UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 of (I.R.S. Employer Identification No.)
incorporation or 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 August 31, 2000
was 12,621,406.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION ---------
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
July 29, 2000, January 29, 2000 and July 31, 1999 3
Consolidated statements of operations -
thirteen and twenty-six weeks ended
July 29, 2000 and July 31, 1999 4
Condensed consolidated statements of cash flows -
twenty-six weeks ended July 29, 2000 and July 31, 1999 5
Notes to condensed consolidated financial statements -
twenty-six weeks ended July 29, 2000 and July 31, 1999 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23-24
SIGNATURES 25
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
------------------------------------------------------------------------------
July 29, January 29, July 31,
2000 2000 1999
-------- ------------ ----------
(Unaudited) (Unaudited)
ASSETS
-------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,387 $ 1,901 $ 2,242
Retained interest in receivables
sold 19,318 29,138 17,116
Receivables - net 7,070 7,597 5,699
Merchandise inventories 165,830 130,028 136,504
Other 7,684 9,666 8,921
------- ------- -------
Total current assets 202,289 178,330 170,482
PROPERTY AND EQUIPMENT, NET 136,207 120,393 117,526
OTHER LONG-TERM ASSETS 20,806 15,281 16,776
------- ------- -------
$359,302 $314,004 $304,784
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Trade accounts payable and
other current liabilities $ 82,138 $ 63,653 $ 57,630
Revolving line of credit 993 5,479 20,801
Current portion of long-term
obligations 7,067 4,479 4,559
------- ------- -------
Total current liabilities 90,198 73,611 82,990
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 75,000 50,000 40,000
Notes and mortgage loans payable 30,448 25,123 26,565
Capitalized lease obligations 5,323 5,551 5,689
------- ------- -------
110,771 80,674 72,254
DEFERRED INCOME & OTHER 27,662 28,520 26,467
SUBORDINATED NOTE PAYABLE
TO AFFILIATE 21,132 20,961 20,789
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 109,539 110,238 102,284
------- ------- -------
$ 359,302 $314,004 $304,784
======= ======= =======
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 Twenty-Six Weeks
Ended Ended
-------------------- --------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $129,478 $118,718 $250,405 $229,822
Net credit revenues 1,989 1,926 4,299 4,162
Net leased department revenues 791 1,123 1,492 2,308
------- ------- ------- -------
132,258 121,767 256,196 236,292
Costs and expenses:
Cost of sales 84,784 77,735 164,972 151,212
Selling, general & administrative
expenses 41,336 39,744 81,601 78,164
Depreciation & amortization 2,608 2,307 5,186 4,584
New store pre-opening expenses 977 977
129,705 119,786 252,736 233,960
------- ------- ------- -------
Operating income 2,553 1,981 3,460 2,332
Other (income) expense:
Interest expense 2,865 2,575 5,517 5,127
Miscellaneous income (329) (414) (683) (763)
------- ------- ------- -------
2,536 2,161 4,834 4,364
------- ------- ------- -------
Income (loss) before income tax
expense (benefit) 17 (180) (1,374) (2,032)
Income tax expense (benefit) 6 (75) (543) (848)
------- ------- ------- -------
Net income (loss) $ 11 $ (105) $ (831) $(1,184)
======= ======= ======= =======
Net income (loss) per common share -
basic and diluted $ 0.00 $ (0.01) $ (0.07) $ (0.09)
======= ======= ======= =======
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)
-----------------------------------------------------------------------------
Twenty-Six Weeks
Ended
------------------------
July 29, July 31,
2000 1999
OPERATING ACTIVITIES: ------- --------
<S> <C> <C>
Net loss $ (831) $ (1,184)
Adjustments:
Depreciation and amortization 5,186 4,584
Provision for credit losses 1,612 1,521
Other adjustments, net (590) (1,756)
Changes in operating assets and liabilities:
Receivables (1,183) (812)
Merchandise inventories (35,427) (12,948)
Other current and long-term assets 1,781 3,462
Trade accounts payable 26,853 (2,305)
Other current and long-term liabilities (8,910) (9,464)
------- -------
Net cash used in operating activities (11,509) (18,902)
INVESTING ACTIVITIES:
Available-for-sale securities:
Maturities (135,492) (143,679)
Purchases 145,312 154,570
Lamonts acquisition (Note 2) (19,165)
Capital expenditures (7,492) (8,736)
Other 97 97
------- -------
Net cash (used in) provided by
investing activities (16,740) 2,252
FINANCING ACTIVITIES:
Net proceeds under revolving line of credit 20,514 528
Proceeds from issuance of 1999-1 Series
certificate 53,000
Principal payments on outstanding Series
certificates (30,900)
Principal payments on long-term obligations (2,454) (2,235)
Proceeds from long-term obligations 10,000 500
Changes in cash management liability and other 675 (3,694)
------- -------
Net cash provided by financing activities 28,735 17,199
------- -------
INCREASE IN CASH 486 549
CASH AT BEGINNING OF PERIOD 1,901 1,693
------- -------
CASH AT END OF PERIOD $ 2,387 $ 2,242
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Twenty-Six Weeks Ended July 29, 2000 and July 31, 1999
---------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Gottschalks Inc. is a regional department
store chain based in Fresno, California. As of
the end of the second quarter of fiscal 2000,
the Company operated forty-two full-line
department stores located in four Western
states, with 38 stores in California, two in
Nevada and one each in Oregon and Washington.
The Company also operates nineteen specialty
apparel stores which carry a limited selection
of merchandise. In addition, as described more
fully in Note 2, the Company completed the
largest acquisition in its operating history
on July 24, 2000, acquiring 34 store leases
and related store fixtures and equipment from
Lamonts Apparel, Inc. ("Lamonts"), a bankrupt
apparel store chain operating in the Pacific
Northwest and Alaska. The Company's department
stores typically offer a wide range of better
to moderate brand-name and private-label
merchandise for the entire family, including
men's, women's, junior's and children's
apparel, cosmetics, shoes and accessories. The
Company's department stores also offer a wide
array of home furnishings, including
domestics, china, housewares, small electrics,
as well as furniture and mattresses in certain
locations. 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 twenty-six week period ended
July 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, the acquisition of 34 store leases
from Lamonts (Note 2) and its LIFO inventory
valuation adjustment ("LIFO adjustment"),
currently recorded only at the end of each
fiscal year (Note 4). These financial
statements should be read in conjunction with
the Company's Annual Report on Form 10-K for
the year ended January 29, 2000 (the "1999
Annual Report on Form 10-K").
Effective as of 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. In
addition, certain other amounts in the
accompanying financial statements for the
fiscal 1999 interim period have been
reclassified to conform with current years
presentation.
The condensed consolidated balance sheet at
January 29, 2000 has been derived from the
audited consolidated financial statements at
that date.
2. ACQUISITION OF STORES FROM LAMONTS APPAREL, INC.
On April 24, 2000, the Company entered into a
definitive asset purchase agreement (the
"Agreement") with Lamonts Apparel, Inc.
("Lamonts"), a bankrupt regional apparel store
chain operating 38 stores located throughout
the Pacific Northwest and Alaska. The
Agreement, as amended, provided for the
Company to acquire 37 of Lamonts' 38 store
leases and related store fixtures and
equipment for a cash purchase price of $20.1
million. Concurrent with the closing of the
transaction on July 24, 2000, the Company sold
one of the store leases for $2.5 million, and
subsequently terminated two other store
leases, resulting in a net cash purchase price
of $17.6 million for 34 store leases and
related store fixtures and equipment. The
Company did not acquire any of Lamonts'
merchandise inventory, customer credit card
receivables or other corporate assets in the
transaction, nor did the Company assume any
material liabilities, other than the 34 store
leases. The 34 stores are located in five
Western states, with 19 stores in Washington,
seven in Alaska, five in Idaho, two in Oregon
and one in Utah. The acquisition significantly
expands the Company's presence in the Pacific
Northwest. The newly acquired stores were
converted to the Gottschalks' banner, re-
merchandised and reopened in stages, beginning
in late August with all stores completely open
by September 7, 2000.
The $17.6 million net cash purchase price for
the assets was partially financed with
proceeds from a $10.0 million note payable
(Note 6), with the remainder provided from
existing financial resources. Direct
transaction costs include investment banking,
legal and accounting fees and other costs. The
acquisition (hereinafter referred to as the
"Lamonts acquisition") was accounted for under
the purchase method of accounting and,
accordingly, the results of operations of the
acquired stores, consisting only of new store
pre-opening costs and acquisition related
expenses in the second quarter and first half
of fiscal 2000, are included in the Company's
financial statements from the acquisition date
of July 24, 2000.
The financial statements reflect the
preliminary allocation of the purchase price
to the acquired assets on the basis of their
estimated fair values as of the date of the
acquisition. The final purchase price
allocation is subject to the completion of an
independent appraisal of the acquired assets.
In addition, estimates of certain direct
transaction costs have not yet been finalized.
The preliminary allocation of the purchase
price is summarized below (in thousands of
dollars):
Fair value of note payable $10,000
Cash 7,580
Direct transaction costs 1,585
------
Total purchase price $19,165
======
Property and equipment $13,483
Favorable lease rights 5,682
------
Total purchase price $19,165
======
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 than 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 substantially 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. 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 affect 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:
July 29, January 29, July 31,
(In thousands of dollars) 2000 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts payable $42,470 $15,617 $20,872
Cash management liability 10,701 10,027 8,482
Accrued expenses 10,333 9,958 9,334
Accrued payroll and related liabilities 6,833 6,861 5,737
Taxes, other than income taxes 5,318 11,141 5,624
Deferred income taxes 4,677 4,677 4,470
Federal and state income taxes payable 1,806 5,372 3,111
------ ------ ------
$82,138 $63,653 $57,630
====== ====== ======
6. DEBT
The Company has a $180.0 million revolving
line of credit arrangement with Congress
Financial Corporation ("Congress") through
March 30, 2002. Borrowings under the facility
are limited to a restrictive borrowing base
equal to 75% of eligible merchandise
inventories, which, 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 currently
charged at a rate of approximately LIBOR plus
1.875% (8.66% at July 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
$107.5 million as of July 29, 2000, of which
$76.0 million was outstanding as of that date.
Outstanding borrowings under the facility
which are not expected to be repaid within one
year of the respective balance sheet dates,
totaling $75.0 million, $50.0 million and
$40.0 million as of July 29, 2000, January 29,
2000 and July 31, 1999, respectively, are
classified as long-term in the accompanying
financial statements. The agreement contains
one financial covenant, pertaining to the
maintenance of a minimum tangible net worth,
with which the Company was in compliance as of
July 29, 2000.
The Company issued a $10.0 million note
payable to a third party lender on July 24,
2000, using the proceeds to finance a portion
of the purchase price for the Lamonts
acquisition (Note 2). The note is payable in
thirty-six monthly principal installments of
$278,000 each, bears interest at a variable
rate equal to LIBOR plus 3.0%, and is
collateralized by fixtures and equipment in
the newly acquired stores and by the equity in
two owned stores subject to mortgage loans
with the same lender. The Company's other long-
term borrowing arrangements are described more
fully in its 1999 Annual Report on Form 10-K.
7. WEIGHTED AVERAGE NUMBER OF SHARES
</TABLE>
<TABLE>
<CAPTION>
Second Quarter First Half
-------------- -------------
2000 1999 2000 1999
----- ---- ---- ----
(Share data in thousands)
Weighted average
<S> <C> <C> <C> <C>
number of shares - basic 12,605 12,575 12,601 12,575
Incremental shares from assumed
issuance of stock options
(treasury stock method) 24 --- --- ---
------ ------ ------ ------
Weighted average number of shares -
diluted 12,629 12,575 12,601 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.
In addition to the stores acquired from
Lamonts, the Company opened one new department
store in the third quarter of 2000 and has
entered into an agreement to open one
additional department store in the fourth
quarter of fiscal 2000. The Company is also in
the process of completing the remodeling and
refurbishing of certain of its existing
locations and certain of the locations
recently acquired from Lamonts. The estimated
remaining cost of such projects, totaling
$10.0 million as of July 29, 2000, is expected
to be financed from 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.
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.
In addition, as described more fully in Note 2
to the accompanying financial statements, the
Company completed the largest acquisition in
its operating history on July 24, 2000,
acquiring 34 store leases and related store
fixtures and equipment from Lamonts. This
business seasonality and the acquisition of
the 34 store leases may result in performance
for the thirteen and twenty-six week periods
ended July 29, 2000 (hereinafter referred to
as the "second quarter" and "first half" of
fiscal 2000) which is not necessarily
indicative of performance for the remainder of
the year.
Effective as of 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.
Results of Operations
-----------------------
The following table sets forth the Company's Consolidated Statements
of Operations as a percent of net sales:
<TABLE>
<CAPTION>
Second Quarter First Half
2000 1999 2000 1999
------ ------ ---- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Net credit revenues 1.5 1.6 1.7 1.8
Net leased department revenues 0.6 0.9 0.6 1.0
----- ----- ----- -----
102.1 102.5 102.3 102.8
Costs and expenses:
Cost of sales 65.5 65.5 65.9 65.8
Selling, general and
administrative expenses 31.9 33.4 32.6 34.0
Depreciation and amortization 2.0 1.9 2.1 2.0
New store pre-opening costs 0.7 0.3
100.1 100.8 100.9 101.8
----- ----- ----- -----
Operating income 2.0 1.7 1.4 1.0
Other (income) expense:
Interest expense 2.2 2.2 2.2 2.2
Miscellaneous income (0.2) (0.3) (0.3) (0.3)
----- ----- ----- -----
2.0 1.9 1.9 1.9
----- ----- ----- -----
Income (loss) before income
tax expense (benefit) 0.0 (0.2) (0.5) (0.9)
Income tax expense (benefit) 0.0 (0.1) (0.2) (0.4)
----- ----- ----- -----
Net income (loss) 0.0% (0.1)% (0.3)% (0.5)%
===== ===== ===== =====
</TABLE>
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999
------------------------------------------------------------------------
Net Sales
---------
Net sales increased by approximately $10.8
million to $129.5 million in the second
quarter of fiscal 2000 as compared to $118.7
million in the second quarter of fiscal 1999,
an increase of 9.1%. This increase is
primarily due to a 7.2% 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 and
are not included in net sales for financial
reporting purposes. 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.
The Company operated forty-two department
stores and nineteen specialty apparel stores
as of the end of the second quarter of fiscal
2000. On August 23, 2000, the Company opened a
new store in Grants Pass, Oregon, and during
the period from August 26 through September 7,
2000, reopened all of the 34 stores acquired
from Lamonts on July 24, 2000. The Company
also plans to open a new department store in
Redding, California, as a replacement for a
specialty store currently existing in that
location. The new store in Redding is expected
to be opened in November 2000, however no
assurance can be given that the stores will
open as scheduled, or that their openings will
not be delayed. Including the 35 new stores
opened early in the third quarter and the new
store expected to be opened in the fourth
quarter, by the end of fiscal 2000 the Company
expects to be operating a total of 78
department stores and 18 specialty stores,
located in seven Western states, with 39
department stores in California, 20 in
Washington, seven in Alaska, five in Idaho,
four in Oregon, two in Nevada and one in Utah.
Net Credit Revenues
---------------------
Net credit revenues related to the Company's
credit card receivables portfolio increased by
$63,000, or 3.3%, in the second quarter of
fiscal 2000 as compared to the second quarter
of fiscal 1999. As a percent of net sales, net
credit revenues were 1.5% of net sales in the
second quarter of fiscal 2000 as compared to
1.6% in the second quarter of fiscal 1999. Net
credit revenues consist of the following:
Second Quarter
(In thousands of dollars) 2000 1999
------------------------------------------------------
Service charge revenues $3,819 $3,756
Interest expense on securitized
receivables (1,016) (1,029)
Charge-offs on receivables sold
and provision for credit losses
on receivables ineligible for
sale (822) (875)
Gain on sale of receivables 8 74
----- -----
$1,989 $1,926
===== =====
Service charge revenues increased by $63,000,
or 1.7%, in the second quarter of fiscal 2000
as compared to the second quarter of fiscal
1999. This increase is primarily due to an
increase in the volume of late charge fees
collected on delinquent credit card balances
as compared to the same period of the prior
year.
Interest expense on securitized receivables
remained unchanged at approximately $1.0
million in the second quarters of fiscal 2000
and 1999. Charge-offs on receivables sold and
the provision for credit losses on receivables
ineligible for sale decreased by $53,000, or
6.1%, in the second quarter of fiscal 2000 as
compared to the second quarter of fiscal 1999
and, as a percent of sales, decreased to 0.6%
in the second quarter of fiscal 2000 as
compared to 0.7% in the second quarter of
fiscal 1999. The gain on the sale of
receivables decreased by $66,000 in the second
quarter of fiscal 2000 as compared to the
second quarter of fiscal 1999.
Net Leased Department Revenues
---------------------------------
Net rental income generated by the Company's
various leased departments decreased by
$332,000, or 29.6%, to $791,000 in the second
quarter of fiscal 2000 as compared to
approximately $1.1 million in the second
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 net 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
$2.2 million, or 28.6%, to $5.5 million in the
second quarter of fiscal 2000 as compared to
$7.7 million in the second 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 $7.1
million to $84.8 million in the second quarter
of fiscal 2000 as compared to $77.7 million in
the second quarter of fiscal 1999, an increase
of 9.1%. The Company's gross margin percentage
remained unchanged at 34.5% in the second
quarters of fiscal 2000 and 1999.
Selling, General and Administrative Expenses
---------------------------------------------
Selling, general and administrative expenses
increased by approximately $1.6 million to
$41.3 million in the second quarter of fiscal
2000 as compared to $39.7 million in the
second quarter of fiscal 1999, an increase of
4.0%. As a percent of net sales, selling,
general and administrative expenses decreased
to 31.9% in the second quarter of fiscal 2000
as compared to 33.4% in the second 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 second quarter of fiscal 2000
as compared to $2.3 million in the second
quarter of fiscal 1999, an increase of 13.0%.
As a percent of net sales, depreciation and
amortization expense increased to 2.0% in the
second quarter of fiscal 2000 as compared to
1.9% in the second quarter of 1999. These
increases are 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.
New Store Pre-Opening Costs
----------------------------
New store pre-opening costs, which are
expensed as incurred, totaled $977,000 in the
second quarter of fiscal 2000. Such costs
relate primarily to the stores recently
acquired from Lamonts and consist of payroll
and fringe benefits for store associates,
store rents, temporary storage, utilities,
travel, grand opening advertising, credit
solicitation and other costs incurred after
the July 24, 2000 acquisition date and through
the end of the quarter. The Company expects to
incur additional new store pre-opening costs
throughout the second half of fiscal 2000 with
respect to the newly acquired stores, and in
connection with other planned new store
openings. No new store pre-opening costs were
incurred in the second quarter of fiscal 1999.
Interest Expense
--------------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $300,000 to $2.9
million in the second quarter of fiscal 2000
as compared to $2.6 million in the second
quarter of fiscal 1999, an increase of 11.3%.
As a percent of net sales, however, interest
expense remained unchanged at 2.2% in the
second quarters of fiscal 2000 and 1999. The
dollar increase is primarily due to higher
average outstanding borrowings on the
Company's working capital facility and an
increase in the weighted-average interest rate
applicable to the facility (8.4% in the second
quarter of fiscal 2000 as compared to 7.1% in
the second quarter of fiscal 1999) resulting
from higher LIBOR and prime interest rates in
effect as compared to the same period of the
prior year.
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,
decreased by approximately $85,000 to $329,000
in the second quarter of fiscal 2000 as
compared to $414,000 in the second quarter of
fiscal 1999. As a percent of net sales,
miscellaneous income also decreased to 0.2% of
net sales in the second quarter of fiscal 2000
as compared to 0.3% in the second quarter of
fiscal 1999.
Income Taxes
-----------------
The Company's interim effective tax rate of
39.5% in the second quarter of fiscal 2000 and
effective tax credit of (41.7%) in the second
quarter of fiscal 1999 relate to the net
income (loss) incurred in those periods and
represent the Company's best estimates of the
annual effective tax rates for those fiscal
years.
Net Income (Loss)
-------------------
As a result of the foregoing, the Company's
net income increased by $116,000 to $11,000 in
the second quarter of fiscal 2000 as compared
to a net loss of ($105,000) in the second
quarter of fiscal 1999. On a per share basis
(basic and diluted), net income was $0.00 per
share in the second quarter of fiscal 2000 as
compared to a net loss of ($0.01) per share in
the second quarter of fiscal 1999. This
improvement was achieved despite significant
new store pre-opening costs incurred in
connection with the Lamonts acquisition.
Excluding those amounts, net income was
$602,000, or $0.05 per share, in the second
quarter of fiscal 2000.
First Half of Fiscal 2000 Compared to First Half of Fiscal 1999
---------------------------------------------------------------
Net Sales
---------
Net sales increased by approximately $20.6
million to $250.4 million in the first half of
fiscal 2000 as compared to $229.8 million in
the first half of fiscal 1999, an increase of
9.0%. This increase is primarily due to a 7.1%
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. Shoe department
sales in those stores in the first half of
fiscal 1999 are included in net leased
department revenues for financial reporting
purposes. 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
$137,000, or 3.3%, in the first half of fiscal
2000 as compared to the first half of fiscal
1999. As a percent of net sales, net credit
revenues were 1.7% of net sales in the first
half of fiscal 2000 as compared to 1.8% in the
first half of fiscal 1999. Net credit revenues
consist of the following:
First Half
(In thousands of dollars) 2000 1999
-------------------------------------------------------------
Service charge revenues $7,843 $7,591
Interest expense on securitized
receivables (2,031) (2,039)
Charge-offs on receivables sold
and provision for credit losses
on receivables ineligible for
sale (1,612) (1,521)
Gain on sale of receivables 99 131
----- ------
$4,299 $4,162
===== =====
Service charge revenues increased by
approximately $250,000, or 3.3%, in the first
half of fiscal 2000 as compared to the first
half of fiscal 1999. 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 same period of the prior
year.
Interest expense on securitized receivables
remained unchanged at approximately $2.0
million in the first half of both fiscal 2000
and 1999. Charge-offs on receivables sold and
the provision for credit losses on receivables
ineligible for sale increased by $91,000, or
6.0%, in the first half of fiscal 2000 as
compared to the first half of fiscal 1999. As
a percent of sales, however, such losses
decreased to 0.6% in the first half of fiscal
2000 as compared to 0.7% in the first half of
fiscal 1999. The gain on the sale of
receivables during the first half of fiscal
2000 was not materially different from the
first half of fiscal 1999.
Net Leased Department Revenues
--------------------------------
Net rental income generated by the Company's
various leased departments decreased by
approximately $800,000, or 35.4%, to $1.5
million in the first half of fiscal 2000 as
compared to $2.3 million in the first half 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.
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 $5.5 million, or 34.8%, to $10.3
million in the first half of fiscal 2000 as
compared to $15.8 million in the first half of
fiscal 1999.
Cost of Sales
---------------
Cost of sales, which includes costs associated
with the buying, handling and distribution of
merchandise, increased by approximately $13.8
million to $165.0 million in the first half of
fiscal 2000 as compared to $151.2 million in
the first half of fiscal 1999, an increase of
9.1%. The Company's gross margin percentage
decreased slightly to 34.1% in the first half
of fiscal 2000 as compared to 34.2% in the
first half of fiscal 1999.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses
increased by approximately $3.4 million to
$81.6 million in the first half of fiscal 2000
as compared to $78.2 million in the first half
of fiscal 1999, an increase of 4.4%. As a
percent of net sales, selling, general and
administrative expenses decreased to 32.6% in
the first half of fiscal 2000 as compared to
34.0% in the first half 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 $600,000 to $5.2
million in the first half of fiscal 2000 as
compared to $4.6 million in the first half of
fiscal 1999, an increase of 13.1%. As a
percent of net sales, depreciation and
amortization expense increased to 2.1% in the
first half of fiscal 2000 as compared to 2.0%
in the first half of fiscal 1999. These
increases are 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.
New Store Pre-Opening Costs
----------------------------
New store pre-opening costs totaled $977,000
in the first half of fiscal 2000. Such costs
relate primarily to the 34 stores acquired
from Lamonts and consist of payroll and fringe
benefits for store associates, store rents,
temporary storage, utilities, travel, grand
opening advertising and credit solicitation
costs incurred after the July 24, 2000
acquisition date and through the end of the
first half of fiscal 2000. The Company expects
to incur additional new store pre-opening
costs throughout the second half of fiscal
2000 with respect to the newly acquired
stores, and in connection with other planned
new store openings. No new store pre-opening
costs were incurred in the first half of
fiscal 1999.
Interest Expense
-------------------
Interest expense, which includes the
amortization of deferred financing costs,
increased by approximately $400,000 to $5.5
million in the first half of fiscal 2000 as
compared to $5.1 million in the first half of
fiscal 1999, an increase of 7.6%. As a
percent of net sales however, interest expense
remained unchanged at 2.2% in the first half
of both fiscal 2000 and 1999. The dollar
increase is primarily due to higher average
outstanding borrowings on the Company's
working capital facility and an increase in
the weighted-average interest rate applicable
to the facility (8.2% in the first half of
fiscal 2000 as compared to 7.1% in the first
half of fiscal 1999) resulting from higher
LIBOR and prime interest rates in effect as
compared to the same period of the prior year.
Miscellaneous Income
---------------------
Miscellaneous income, which includes the
amortization of deferred income and other
miscellaneous income and expense amounts,
decreased by $80,000 to $683,000 in the first
half of fiscal 2000 as compared to $763,000 in
the first half of fiscal 1999. As a percent
of net sales however, miscellaneous income
remained unchanged at 0.3% of net sales in the
first half of both 2000 and 1999.
Income Taxes
----------------
The Company's interim effective tax credits of
(39.5%) and (41.7%) in the first half of
fiscal 2000 and 1999, respectively, 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 was reduced by $353,000 to ($831,000)
in the first half of fiscal 2000 as compared
to a net loss of approximately ($1,184,000) in
the first half of fiscal 1999. On a per share
basis (basic and diluted), the net loss was
($0.07) per share in the first half of fiscal
2000 as compared to ($0.09) per share in the
first half of fiscal 1999. This improvement
was achieved despite significant new store pre-
opening costs incurred in connection with the
Lamonts acquisition. Excluding those amounts,
the net loss was ($240,000), or ($0.02) per
share, in the first half of fiscal 2000.
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 which, 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 currently
charged at a rate of approximately LIBOR plus
1.875% (8.66% at July 29, 2000), with no
interest charged on the unused portion of the
line of credit. As of July 29, 2000, the
Company had excess availability of $31.5
million on the facility and was in compliance
with the single financial loan covenant
applicable to the facility.
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.
The Company is currently evaluating the
issuance of an additional $25.0 million
Variable Base Certificate under the program.
The issuance of the certificate would enable
the Company to finance receivables currently
in excess of amounts required to support the
1999-1 Series, as well as receivables expected
to be generated in the 35 new stores opened
early in the third quarter of fiscal 2000 and
the additional store expected to be opened in
the fourth quarter of fiscal 2000. It is
expected that the Variable Base Certificate
will be issued during the second half of
fiscal 2000. However, there can be no
assurance that such an issuance will occur, or
that its issuance will not be delayed, subject
to a variety of conditions precedent or other
factors.
Uses of Liquidity.
--------------------
Lamonts Acquisition.
As described more fully in Note 2 to the
accompanying financial statements, on July 24,
2000, the Company acquired 34 former Lamonts
store leases and related store fixtures and
equipment for a net purchase price of $17.6
million in cash. The purchase price for the
assets was financed through the issuance of a
$10.0 million three-year note payable to a
third party lender, with the remainder
provided from existing financial resources.
The Company also experienced a significant
increase in merchandise inventory levels as of
the end of the second quarter of fiscal 2000
as compared to the prior year, primarily in
connection with the initial stocking of the
newly acquired stores. Such purchases were
largely financed with short-term trade credit.
Capital Expenditures.
Capital expenditures in the first half of
fiscal 2000, totaling $7.5 million, were
primarily related to the renovation and
refixturing of certain existing locations,
tenant improvements and fixtures for the new
department store in Grants Pass, Oregon, and
information systems enhancements. In addition
to the stores acquired from Lamonts, the
Company opened one new department store in the
third quarter of 2000 and has entered into an
agreement to open one additional department
store in the fourth quarter of fiscal 2000.
The Company is also in the process of
completing the remodeling and refurbishing of
certain of its existing locations and certain
of the locations recently acquired from
Lamonts. The estimated remaining cost of such
projects, totaling $10.0 million as of July
29, 2000, is expected to be financed from
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.
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.
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 stores 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 July 29, 2000.
The Company's credit agreement with Congress
prohibits the Company from paying dividends
without prior written consent from that
lender.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 22, 2000, the Company held its 2000
Annual Meeting of Stockholders at which the
following matter was submitted to a vote of
the Company's stockholders:
1. The stockholders voted for eleven
nominees for director, each for one year
terms. Each of the eleven nominees were
elected. The results of the vote are as
follows:
NOMINEE FOR DIRECTOR VOTES FOR VOTES WITHHELD
-------------------- --------- ---------------
Joe Levy 10,400,363 1,205,243
James R. Famalette 11,391,204 214,402
Max Gutmann 10,391,642 1,213,964
Bret W. Levy 11,373,249 232,357
Sharon Levy 10,396,569 1,209,037
Joseph J. Penbera 10,394,033 1,211,573
Frederick R. Ruiz 11,389,599 216,007
O. James Woodward III 11,379,304 226,302
William Smith 11,382,704 222,902
Isidoro A?lvarez A?lvarez 11,387,683 217,923
Jorge Pont Sa?nchez 11,387,883 202,241
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
----------- -------------
10.43 Ninth Amendment to
Loan and Security Agreement
dated June 28, 2000, by and
between Gottschalks Inc. and
Congress Financial Corporation
(Western).
10.44 Amendment No. 1 to
the Asset Purchase Agreement
dated May 16, 2000 by and
between Gottschalks Inc. and
Lamonts Apparel, Inc. (*)
10.45 Promissory Note
dated July 24, 2000 by and
between Gottschalks Inc. and
Heller Financial Leasing, Inc.
27 Financial Data Schedule
* Filed with the Company's Current Report on Form 8-K dated
July 24, 2000 (File No. 1-09100)
(b) The Company filed the following Current
Report on Form 8-K during the thirteen week
period ended July 29, 2000:
- Current Report on Form 8-
K dated July 24, 2000, describing
pursuant to Item 2, Acquisition or
Disposition of Assets, (i) the
completion of the acquisition of 37
store leases and related store
fixtures and equipment from Lamonts
Apparel, Inc. for a cash purchase
price of $20.1 million, (ii) the
sale of one of the leases acquired
for $2.5 million, and (iii) the
termination of two of the leases
acquired for $20,000 in cash.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gottschalks Inc.
----------------
(Registrant)
September 12, 2000 \s\ James R. Famalette
------------------- ----------------------
(James R. Famalette,
President and Chief
Executive Officer)
September 12, 2000 \s\ Michael S.Geele
------------------ ---------------------
(Michael S.Geele,
Senior Vice President
and Chief Financial Officer)
