UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from
_________________ to ______________________.
Commission file number 1-09100
Gottschalks Inc.
-------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 77-0159791
--------------------------- -----------------
State or other jurisdiction (I.R.S.Employer
of incorporation or Identification No.)
organization)
7 River Park Place East, Fresno, California 93720
------------------------------------------- -------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (559)434-4800
-------------
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the
Registrant was required to file such reports);
and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
---- ----
The number of shares of the Registrant's
common stock outstanding as of May 31, 2000
was 12,596,837.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION ---------
-----------------------------
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
April 29, 2000, January 29, 2000 and May 1, 1999 2
Consolidated statements of operations -
thirteen weeks ended April 29, 2000 and May 1, 1999 3
Condensed consolidated statements of cash flows -
thirteen weeks ended April 29, 2000 and May 1, 1999 4
Notes to condensed consolidated financial statements -
thirteen weeks ended April 29, 2000 and May 1, 1999 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
----------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
--------------------------------------------------------------------
April 29, January 29, May 1,
2000 2000 1999
--------- ---------- ---------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,462 $ 1,901 $ 2,319
Retained interest in receivables sold 21,322 29,138 16,651
Receivables - net 5,795 7,597 6,083
Merchandise inventories 152,769 130,028 143,264
Other 9,322 9,666 12,068
------- ------- -------
Total current assets 191,670 178,330 180,385
PROPERTY AND EQUIPMENT 185,888 184,119 173,189
Less accumulated depreciation and
amortization 66,295 63,726 56,494
------- ------- -------
119,593 120,393 116,695
OTHER LONG-TERM ASSETS 15,140 15,281 17,123
------- ------- -------
$326,403 $314,004 $314,203
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and
other current liabilities $ 68,780 $ 63,653 $ 68,826
Revolving line of credit 15,154 5,479 16,785
Current portion of long-term
obligations 4,161 4,479 4,507
------- ------- -------
Total current liabilities 88,095 73,611 90,118
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 50,000 50,000 40,000
Notes and mortgage loans payable 24,394 25,123 27,276
Capitalized lease obligations 5,382 5,551 6,152
------- ------- -------
79,776 80,674 73,428
DEFERRED INCOME & OTHER 28,089 28,520 27,564
SUBORDINATED NOTE PAYABLE
TO AFFILIATE 21,046 20,961 20,704
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 109,397 110,238 102,389
------- ------- -------
$326,403 $314,004 $314,203
======= ======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
Thirteen Weeks
Ended
------------------------------
April 29, May 1,
2000 1999
---------- --------
<S> <C> <C>
Net sales $120,928 $111,104
Net credit revenues 2,310 2,237
Net leased department revenues 701 1,185
------- -------
123,939 114,526
Costs and expenses:
Cost of sales 80,188 73,477
Selling, general & administrative expenses 40,266 38,420
Depreciation & amortization 2,578 2,277
------- -------
123,032 114,174
------- -------
Operating income 907 352
Other (income) expense:
Interest expense 2,651 2,552
Miscellaneous income (354) (349)
------- -------
2,297 2,203
------- -------
Loss before income tax benefit (1,390) (1,851)
Income tax benefit (549) (772)
------- -------
Net loss $ (841) $ (1,079)
======= =======
Net loss per common share - basic and
diluted $ (0.07) $ (0.09)
======= =======
Weighted average number of
common shares outstanding -
basic and diluted 12,597 12,575
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - Note 1)
(In thousands of dollars)
----------------------------------------------------------------------------
Thirteen Weeks
Ended
-------------------------
April 29, May 1,
2000 1999
--------- -------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (841) $ (1,079)
Adjustments:
Depreciation and amortization 2,578 2,277
Provision for credit losses 298 228
Other adjustments, net (345) (771)
Changes in operating assets and liabilities:
Receivables 1,504 22
Merchandise inventories (22,555) (19,930)
Other current and long-term assets 303 151
Trade accounts payable 13,181 5,448
Other current and long-term liabilities (8,909) (9,791)
------- -------
Net cash used in operating activities (14,786) (23,445)
INVESTING ACTIVITIES:
Available-for-sale securities:
Maturities (66,784) (78,090)
Purchases 74,600 86,947
Capital expenditures (1,817) (5,409)
Other 49 49
------- -------
Net cash provided by investing
activities 6,048 3,497
FINANCING ACTIVITIES:
Net proceeds (repayments) under revolving
line of credit 9,675 (3,488)
Proceeds from issuance of 1999-1 Series
certificate 53,000
Principal payments on outstanding Series
certificates (28,400)
Principal payments on long-term obligations (1,230) (1,113)
Proceeds from long-term obligations 500
Changes in cash management liability and other 854 75
------- -------
Net cash provided by financing activities 9,299 20,574
------- -------
INCREASE IN CASH 561 626
CASH AT BEGINNING OF PERIOD 1,901 1,693
------- -------
CASH AT END OF PERIOD $ 2,462 $ 2,319
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen Weeks Ended April 29, 2000 and May 1,1999
-----------------------------------------------------------------------
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Gottschalks Inc. is a regional department and
specialty store chain based in Fresno,
California, currently consisting of forty-two
full-line department stores and twenty
specialty stores which carry a limited
selection of merchandise. The Company's
department stores are located primarily in non-
major metropolitan cities throughout
California and in Oregon, Washington and
Nevada, and typically offer a wide range of
moderate and better brand-name and private-
label merchandise, including men's, women's,
junior's and children's apparel, cosmetics,
shoes and accessories, home furnishings and
other consumer goods. The Company operates in
one reportable operating segment.
The accompanying unaudited condensed
consolidated financial statements include the
accounts of Gottschalks Inc. and its wholly-
owned subsidiary, Gottschalks Credit
Receivables Corporation ("GCRC") (see Note 3).
Such financial statements have been prepared
in accordance with accounting principles
generally accepted in the United States of
America for interim financial information and
the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not
include all of the information and footnotes
required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments
(consisting primarily of normal recurring
accruals) considered necessary for a fair
presentation have been included. Operating
results for the thirteen week period ended
April 29, 2000 are not necessarily indicative
of the results that may be expected for the
year ending February 3, 2001 (fiscal 2000),
due to the seasonal nature of the Company's
business and its LIFO inventory valuation
adjustment ("LIFO adjustment"), currently
recorded only at the end of each fiscal year.
These financials statements should be read in
conjunction with the Company's Annual Report
on Form 10-K for the year ended January 29,
2000 (the "1999 Annual Report on Form 10-K").
Effective the end of fiscal 1999, the Company
implemented the provisions of Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements", 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.
The condensed consolidated balance sheet at
January 29, 2000, has been derived from the
audited consolidated financial statements at
that date.
2. BUSINESS ACQUISITION
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 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. In January 2000, Lamonts
filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code, which
subjected the purchase to approval by the
Bankruptcy Court. On May 16, 2000, following
negotiations among Gottschalks, Lamonts and
representatives of Lamont's creditors
committee, the Bankruptcy Court issued a
judgement approving Gottschalks' purchase of
thirty-seven stores from Lamonts for a cash
purchase price of $20.1 million (hereinafter
referred to as the "Lamonts acquisition"). The
Company has also agreed to accept $2.5 million
from one store landlord to terminate that
store's lease. As a result, the Company will
acquire thirty-six stores for a net cash
purchase price of $17.6 million.
On May 25, 2000, an appeal was filed by
another bidder to reverse the Bankruptcy
Court's decision. Management believes the
likelihood of a successful appeal is extremely
remote, and that the acquisition will close as
originally expected, on or about July 24,
2000. However, there can be no absolute
assurance that the transaction will close, or
its closing will not be accelerated or
delayed, subject to a variety of conditions
precedent and other factors.
3. RECEIVABLES SECURITIZATION PROGRAM
As described more fully in the Company's 1999
Annual Report on Form 10-K, the Company's
receivables securitization program provides
the Company with a source of working capital
and long-term financing that is generally more
cost-effective that traditional debt
financing. Under the program, the Company
automatically sells all of its accounts
receivable arising under its private-label
credit cards 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. The Company
accounts for the transfer of receivables to
GCC Trust as sales for financial reporting
purposes, pursuant to the provisions of
Statement of Financial Accounting Standards
No. 125.
Under the program, a $53.0 million principal
amount 7.66% Fixed Base Class A-1 Credit Card
Certificate (the "1999-1 Series") was issued
on March 1, 1999 to a single investor through
a private placement. 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 treated as off-balance
sheet for financial reporting purposes, is to
be repaid in twelve equal monthly installments
commencing September 2003 and continuing
through August 2004. 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
the payment of monthly interest to the
investor, and are then available to fund the
working capital requirements of the Company.
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 Company may expand the program
to meet future receivables growth.
4. MERCHANDISE INVENTORIES
Inventories, which consist of merchandise held
for resale, are valued by the retail method
and are stated at last-in, first-out (LIFO)
cost, which is not in excess of market value.
The Company includes in inventory the
capitalization of certain indirect costs
related to the purchasing, handling and
storage of merchandise to better match sales
with those related costs. Current cost, which
approximates replacement cost, under the first-
in, first-out (FIFO) method was equal to the
LIFO value of inventories at January 29, 2000.
A valuation of inventory under the LIFO method
is presently made only at the end of each year
based on actual inventory levels and costs at
that time. Since these factors are subject to
variability beyond the control of management,
interim results of operations are subject to
the final year-end LIFO inventory valuation
adjustment. Management does not currently
anticipate that its year-end LIFO adjustment
will materially effect its fiscal 2000
operating results.
5. TRADE ACCOUNTS PAYABLE AND OTHER CURRENT LIABILTIIES
<TABLE>
<CAPTION>
Trade accounts payable and other current liabilities consist of the
following:
April 29, January 29, May 1,
(In thousands of dollars) 2000 2000 1999
----------------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts payable $28,799 $15,617 $28,626
Cash management liability 10,880 10,027 12,253
Taxes, other than income taxes 7,158 11,141 6,447
Accrued expenses 8,081 9,958 7,919
Accrued payroll and related
liabilities 7,363 6,861 5,855
Federal and state income taxes
payable 1,821 5,372 3,256
Deferred income taxes 4,677 4,677 4,470
------ ------ ------
$68,779 $63,653 $68,826
====== ====== ======
</TABLE>
6. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit
arrangement with Congress Financial
Corporation ("Congress"), which provides the
Company with a $180.0 million facility through
March 30, 2002. Borrowings under the facility
are limited to a restrictive borrowing base
equal to 75% of eligible merchandise
inventories and, at the Company's option, may
be increased to 80% from November 1 through
December 31 of each year to fund increased
seasonal inventory requirements. Interest
under the facility is charged at a rate of
LIBOR plus 1.875% (8.11% at April 29, 2000),
with no interest charged on the unused portion
of the line of credit. The maximum amount
available for borrowings under the line of
credit was $98.4 million as of April 29, 2000,
of which $65.2 million was outstanding as of
that date. Of that amount, $50.0 million and
$40.0 million has been classified as long-term
in the accompanying financial statements as of
April 29, 2000 and May 1, 1999, respectively,
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
April 29, 2000.
7. WEIGHTED AVERAGE NUMBER OF SHARES
<TABLE>
<CAPTION>
First Quarter
------------------
2000 1999
------- -------
(Share data in thousands)
Weighted average number
<S> <C> <C>
of shares - basic 12,597 12,575
Incremental shares from
assumed issuance of
stock options
(treasury stock method) --- ---
------ ------
Weighted average number
of shares - diluted 12,597 12,575
====== ======
</TABLE>
Options with an exercise price greater than
the average market price of the Company's
common stock during the period, or outstanding
in a period in which the Company reports a net
loss, are excluded from the computation of the
weighted average number of shares on a diluted
basis, as such options are anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
The Company is party to legal proceedings and
claims which arise during the ordinary course
of business. In the opinion of management, the
ultimate outcome of such litigation and claims
is not expected to have a material adverse
effect on the Company's financial position or
results of its operations.
The Company has entered into an agreement to
open one new department store in Grants Pass,
Oregon, in August 2000, and is in process of
remodeling several existing locations. The
estimated remaining cost of these projects as
of April 29, 2000, totaling $6.2 million, is
expected to be provided for from existing
financial resources. As described more fully
in Note 2, the Company has entered into a
definitive asset purchase agreement and a
lease termination agreement to acquire 36
stores for $17.6 million in cash.
GOTTSCHALKS INC. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------------------
Following is management's discussion and
analysis of significant factors which have
affected the Company's financial position and
its results of operations for the periods
presented in the accompanying condensed
consolidated financial statements. The
Company's operating results, like those of
most retailers, are subject to seasonal
influences, with the major portion of sales,
gross margin and operating results realized
during the fourth quarter of each fiscal year.
This business seasonality may result in
performance for the thirteen week period ended
April 29, 2000 (hereinafter referred to as the
"first quarter" of fiscal 2000) which is not
necessarily indicative of performance for the
remainder of the year. In addition, effective
the end of 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.
Thirteen Weeks Ended April 29, 2000 Compared
to Thirteen Weeks Ended May 1, 1999
------------------------------------------------------
Results of Operations
---------------------
The following table sets forth the Company's
Consolidated Statements of Operations as a
percent of net sales:
<TABLE>
<CAPTION>
First Quarter
2000 1999
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 1.9 2.0
Net leased department revenues 0.6 1.1
----- -----
102.5 103.1
Cost and expenses:
Cost of sales 66.3 66.1
Selling, general and administrative
expenses 33.3 34.6
Depreciation and amortization 2.1 2.1
----- -----
101.7 102.8
----- -----
Operating income 0.8 0.3
Other (income) expense:
Interest expense 2.2 2.3
Miscellaneous income (0.3) (0.3)
----- -----
1.9 2.0
----- -----
Loss before income tax benefit (1.1) (1.7)
Income tax benefit (0.4) (0.7)
----- -----
Net Loss (0.7)% (1.0)%
</TABLE>
First Quarter of Fiscal 2000 Compared to First Quarter of Fiscal 1999
----------------------------------------------------------------------
Net Sales
---------
Net sales increased by approximately $9.8
million to $120.9 million in the first quarter
of fiscal 2000 as compared to $111.1 million
in the first quarter of fiscal 1999, an
increase of 8.8%. This increase is primarily
due to a 6.9% 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. The increase is also due to
additional sales volume generated by two new
stores opened in Danville and Davis,
California, in October and November 1999,
respectively.
Net Credit Revenues
-------------------
Net credit revenues related to the Company's
credit card receivables portfolio increased by
$73,000, or 3.3%, in the first quarter of
fiscal 2000 as compared to the first quarter
of fiscal 1999. As a percent of net sales, net
credit revenues was 1.9% of net sales in the
first quarter of fiscal 2000 as compared to
2.0% in the first quarter of fiscal 1999. Net
credit revenues consist of the following:
<TABLE>
<CAPTION>
First Quarter
(In thousands of dollars) 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Service charge revenues $4,025 $3,835
Interest expense on securitized
receivables (1,015) (1,009)
Charge-offs on receivables sold
and provision for credit
losses on receivables ineligible
for sale (790) (646)
Gain on sale of receivables 90 57
------ ------
$2,310 $2,237
====== ======
</TABLE>
Service charge revenues increased by $190,000,
or 5.0%, in the first quarter of fiscal 2000
as compared to the first quarter of
fiscal1999. This increase is primarily due to
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 as compared to the prior
year.
Interest expense on securitized receivables
increased by $6,000, or 0.6%, in the first
quarter of fiscal 2000 as compared to the
first quarter of fiscal 1999. Increased
interest expense on securitized receivables in
the first quarter of fiscal 2000 resulting
from a higher level of outstanding securitized
borrowings and a higher weighted-average
interest rate applicable to such borrowings
during the period (7.7% in the first quarter
of fiscal 2000 as compared to 7.4% in the
first quarter of fiscal 1999), was
substantially offset by fees paid in the first
quarter of fiscal 1999 in connection with the
retirement of previously outstanding
certificates under the program. Charge-offs
on receivables sold and the provision for
credit losses on receivables ineligible for
sale increased by $144,000, or 22.3%, in the
first quarter of fiscal 2000 as compared to
the first quarter of fiscal 1999. As a percent
of sales, such losses increased to 0.7% in the
first quarter of fiscal 2000 as compared to
0.6% in the first quarter of fiscal1999. The
gain on the sale of receivables during the
first quarter of fiscal 2000 was not
materially different from the first quarter of
fiscal 1999.
Net Leased Department Revenues
-------------------------------
Net rental income generated by the Company's
various leased departments decreased by
$484,000, or 40.8%, to $701,000 in the first
quarter of fiscal 2000 as compared to $1.2
million in the first quarter of fiscal 1999.
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
sales are presented net of the related costs
for financial reporting purposes. Sales
generated in the Company's leased departments,
consisting primarily of the shoe departments
(prior to August 1, 1999), fine jewelry
departments and beauty salons, decreased by
$3.3 million, or 40.7%, to $4.8 million in the
first quarter of fiscal 2000 as compared to
$8.1 million in the first quarter of fiscal
1999.
Cost of Sales
-------------
Cost of sales, which includes costs associated
with the buying, handling and distribution of
merchandise, increased by approximately $6.7
million to $80.2 million in the first quarter
of fiscal 2000 as compared to $73.5 million in
the first quarter of fiscal 1999, an increase
of 9.1%. Due to higher markdowns as a
percentage of sales, the Company's gross
margin percentage decreased slightly to 33.7%
in the first quarter of fiscal 2000 as
compared to 33.9% in the first quarter of
fiscal 1999.
Selling, General and Administrative Expenses
-------------------------------------------
Selling, general and administrative expenses
increased by approximately $1.9 million to
$40.3 million in the first quarter of fiscal
2000 as compared to $38.4 million in the first
quarter of fiscal 1999, an increase of 4.8%.
As a percent of net sales, selling, general
and administrative expenses decreased to 33.3%
in the first quarter of fiscal 2000 as
compared to 34.6% in the first quarter of
fiscal 1999. This decrease as a percent of
net sales arose from the leveraging of fixed
costs and corporate overhead against a higher
sales base and from continued efforts to
reduce costs and improve efficiencies in all
areas of the Company's operations.
Depreciation and Amortization
-----------------------------
Depreciation and amortization expense, which
includes the amortization of goodwill,
increased by approximately $300,000 to $2.6
million in the first quarter of fiscal 2000 as
compared to $2.3 million in the first quarter
of fiscal 1999, an increase of 13.2%. As a
percent of net sales, depreciation and
amortization expense remained unchanged at
2.1% in the first quarters of fiscal 2000 and
1999. The dollar increase is primarily due to
additional depreciation related to capital
expenditures for the renovation of existing
stores, and for the two new stores opened in
Danville and Davis, California, in late fiscal
1999.
Interest Expense
----------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $100,000 to $2.7
million in the first quarter of fiscal 2000 as
compared to $2.6 million in the first quarter
of fiscal 1999, an increase of 3.9%. As a
percent of net sales, interest expense
decreased to 2.2% in the first quarter of
fiscal 2000 as compared to 2.3% in the first
quarter of fiscal 1999. The dollar increase
is primarily due to higher average outstanding
borrowings on the Company's working capital
facility, combined with an increase in the
weighted-average interest rate applicable to
the facility (7.97% in the first quarter of
fiscal 2000 as compared to 7.14% in the first
quarter of fiscal 1999). Effective March 1,
2000, the Company received a 1/8% reduction to
the interest rate on its working capital
facility. The reduction in interest expense
resulting from this decrease, however, was
exceeded by the effects of increases in LIBOR
and prime interest rates during in the first
quarter of fiscal 2000.
Interest expense related to securitized
receivables is reflected as a reduction of net
credit revenues and is not included in
interest expense for financial reporting
purposes.
Miscellaneous Income
---------------------
Miscellaneous income, which includes the
amortization of deferred income and other
miscellaneous income and expense amounts,
remained essentially unchanged at
approximately $350,000 in the first quarters
of fiscal 2000 and 1999. As a percent of net
sales, miscellaneous income also remained
unchanged at 0.3% in the first quarters of
fiscal 2000 and 1999.
Income Taxes
------------
The Company's interim effective tax credits of
(39.5%) in the first quarter of fiscal 2000
and (41.7%) in the first quarter of fiscal
1999 relate to net losses incurred in those
periods and represent the Company's best
estimates of the annual effective tax rates
for those fiscal years.
Net Loss
--------
As a result of the foregoing, the Company's
net loss decreased by $238,000 to $841,000 in
the first quarter of 2000 as compared to
$1,079,000 in the first quarter of 1999. On a
per share basis (basic and diluted), the net
loss decreased by $0.02 per share to $(0.07)
per share in the first quarter of 2000 as
compared to $(0.09) per share in the first
quarter of 1999.
Liquidity and Capital Resources
-------------------------------
Sources of Liquidity.
As described more fully in the Company's 1999
Annual Report on Form 10-K and Notes 3 and 6
to the accompanying financial statements, the
Company's working capital requirements are
currently met through a combination of cash
provided by operations, short-term trade
credit, and by borrowings under its revolving
line of credit and its receivables
securitization program. The Company's
liquidity position, like that of most
retailers, is affected by seasonal influences,
with the greatest portion of cash from
operations generated in the fourth quarter of
each fiscal year.
Revolving Line of Credit.
The Company has a $180.0 million revolving
line of credit facility with Congress through
March 30, 2002. Borrowings under the
arrangement are limited to a restrictive
borrowing base equal to 75% of eligible
merchandise inventories and, at the Company's
option, may be increased 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 is charged at a
rate of approximately LIBOR plus 1.875%, with
no interest charged on the unused portion of
the line of credit. The Company had excess
availability of $33.2 million on the facility
as of April 29, 2000.
Receivables Securitization Program.
The Company's receivables securitization
program provides the Company with an
additional source of working capital and long-
term financing that is generally more cost-
effective than traditional debt financing.
Under the program, a $53.0 million principal
amount 7.66% Fixed Base Class A-1 Credit Card
Certificate (the "1999-1 Series") has been
issued to a single investor through a private
placement. Interest on the 1999-1 Series is
earned by the certificate holder on a monthly
basis at a fixed interest rate of 7.66%, and
the outstanding principal balance of the
certificate is to be repaid in twelve equal
monthly installments commencing September 2003
and continuing through August 2004. Monthly
cash flows generated by the Company's credit
card portfolio, consisting of principal and
interest collections, are first used to pay
certain costs of the program, which include
interest payable to the investor, and are then
available to fund the working capital
requirements of the Company. Subject to
certain conditions, the Company may expand the
securitization program to meet future
receivables growth.
Uses of Liquidity.
Capital expenditures in the first quarter of
2000, totaling $1.8 million, were primarily
related to the renovation and refixturing of
certain existing locations. The Company has
entered into an agreement to open one new
department store in Grants Pass, Oregon, in
August 2000 and is in the process of
remodeling certain existing store locations.
The $6.2 million estimated remaining cost of
the projects as of April 29, 2000 is expected
to be funded with existing financial
resources. Such projects are expected to be
fully complete in fiscal 2000. However, there
can be no assurance that the completion of
such projects will not be delayed subject to a
variety of conditions precedent or other
factors.
Business Acquisition.
As described more fully in Note 2 of the
accompanying financial statements, the Company
has entered into a definitive asset purchase
agreement with Lamonts, providing for the
Company to acquire 37 of Lamont's department
store leases and store fixtures and equipment
for a cash purchase price of $20.1 million.
The Company also entered into a separate
agreement with one store landlord to terminate
one store lease for $2.5 million, resulting in
a $17.6 million net cash purchase price for 36
stores. The Bankruptcy Court has approved the
transaction, however, an appeal has been filed
by another bidder to reverse the decision.
Management believes the likelihood of a
successful appeal is extremely remote, and
that the transaction will close as originally
expected, on or about July 24, 2000. However,
there can be no absolute assurance that the
transaction will close, or its closing will
not be accelerated or delayed, subject to a
variety conditions precedent and other
factors.
To finance the transaction, the Company has
obtained a commitment from Congress to provide
a short-term acquisition financing facility
for $10.0 million, with the remainder of the
purchase price to be funded with existing
working capital facility. The Company is also
evaluating other various short-term
acquisition financing alternatives with longer
maturities, ranging up to 36 months. The
Company expects to repay any short-term
acquisition financing 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.
Management believes the previously described
sources of liquidity will be sufficient to
provide for the Company's working capital,
capital expenditure and debt service
requirements throughout fiscal 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 it is
deemed to be advantageous.
Audit Committee
-----------------
The Company has an Audit Committee of the
Board of Directors, the charter of which
includes, among other things, overseeing the
activities of management and the Company's
external auditors, Deloitte & Touche LLP,
relative to the financial reporting process.
For fiscal 2000, the Audit Committee is
comprised of Joseph J. Penbera (Chairman),
Frederick R. Ruiz, O. James Woodward III,
William Smith and Max Gutmann. In fulfilling
the Audit Committees' responsibilities, the
Audit Committee conducted a meeting with
management and the Company's outside auditors,
prior to the issuance of quarterly earnings to
the public, to review the quality and
reliability of the Company's quarterly
financial statements for the first quarter of
2000. The Audit Committee also discussed with
management, the internal auditors and the
independent auditors the quality and adequacy
of the Company's internal controls and the
internal audit function's organization and
responsibilities.
Safe Harbor Statement.
-----------------------
Certain statements contained in this Quarterly
Report on Form 10-Q are forward-looking
statements within the meaning of Section 27A
of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-
looking statements be subject to the safe
harbors created thereby. These forward-
looking statements include the plans and
objectives of management for future operations
and the future economic performance of the
Company that involve risks and uncertainties.
Such forward-looking statements may be
identified by words including, but not limited
to: "will", "believes", "anticipates",
"intends", "seeks", "may", "expects", and "estimates", or
similar terms, variations of such terms or the
negative of such terms.
The forward-looking statements are qualified
by important factors that could cause results
to differ materially from those identified in
such forward-looking statements, including,
without limitation, the following: (i) the
ability of the Company to gauge fashion trends
and preferences of its customers; (ii) the
level of demand for the merchandise offered by
the Company; (iii) the ability of the Company
to locate and obtain favorable store sites,
negotiate acceptable lease terms, and hire and
train employees; (iv) the ability of
management to manage the planned expansion and
to successfully integrate the business
acquired from Lamonts; (v) the continued
ability to obtain adequate credit from factors
and vendors and the timely availability of
branded and other merchandise; (vi) the effect
of economic conditions, both nationally and in
the Company's specific market areas; (vii) the
effect of severe weather or natural disasters;
and (viii) the effect of competitive pressures
from other retailers. Results actually
achieved thus may differ materially from
expected results in these statements as a
result of the foregoing factors or other
factors affecting the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described more fully in Part II, Item 7A of
the Company's 1999 Annual Report on Form 10-K,
the Company is exposed to market risks in the
normal course of business due to changes in
interest rates on short-term borrowings under
its revolving line of credit. Based on current
market conditions, management does not believe
there has been a material change in the
Company's exposure to interest rate risks as
described in that report.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered securities
by the Company during the thirteen week period
ended April 29, 2000.
The Company's credit agreement with Congress
prohibits the Company from paying dividends
without prior written consent from that
lender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant
to the requirements of Item 601 of
Regulation S-K:
Exhibit No. Description
---------- -----------
10.40 Seventh Amendment to Loan and Security Agreement
dated March 27, 2000, by and between Gottschalks
Inc. and Congress Financial Corporation (Western) (*)
10.41 Asset Purchase Agreement dated April 24, 2000, by and
between Gottschalks Inc. and Lamonts Apparel, Inc. (*)
10.42 Eighth Amendment to Loan and Security Agreement
dated May 19, 2000, by and between Gottschalks Inc. and
Congress Financial Corporation (Western).
27 Financial Data Schedule
(*) Filed in the Company's Annual Report on Form 10-K dated
January 29, 2000 (File No. 1-09100).
(b) The Company did not file any Current Reports on Form 8-K during
the thirteen week period ended April 29, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gottschalks Inc.
---------------
(Registrant)
June 13, 2000 \s\ James R. Famalette
--------------- -----------------------
(James R.Famalette, President
and Chief Executive Officer)
June 13, 2000 \s\ Michael Geele
--------------- -------------------------
(Michael Geele, Senior Vice President
and Chief Financial Officer)
