Inc.
12413 Willows Road N.E.
Kirkland, WA 98034
Telecopy: 425-814-9749
Attention: Debbie A. Brownfield
With copies to:
Heller Ehrman White & McAuliffe LLP
701 Fifth Avenue, Suite 6100
Seattle, WA 98104-7098
Telecopy: 206-447-0849
Attention: Bruce M. Pym, Esq.
and
Stutman, Treister & Glatt,
Professional
Corporation
3699 Wilshire Boulevard, Suite 900
Los Angeles, CA 90010
Telecopy: 213-251-5288
Attention: Eve H. Karasik, Esq.
and
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, NY 10036-7798
Telecopy: 212-479-6275
Attention: Lawrence C. Gottlieb
or to such other address or to such other
person as either party shall have last
designated by such notice to the other party.
Each such notice or other communication shall
be effective (i) if given by
telecommunication, when transmitted to the
applicable number specified in (or pursuant
to) this Section 11.10 and an appropriate
answerback is received, (ii) if given by mail
or courier or any other means, when actually
delivered.
11.11 Expenses. Except as otherwise
expressly provided in this Agreement, each of
the parties shall pay its own expenses
incident to the negotiation, preparation and
performance of this Agreement and the
transactions contemplated hereby, including
but not limited to the fees, expenses and
disbursements of its investment bankers,
accountants and counsel.
11.12 Remedies. To the extent permitted
by Law, and except as otherwise expressly
provided herein to the contrary, all rights
and remedies existing under this Agreement and
any Related Agreements or documents are
cumulative to, and not exclusive of, any
rights or remedies otherwise available under
applicable Law. No failure on the part of any
party to exercise or delay in exercising any
right hereunder shall be deemed a waiver
thereof, nor shall any single or partial
exercise preclude any further or other
exercise of such or any other right.
11.13 Attorneys' Fees. In the event of
any Action for the breach of this Agreement or
misrepresentation by any party, the prevailing
party shall be entitled to reasonable
attorneys' fees, costs and expenses incurred
in such Action. Attorneys' fees incurred in
enforcing any judgment in respect of this
Agreement are recoverable as a separate item.
The preceding sentence is intended to be
severable from the other provisions of this
Agreement and to survive any judgment and, to
the maximum extent permitted by law, shall not
be deemed merged into any such judgment.
11.14 Representation by Counsel;
Interpretation. The parties each acknowledge
that each party to this Agreement has been
represented by counsel in connection with this
Agreement and the transactions contemplated by
this Agreement. Accordingly, any rule of Law
or any legal decision that would require
interpretation of any claimed ambiguities in
this Agreement against the party that drafted
it has no application and is expressly waived.
The provisions of this Agreement shall be
interpreted in a reasonable manner to effect
the intent of the parties.
11.15 Severability. If any provision of
this Agreement is determined to be invalid,
illegal or unenforceable by any Governmental
Entity, the remaining provisions of this
Agreement shall remain in full force and
effect provided that the essential terms and
conditions of this Agreement for all parties
remain valid, binding and enforceable.
11.16 Calendar Days; Holidays. All
references made in this Agreement to the word
"days," whether for notices, schedules or
other miscellaneous time limits, shall at all
times herein be deemed to mean calendar days,
unless specifically referenced as Business
Days. When performance of an obligation or
satisfaction of a condition set forth in this
Agreement is required on or by a date that is
a Saturday, Sunday, or a legal holiday, such
performance or satisfaction shall instead be
required on or by the next Business Day
following that Saturday, Sunday or holiday,
notwithstanding any other provision of this
Agreement.
11.17 Effectiveness. Notwithstanding any
provision herein to the contrary, this
Agreement shall be effective and binding upon
the parties only upon issuance of the Approval
Order (except for the provisions of Section
6.7, which shall be effective and binding upon
the parties upon the execution and delivery of
this Agreement).
11.18 Disclosure Schedule. The parties
acknowledge that with respect to information
required under this Agreement to be provided
(as distinguished from information
constituting exceptions to Seller's
representations and warranties), Sections
2.1(a), 4.8, and 4.10(d) of the Disclosure
Schedule are incomplete. Seller shall, with
respect to information called for by Sections
2.1(a) and 4.10(d) of the Disclosure Schedule,
deliver, and, with respect to information
called for by Section 4.8 of the Disclosure
Schedule, Seller shall use commercially
reasonable efforts to deliver, to Buyer and
its counsel complete and final versions of
such Sections of the Disclosure Schedule as
soon as practicable but in any event not later
than 5:00 p.m. PDT on Friday, April 28.
IN WITNESS WHEREOF, each of the
parties hereto has caused this Agreement to be
executed by its duly authorized officers as of
the day and year first above written.
LAMONTS APPAREL, INC.
By: /s/ Alan R. Schlesinger
Title: CEO
GOTTSCHALKS INC.
By: /s/ Michael S. Geele
Title: Senior Vice President and
Chief Financial Officer
EXHIBIT A
FORM OF BILL OF SALE AND ASSIGNMENT
For good and valuable consideration,
receipt of which is hereby acknowledged, and
pursuant to that certain Asset Purchase
Agreement dated as of April 24, 2000 (the
"Agreement;" capitalized terms used but not
defined herein being used herein as therein
defined) by and between LAMONTS APPAREL, INC.,
a Delaware corporation ("Seller"), and
GOTTSCHALKS INC., a Delaware corporation
("Buyer"), and intending to be legally bound
hereby, Seller does hereby unconditionally and
irrevocably sell, convey, grant, assign and
transfer to Buyer all of its right, title and
interest in and to the Purchased Assets
including, but not limited to, those listed on
Schedule 1 hereto.
IN WITNESS WHEREOF, Seller has
caused this Bill of Sale and Assignment to be
executed this _____ day of ______________,
2000.
LAMONTS APPAREL, INC.
By:___________________________
Name:________________________
Title:__________________________
SCHEDULE 1
to
BILL OF SALE AND ASSIGNMENT
(To Come)
EXHIBIT B
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
This ASSIGNMENT AND ASSUMPTION
AGREEMENT is entered into as of
__, 2000 by and between
LAMONTS APPAREL, INC., a Delaware corporation
("Seller"), and GOTTSCHALKS INC., a Delaware
corporation ("Buyer").
W I T N E S S E T H
WHEREAS, pursuant to that certain
Asset Purchase Agreement dated as of April 24,
2000 (the "Agreement;" capitalized terms used
but not defined herein being used herein as
therein defined) by and between the parties
hereto, Seller desires to transfer to Buyer,
and Buyer desires to acquire from Seller,
Seller's interest in the Assumed Mall
Agreements and the Assumed Contracts.
NOW THEREFORE, in consideration of
the transfer contemplated hereby and other
good and valuable consideration the receipt
and sufficiency of which are hereby
acknowledged, Seller and Buyer do hereby agree
as follows:
1. Seller hereby assigns and
transfers to Buyer, and Buyer accepts the
assignment and transfer of, all of Seller's
right, title and interest in, to and under the
Assumed Mall Agreements and the Assumed
Contracts, and Buyer assumes and undertakes to
perform Seller's obligations under the Assumed
Mall Agreements and the Assumed Contracts, but
only if and to the extent that the same arise
after the Closing Date.
2. This Agreement shall be governed
by and construed in accordance with the laws
of the State of Washington.
IN WITNESS WHEREOF, Seller and Buyer
have caused this Assignment and Assumption
Agreement to be executed as of the date first
above written.
LAMONTS APPAREL, INC.
By:___________________________
Name:________________________
Title:__________________________
GOTTSCHALKS INC.
By:___________________________
Name:________________________
Title:_________________________
EXHIBIT C
FORM OF LEASE ASSIGNMENT AND ASSUMPTION
AGREEMENT
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN
TO:
_______________________
_______________________
_______________________
_______________________
Attn: __________________
______________________________________________
_____________________
LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS LEASE ASSIGNMENT AND ASSUMPTION
AGREEMENT (this "Assignment") is made as of
the ______________________ day of
_____________, 2000, by and between LAMONTS
APPAREL, INC., a Delaware corporation
("Assignor"), and GOTTSCHALKS INC., a Delaware
corporation ("Assignee"). Terms used herein
and not otherwise defined shall have the
meanings assigned to them in the Asset
Purchase Agreement dated April 24, 2000, by
and between Assignor and Assignee (the
"Agreement").
W I T N E S S E T H :
WHEREAS, pursuant to the Agreement,
Assignor has agreed to assign, transfer and
convey and Assignee has agreed to acquire and
accept the interest of Assignor under the
leases described on Exhibit 1 attached hereto
(the "Leases"), which Leases relate to that
certain real property described on Exhibit 2
attached hereto; and
WHEREAS, Assignee has agreed under
the Agreement to assume Assignor's obligations
to perform under the Leases, but only if and
to the extent that the same arise after the
Closing Date.
NOW, THEREFORE, with reference to
the foregoing recitals, which are incorporated
herein by this reference and for other good
and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged,
the parties hereto do hereby agree as follows:
1. Assignor does hereby assign,
grant, transfer and convey to Assignee all of
its right, title and interest as lessee under
the Leases.
2. Assignee accepts the foregoing
assignment and assumes Seller's obligations to
perform under the Leases, but only if and to
the extent that the same arise after the
Closing Date.
3. Assignor shall not further
assign, grant, transfer, sell, convey,
mortgage, pledge or otherwise encumber all or
any portion of its interest in the Leases.
Any attempted further assignment, grant,
transfer, sale, conveyance, mortgage, pledge
or other encumbrance, whether made voluntarily
or otherwise, shall be void and of no effect.
4. The persons executing this
Assignment hereby represent and warrant that
they are duly authorized to execute and
deliver this Agreement on behalf of Assignor
or Assignee, as the case may be.
5. This Assignment may be executed
in any number of counterparts, each of which
shall be deemed an original, but all of which
together shall constitute only one instrument.
IN WITNESS WHEREOF, the parties
hereto have caused this Assignment to be
executed as of the date first above written.
"Assignor"
LAMONTS APPAREL, INC.
By
Name:
Title:
"Assignee"
GOTTSCHALKS INC.
By
Name:
Title:
EXHIBIT 1 (to Exhibit C of Asset Purchase
Agreement)
THE LEASE
[insert copy of Lease]
EXHIBIT 2 (to Exhibit C of Asset Purchase
Agreement)
DESCRIPTION OF PROPERTY
[Use only if Exhibit 1 does not include this
information]
EXHIBIT D
FORM OF LESSOR ESTOPPEL CERTIFICATE
Gottschalks Inc.
7 River Park Place East
Fresno, California 92729
Attn: ___________________
RE: [reference lease] (the "Lease")
with respect to certain
premises (the "Leased
Premises)") in the [reference
mall and location] (the
"Shopping Center")
The undersigned (the "Landlord"),
the landlord under the Lease covering the
Leased Premises, has been informed by Lamonts
Apparel, Inc. ("Lamonts"), the tenant under
the Lease, that Lamonts has assigned or will
assign the Lease to Gottschalks Inc.
("Gottschalks") and that Gottschalks has
assumed or will assume the obligations of
Lamonts under the Lease (collectively, the
"Assignment").
As a condition precedent to the
Assignment, Gottschalks is requiring and will
be relying on this landlord estoppel
certificate (this "Certificate").
Accordingly, Landlord hereby certifies to
Gottschalks the following to Landlord's best
knowledge as of the date hereof:
1. Landlord is the lessor under
the Lease, pursuant to which Lamonts leases
the Leased Premises. The Lease has not been
modified, changed, altered, supplemented or
amended in any respect, nor have any
provisions thereof been waived [except as
described in the reference line of this
letter].
2. The lease is valid and in full
force and effect on the date hereof. Landlord
does not have any other agreements with
Lamonts with respect to the Lease or the
Leased Premises.
3. Lamonts is the current tenant
under the Lease. All rents or other sums
(including, but not limited to, taxes,
utilities, maintenance fees, and insurance)
due and payable under the Lease have been paid
through the date of this Certificate. No
rents or other charges (including, but not
limited to, taxes, utilities, maintenance fees
and insurance) have been prepaid, other than
as provided in the Lease.
4. No event has occurred and no
condition exists that constitutes, or that
would constitute with the giving of notice or
the lapse of time or both, a default by
Landlord or by Lamonts under the Lease.
Landlord has no existing credits, defenses,
offsets or counterclaims against the
enforcement of the Lease by Lamonts.
5. All work required to be
performed by Lamonts under the Lease has been
completed, and all conditions of the Lease
required to be satisfied by Lamonts have been
satisfied, other than ongoing obligations such
as the payment of rent.
6. The term of the Lease is
_____________.
7. The security deposit held by
the Landlord under the Lease is $________.
8. Landlord has no knowledge of
and has received no notice of any assignment,
hypothecation and pledge of Lamonts' interest
in the Lease (other than the "Assignment").
9. Landlord has not received any
notice of any present violation of any laws,
regulations or ordinances relating to the use
or condition of the Leased Premises or the
Shopping Center.
10. Landlord does not currently
engage in or permit, and has not in the past
engaged in or permitted, within or upon the
Leased Premises or the Shopping Center, any
use or disposal of any toxic or hazardous
substances which are regulated under any
federal, state, county or municipal laws,
regulations or ordinances, other than minimal,
non-reportable quantities of substances used
in the ordinary course of business. To
Landlord's knowledge, no occupant of any
portion of the Shopping Center has used or
disposed of any toxic or hazardous substances
on the Shopping Center premises, other than
minimal, non-reportable quantities of
substances used by such occupant in the
ordinary course of business.
11. Landlord is not the subject of
any voluntary actions or, to Landlord's
knowledge, involuntary actions under any
insolvency or bankruptcy laws.
12. This Certificate binds Landlord
and its representatives, successors and
assigns. Landlord shall notify all successor
owners, assignees and mortgagees of the
existence and terms of this Certificate.
Landlord understands that Gottschalks is
relying upon the truth of the statements made
in this Certificate in entering into the
Assignment, and this Certificate shall inure
to the benefit of Gottschalks, Lamonts and
their respective representatives, successors
and assigns. The undersigned has the power
and authority to render this certificate on
behalf of Landlord.
Date: ___________, 2000
"LANDLORD"
[NAME OF
LANDLORD]
By:_________________________
Name:
Title:
EXHIBIT E
FORM OF LANDLORD AGREEMENT
CONGRESS FINANCIAL CORPORATION, a
Delaware corporation ("Lender") has entered
into financing agreements with Gottschalks
Inc., a Delaware corporation ("Debtor")
pursuant to which Lender has been granted a
security interest in any or all of Debtor's or
its affiliates' personal property, including,
but not limited to, inventory and equipment
(hereinafter "Personal Property"). For
purposes of this landlord agreement (this
"Agreement"), the term "Personal Property"
does not include plumbing and electrical
fixtures, heating, ventilation and air
conditioning, wall and floor coverings, walls
or ceilings and other fixtures not
constituting trade fixtures. Some or part of
the Personal Property has or may from time to
time become affixed to or be located on,
wholly or in part, the real property leased by
Debtor or its affiliates located at
[location], the legal description of which is
attached as Exhibit A (the "Premises"). The
undersigned is the owner or lessor of the
Premises.
The undersigned agrees as follows:
1. The undersigned waives and
relinquishes any landlord's lien, rights or
levy or distraint, claim, security interest or
other interest the undersigned may now or
hereafter have in or with respect to any of
the Personal Property, whether for rent or
otherwise.
2. The Personal Property may be
installed in or located on the Premises and is
not and shall not be deemed a fixture or part
of the real property but shall at all times be
considered personal property.
3. Lender, at its option, may
enter and use the Premises for the purposes of
repossessing, removing, selling or otherwise
dealing with any of the Personal Property, and
such license shall be irrevocable and shall
continue from the date Lender enters the
Premises for a period of up to ninety (90)
days after the receipt by Lender of written
notice from the undersigned directing removal
of the Personal Property; provided, that (a)
for each day that Lender uses the Premises
pursuant to the rights granted to it
hereunder, unless the undersigned has
otherwise been paid rent in respect to any of
such period, Lender shall pay the regularly
scheduled rent provided under the lease
relating to such Premises between the
undersigned and Debtor (the "Lease"), prorated
on a per diem basis to be determined on a
thirty (30) day month, without hereby assuming
the Lease or incurring any other obligations
of Debtor and (b) any damage to the Premises
caused by Lender or its representatives will
be repaired by Lender at its sole expense.
4. The undersigned agrees to send
notice in writing of any default under the
Lease to:
Congress Financial
Corporation
251 South Lake Avenue,
Suite 900
Pasadena, California 91101
Attention: Kristine Metchikian
Upon receipt of such notice, Lender shall have
the right, but not the obligation, to cure
such default within ten (10) days thereafter.
Any payment made or act done by Lender to cure
any such default shall not constitute an
assumption of the Lease or any obligations of
Debtor.
5. This waiver may not be changed
or terminated orally or by a course of conduct
and is binding upon the undersigned and the
heirs, personal representatives, successors
and assigns of the undersigned and inures to
the benefit of Lender and the successors and
assigns of Lender.
6. LANDLORD WAIVES ANY RIGHT TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
ARISING OUT OF THIS AGREEMENT.
Dated this ____ day of ____________,2000.
[LANDLORD]
By:________
Name:
Title:
EXHIBIT F
FORM OF MALL AGREEMENT ESTOPPEL CERTIFICATE
FORM OF ESTOPPEL CERTIFICATE FOR MALL
AGREEMENTS
TO: Gottschalks Inc.
7 River Park Place East
Fresno, California 93729
Attn:
Re: Reciprocal Easement Agreement - [name of shopping
center] (the "Shopping Center"), [city],Washington
The undersigned has been informed by
Lamonts Apparel, Inc. ("Lamonts") that
Gottschalks Inc. ("Gottschalks") intends to
purchase certain assets of Lamonts (the
"Acquisition"). Lamonts presently
[owns/leases] and operates a department store
in the Shopping Center. After the
Acquisition, Gottschalks will continue to
operate the department store currently
operated by Lamonts in the Shopping Center.
The department store will be operated under
the trade name "Gottschalks".
The Shopping Center premises are
encumbered and benefited by that certain
[title of reciprocal easement agreement]
described in Schedule 1 hereto (the "REA").
As a condition precedent to the Acquisition,
Gottschalks is requiring and will be relying
on this Estoppel Certificate (this
"Certificate").
The undersigned, a "Party" to the
REA [and a party to the Additional Agreement
described in Schedule 2 hereto (the
"Additional Agreement")], hereby confirms, as
of the date of this Certificate, as follows:
1. To the knowledge of the
undersigned, no party is in default
under the REA [or the Additional
Agreement].
2. There has been no assignment,
modification or amendment of the REA
[or the Additional Agreement].
3. The REA [and the Additional
Agreement] [is/are] in full force
and effect.
This Certificate is for the benefit
of and may be relied upon by Gottschalks and
its successors and assigns from time to time.
Very truly yours,
By:
Name:
Title:
Date: ____________________, 2000
SCHEDULE 1
Description of REA
[Insert description of REA]
[SCHEDULE 2]
[Description of Additional Agreement]
[[Insert description of Additional Agreement]]
EXHIBIT G
FORM OF SUBORDINATION, NONDISTURBANCE AND
ATTORNMENT AGREEMENT
PREPARED BY AND
RETURN TO WHEN RECORDED:
Gottschalks Inc.
7 River Park Place East
Fresno, California 93729
Attn:
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
AGREEMENT
THIS AGREEMENT is made and entered
into as of the _____ day of ____________,
2000, by and between
_____________________________ ("Lender") and
GOTTSCHALKS INC., 7 River Park Place East,
Fresno, California 93729 ("Tenant").
WITNESSETH:
WHEREAS, by the lease described on
Schedule 1 hereto (the "Lease"), the Tenant
has leased from ______________________
("Landlord") certain premises ("Premises")
located in the City of _____________, County
of _______________, State of ______________,
which Premises are legally described on
Schedule 2 attached hereto, together with and
subject to various easements and rights as
referenced in the Lease.
WHEREAS, Lender is the holder of a
[deed of trust and assignment of rents] on the
Premises, given to the Lender by Landlord,
dated as of ___________ ____, 19___, recorded
in the Official Records of ______________
County, _______________ as Instrument No.
_____________ (collectively referred to herein
with any other documents securing the debt
secured by the deed of trust as the
"Mortgage").
NOW, THEREFORE, in consideration of
the premises and other valuable consideration,
the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree
as follows:
1. Lender hereby consents to the
Lease. The Lease and all extensions,
renewals, replacements or modifications
thereof are and shall be subject and
subordinate to the Mortgage and all terms and
conditions thereof insofar as it affects the
Premises, and to all renewals, modifications,
consolidations, replacements and extensions
thereof, to the full extent of amounts secured
thereby and interest thereon.
2. Tenant shall attorn to and
recognize any purchaser at a foreclosure sale
under the Mortgage, any transferee who
acquires the Premises by deed in lieu of
foreclosure, and the successors and assigns of
such purchaser(s), as its landlord for the
unexpired balance (and any extensions, if
exercised) of the term of the Lease on the
same terms and conditions set forth in the
Lease.
3. If it becomes necessary to
foreclose the Mortgage, Lender shall neither
terminate the Lease nor join Tenant in summary
or foreclosure proceedings so long as Tenant
is not in default under any of the terms,
covenants or conditions of the Lease.
4. Nothing herein contained shall
impose any obligations upon Lender to perform
any of the obligations of Landlord as landlord
under the Lease, unless and until Lender shall
become owner or lender in possession of the
Premises.
5. Any notice required or desired
to be given under this Agreement shall be in
writing and shall be deemed given (a) upon
receipt if delivered personally; (b) two (2)
business days after being deposited into the
U.S. mail if being sent by certified or
registered mail, return receipt requested,
postage prepaid; or (c) one (1) business day
after being sent by reputable overnight
courier service (e.g., Federal Express,
Airborne, etc.) with guaranteed overnight
delivery, and addressed as follows:
If to Lender:
If to Tenant: GOTTSCHALKS INC.
[Store Address]
Attn: Manager
With a copy to: GOTTSCHALKS INC.
7 River Park Place East
Fresno, California 93729
Attn: General Counsel
6. This Agreement shall be binding
upon and inure to the benefit of any person or
entity acquiring rights to the Premises by
virtue of the Mortgage, and the successors,
administrators and assigns of the parties
hereto.
[SIGNATURES APPEAR ON NEXT PAGE]
IN WITNESS WHEREOF, the parties hereto
have executed these presents as of the day and
year first above written.
LENDER:
By:
Name:
Title:
TENANT: GOTTSCHALKS INC.,
a Delaware corporation
By:
Name:
Title:
State of___________ )
) SS.
County of _______________ )
On ______________________, 2000 before me,
___________________________, personally
appeared
______________________________________,
personally known to me (or proved to me on the
basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me
that he/she/they executed the same in
his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the
instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed
the instrument.
WITNESS my hand and official seal.
Signature ________________________________
(Seal)
State of Washington )
) SS.
County of ___________________)
On ______________________, 2000 before me,
___________________________, personally
appeared
______________________________________,
personally known to me (or proved to me on the
basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me
that he/she/they executed the same in
his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the
instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed
the instrument.
WITNESS my hand and official seal.
Signature ________________________________
(Seal)
SCHEDULE 1
Description of Lease
[Insert description of Lease]
SCHEDULE 2
Description of Premises
[Insert description of Premises]
ARTICLE I
DEFINITIONS
1.1 General Provisions 1
1.2 Specific Provisions 1
ARTICLE II
PURCHASE AND SALE OF ASSETS; ASSUMPTION
OF LIABILITIES
2.1 Purchase and Sale of Assets 5
2.2 Assumed Liabilities 6
2.3 No Other Assets Purchased or
Liabilities Assumed 6
ARTICLE III
PURCHASE PRICE; CLOSING
3.1 Total Purchase Price; Cash
Portion; Allocation 6
3.2 Closing 7
3.3 Items to be Delivered at the
Closing by Seller 7
3.4 Items to be Delivered at the
Closing by Buyer 7
3.5 Circumstances Under Which
Certain Assumed Contracts May
Be Excluded 8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 Organization and Related
Matters 8
4.2 Leases, Mall Agreements and
Assumed Contracts 8
4.3 Title 9
4.4 Authorization;No Conflicts 10
4.5 Condition of Property 10
4.6 Legal Proceedings; Labor
Matters 10
4.7 Insurance 11
4.8 Permits 11
4.9 Compliance with Law;
Environmental Matters 11
4.10 Employee Benefits 11
4.11 Year 2000 Compliance 12
4.12 No Brokers or Finders 13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 Organization and Related
Matters 13
5.2 Authorization; No Conflicts 13
5.3 Ability to Perform 14
5.4 No Brokers or Finders 14
ARTICLE VI
INTERIM COVENANTS
6.1 Access 14
6.2 Notice of Certain Developments 14
6.3 Conduct of Business 14
6.4 Permits and Approvals; Lease
and Mall Agreement Cure
Payments 15
6.5 Prorations; Sales and Transfer
Taxes 16
6.6 Certain Employee Matters 16
6.7 Acquisition Proposals; Minimum
Overbid Proposals; Expense
Reimbursement 17
ARTICLE VII
GENERAL CONDITIONS TO OBLIGATIONS OF THE
PARTIES
7.1 General Conditions 18
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
8.1 Conditions to Obligations of
Buyer 18
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF SELLER
9.1 Conditions to Obligations of
Seller 19
ARTICLE X
TERMINATION OF OBLIGATIONS; SURVIVAL
10.1 Termination of Agreement 19
10.2 Effect of Termination 20
10.3 Survival of Representations and
Warranties 20
ARTICLE XI
GENERAL
11.1 Amendments; Waivers 20
11.2 Disclosure Schedule; Buyer
Disclosure Schedule; Exhibits;
Integration 20
11.3 Best Efforts; Further
Assurances; Power of Attorney 20
11.4 Governing Law 21
11.5 No Assignment 21
11.6 Headings 21
11.7 Counterparts 21
11.8 Publicity and Reports 21
11.9 Parties in Interest 21
11.10Notices 21
11.11Expenses 23
11.12Remedies 23
11.13Attorneys' Fees 23
11.14Representation by Counsel; Interpretation 23
11.15Severability 23
11.16Calendar Days; Holidays 24
11.17Effectiveness 24
11.18Disclosure Schedule 24
EXHIBITS
A Form of Bill of Sale and Assignment
B Form of Assignment and Assumption Agreement
C Form of Lease Assignment and Assumption Agreement
D Form of Lessor Estoppel Certificate
E Form of Landlord Agreement
F Form of Mall Agreement Estoppel Certificate
G Form of Subordination,Nondisturbance and Attornment Agreement
ASSET PURCHASE AGREEMENT
dated as of
APRIL 24, 2000
by and between
LAMONTS APPAREL, INC.
and
GOTTSCHALKS INC.
