-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qdor9dSmWLYL7k1z3vSq1qhjaIKPflzV5F2VXCSndNdAfNw2v5Hv3QF673bMJ9XL F9XI5vaemj1t80aGsnUcvQ== 0000790414-00-000006.txt : 20000501 0000790414-00-000006.hdr.sgml : 20000501 ACCESSION NUMBER: 0000790414-00-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTTSCHALKS INC CENTRAL INDEX KEY: 0000790414 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 770159791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09100 FILM NUMBER: 612527 BUSINESS ADDRESS: STREET 1: 7 RIVER PARK PL E STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 BUSINESS PHONE: 2094348000 MAIL ADDRESS: STREET 1: 7 RIVER PARK PLACE EAST STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For The Fiscal Year Ended January 29, 2000 ---------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from _________ to _________ Commission File Number 1-09100 Gottschalks Inc. ______________________________________________________ (Exact name of Registrant as specified in its charter) Delaware 77-0159791 __________________________________________________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7 River Park Place East, Fresno, CA 93720 (Address of principal executive offices) (Zip code) Registrant's telephone no., including area code: (559) 434-4800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered Common Stock, $.01 par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 31, 2000: Common Stock, $.01 par value: $38,237,000 On March 31, 2000 the Registrant had outstanding 12,596,837 shares of Common Stock. Documents Incorporated By Reference: Portions of the Registrant's definitive proxy statement with respect to its Annual Stockholders' Meeting scheduled to be held on June 22, 2000, which will be filed pursuant to Regulation 14A, are incorporated by reference into Part III of this Form 10-K. INDEX PART I PAGE NO. Item 1. Business............................................ 1 Item 2. Properties.......................................... 14 Item 3. Legal Proceedings................................... 18 Item 4. Submission of Matters to a Vote of Security Holders.................................... 18 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 18 Item 6. Selected Financial Data............................. 19 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.................. 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................... 37 Item 8. Financial Statements and Supplementary Data......... 38 Item 9. Changes in and Disagreements with Accountants on Auditing and Financial Disclosures.................. 38 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 38 Item 11. Executive Compensation.............................. 40 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 40 Item 13. Certain Relationships and Related Transactions...... 40 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......................................... 40 Signatures.................................................... 90 PART I Item 1. BUSINESS GENERAL Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California. The Company currently operates forty-two full-line department stores, including thirty-two "Gottschalks" stores located throughout California, and in Oregon, Washington and Nevada, and ten "Harris/Gottschalks" stores located in the Southern California area. The Company also operates twenty "Gottschalks" and "Village East" specialty apparel stores. (1). In fiscal 1999, the Company's sales totaled $539.4 million, a 13.1% increase from fiscal 1998 sales of $476.9 million. (2) Gottschalks and Harris/Gottschalks department stores typically offer a wide range of moderate to better brand-name and private- label merchandise, including men's, women's, junior's and children's apparel; cosmetics, shoes, fine jewelry and accessories; and home furnishings including china, housewares, domestics, small electric appliances and furniture (in selected locations). The majority of the Company's department stores range from 50,000 to 150,000 in gross square feet, and are generally anchor tenants of regional shopping malls or strip centers. Village East specialty stores, which offer apparel for larger women, are located in the same mall in which a Company department store is located, or as a separate department within some of the Company's larger stores. The Company services all of its stores, including its store locations outside California, from a 420,000 square foot distribution facility centrally located in Madera, California. The Company has operated continuously for 96 years since it was founded by Emil Gottschalk in 1904. The Company initially offered its stock to the public in 1986, and most of its growth has occurred since then. The Company is incorporated in the state of Delaware. Gottschalks Inc. has one wholly- owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"). GCRC is a qualified special purpose entity which was formed in 1994 in connection with a receivables securitization program. (See Note 3 to the Consolidated Financial Statements.) _________________________ (1) The Company's specialty apparel sales represent 3.7% of total fiscal 1999 sales. (2) Total sales do not include leased department sales totaling $29.0 million in fiscal 1999 and $40.2 million in fiscal 1998. Including leased department sales, total sales in the Company's owned and leased departments were $568.4 million in fiscal 1999 and $517.1 million in 1998. BUSINESS ACQUISITIONS Recent Developments. On April 24, 2000, the Company entered into a definitive asset purchase agreement with Lamonts Apparel, Inc. ("Lamonts"), providing for the Company to acquire all of Lamont's department store leases and fixtures and equipment. Lamonts is a Northwest-based regional department store chain currently operating thirty-eight department stores, with twenty-three located in the state of Washington, seven in Alaska, five in Idaho, two in Oregon and one in Utah. Lamonts stores generally carry an assortment of moderately priced brand-name fashion apparel, accessories and merchandise for the home. Lamonts filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in January 2000, and the purchase is subject to approval by the Bankruptcy Court. If approved, the transaction is expected to close in late July 2000. On August 20, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of The Harris Company ("Harris"), a wholly-owned subsidiary of El Corte Ingles ("ECU") of Spain. Harris operated nine full-line department stores located in the Southern California area. As planned, the Company closed one of the acquired stores on January 31, 1999. The Company operates the acquired stores as "Harris/Gottschalks" stores. The Company also converted two of its existing Gottschalks department stores located in close proximity to the acquired stores to Harris/Gottschalks stores, bringing the total number of stores operated as Harris/Gottschalks stores to ten as of January 28, 2000. As a result of the acquisition, Harris became a significant stockholder of the Company. The Company also leases three of the Harris/Gottschalks locations from ECI. (See Note 2 to the Consolidated Financial Statements). OPERATING STRATEGY Merchandising Strategy. The Company's merchandising strategy is directed at offering and promoting nationally advertised, brand-name merchandise recognized by its customers for style and value. Brand- name merchandise is complemented with offerings of private-label and other higher and budget-priced merchandise. Brand-name apparel, shoe, cosmetic and accessory lines carried by the Company include Estee Lauder, Lancome, Clinique, Chanel, Dooney & Bourke, Nine West, Liz Claiborne, Carole Little, Calvin Klein, Ralph Lauren (Polo and Chaps), Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan Picone, Haggar, Koret and Levi Strauss. Brand-name merchandise carried for the home includes Lenox, Krups, Calphalon, Royal Velvet, Ralph Lauren, Tommy Hilfiger, KitchenAid and Samsonite. The Company also purchases merchandise from numerous other suppliers. In no instance did purchases from any single vendor amount to more than 5% of the Company's net purchases in fiscal 1999. In the Company's stores, brand-name merchandise is prominently displayed, often using vendor supplied fixtures and signage. The Company's merchandising activities are conducted centrally from its corporate offices in Fresno, California. The Company's merchandise mix as a percentage of total sales is reflected in the following table:
Fiscal Years 1999 1998 1997 1996 1995 Women's Apparel 26.6% 27.0% 27.2% 26.3% 25.9% Cosmetics, Shoes & Accessories(1) 22.2 19.0 17.8 17.5 17.2 Men's Apparel 13.7 14.0 14.0 14.5 14.3 Junior's and Children's Apparel 10.3 10.1 10.5 10.7 10.9 Shoes, Fine Jewelry & Other Leased Departments(1) 5.1 7.7 7.8 7.8 7.4 Home 22.1 22.2 22.7 23.2 24.3 Total Sales (2) 100.0% 100.0% 100.0% 100.0% 100.0% _____________________
(1) The increase in cosmetics, shoe and accessory sales from fiscal 1998 to 1999, and the corresponding decrease in leased department sales, is primarily due to the conversion of the shoe departments in twenty- eight Gottschalks department stores from leased departments to owned departments on August 1, 1999. Prior to August 1, 1999, these shoe departments were operated by an independent lessee. The shoe departments in the eight acquired Harris/Gottschalks locations have been operated as owned departments since the acquisition of those stores in August 1998. The shoe departments in the other two Harris/Gottschalks locations were converted from leased to owned departments in February 1999. (2) Pursuant to Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", sales amounts reported in the Company's consolidated income statements do not include sales applicable to leased departments. Leased department sales are included in the table above, however, in order to facilitate an understanding of the Company's sales relative to its selling square footage. Store Location and Expansion Strategy. The Company's stores are located primarily in diverse, growing, non-major metropolitan areas in the western United States. Management believes the Company has a competitive advantage in offering moderate to better brand-name merchandise and a high level of service to customers in secondary markets where there is strong demand and fewer competitors offering such merchandise. The Company has historically avoided expansion into major metropolitan areas which are well served by the Company's larger competitors. Some of the Company's stores located in California are in agricultural areas and cater to mature customers with above average levels of disposable income. Most of the Company's department stores are anchor tenants of regional shopping malls. Other anchor tenants in the malls generally complement the Company's goods with a mixture of competing and non-competing merchandise, and serve to increase customer foot traffic within the mall. In recent years, the Company has also opened new stores in strategically located strip centers. With new regional shopping mall construction on the decline, management believes the Company has a competitive advantage in being willing to accommodate diverse locations into its operation that may not be desired by its larger competitors that adopt a more standardized approach to expansion. The Company generally seeks to open two new department stores per year, although more stores may be opened in any given year if it is believed to be financially attractive to the Company. As part of its expansion strategy, the Company may also pursue selective strategic acquisitions. (See Part I, Item I, "Business Acquisitions Recent Developments".) The Company has also continued to invest in the renovation and refixturing of its existing store locations in an attempt to maintain and improve market share in those market areas. Store renovation projects can range from updating decor and improving in- store lighting, fixturing, wall merchandising and signage, to more extensive remodeling and expansion projects. The Company sometimes receives reimbursement from mall owners and vendors for certain of its new store construction costs and costs associated with the renovation and refixturing of existing store locations. Such contributions have enhanced the Company's ability to enter into attractive market areas that are consistent with the Company's long-term expansion plans. The following tables present selected data related to the Company's stores for the fiscal years indicated:
Stores open at Fiscal Years year-end: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Department stores 42 40(1) 34 32 31 Specialty stores (2) 20 22 25 27 29 -- -- -- -- -- TOTAL 62 62 59 59 60 == == == == == Gross store square footage (in thousands): Department stores 4,377 4,301 3,391 3,175 2,878 Specialty stores 77 83 94 101 106 ----- ----- ----- ----- ----- TOTAL 4,454 4,384 3,485 3,276 2,984 ===== ===== ===== ===== ===== _______________________________
(1) The Company acquired nine stores from Harris in August 1998, Cosing one of the stores acquired on January 31, 1999, as planned. Two of the stores acquired are located in malls with pre-existing Gottschalks locations. The Company combines separate locations within the same mall for the purpose of determining the total number of stores being operated, resulting in a net addition of six department stores in fiscal 1998. (2) The Company has continued to close certain free-standing Village East stores as their leases expire and incorporate those stores as separate departments into nearby Gottschalks department stores. Sales generated by these departments are combined with total specialty store sales for reporting purposes. As of the end of fiscal 1999, the Company operated thirty-eight department stores in California, two in Nevada and one each in Oregon and Washington. Following is a summary of the Company's department store locations, by store size: # of stores open ------ Larger than 200,000 gross square feet 3 150,000 - 199,000 gross square feet 7 100,000 - 149,999 gross square feet 8 50,000 - 99,000 gross square feet 19 25,000 - 49,000 gross square feet 5 --- TOTAL 42 === Sales Promotion Strategy. The Company's sales promotion strategy is based on a multi-media approach, using newspapers, television, radio, direct mail and catalogs to highlight seasonal promotions, selected brand- name merchandise and frequent storewide sales events. Advertising efforts are focused on communicating branded merchandise offered by the Company, and the high levels of quality, value and customer service available in the Company's stores. In its efforts to improve the effectiveness of its advertising expenditures, the Company uses data captured through its proprietary credit card and third party credit cards to develop segmented advertising and promotional events targeted at specific customers who have established purchasing patterns for certain brands, departments or store locations. The Company's sales promotion strategy also focuses on special events such as fashion shows, bridal shows and wardrobing seminars in its stores and in the communities in which they are located to convey fashion trends to its customers. The Company receives reimbursement for certain of its promotional activities from some of its vendors. The Company offers selected merchandise, a complete Bridal Registry service, and other general corporate information on the World Wide Web at http://www.gottschalks.com, and sells merchandise through its mail order department. Customer Service. Management believes one way the Company can differentiate itself from its competitors is to provide a consistently high level of customer service. The Company has a "Four Star" customer service program, designed to continually emphasize and reward high standards of customer service in the Company's stores. Sales associates are encouraged to keep notebooks of customers' names, clothing sizes, birthdays, and major purchases and to telephone customers about promotional sales and send thank-you notes and other greetings to their customers during their normal working hours. Product seminars and other training programs are frequently conducted in the Company's stores and its corporate headquarters to ensure that sales associates will be able to provide useful product information to customers. The Company also offers opportunities for management training and leadership classes for those associates identified for promotion within the Company. Various financial incentives are offered to the Company's sales associates for reaching sales performance goals. In addition to providing a high level of personal sales assistance, management believes that well-stocked stores, a liberal return and exchange policy, frequent sales promotions and a conveniently located and attractive shopping environment enhance the customers' shopping experience and increase customer loyalty. Management also believes that maintaining appropriate staffing levels in its stores, particularly at peak selling periods, is essential for providing a high level of customer service. Distribution of Merchandise. The Company's 420,000 square foot distribution center is centrally located in Madera, California and serves all of the Company's store locations, including its store locations outside California. The distribution center presently has the capacity to process merchandise for up to fifty-five department store locations, but was designed to provide for the future growth of the Company and the expansion of its capacity beyond that amount. The Company currently receives substantially all of its merchandise at the distribution center and makes daily distributions to the stores. The Company has continued to focus on the adoption of new technology and operational best practices at its distribution center with the goals of receiving, processing and distributing merchandise to stores at a faster rate and at a lower cost per unit. The Company's logistical system, installed in fiscal 1998, has reduced the manual handling of a large percentage of incoming merchandise, and through the use of "cross docking" techniques, enables the Company to process merchandise through the distribution center and to the stores in minutes and hours as compared to several days in the past. Currently, approximately 56% of merchandise is processed using cross-docking techniques. In addition, over 90% of merchandise received by the Company is shipped by vendors which provide the Company with an advance shipping notice ("ASN"), which is an electronic document transmitted by a vendor that details the contents of each carton in route to the distribution center. These vendors ship only floor-ready merchandise which arrives on approved hangers pre-tagged with universal product code ("UPC") tickets, a bar coded price label containing item numbers, retail prices and other information that can be electronically translated into the Company's inventory systems. The Company also has formal guidelines for vendors with respect to shipping, receiving and invoicing for merchandise. Vendors that do not comply with the guidelines for shipping merchandise using ASN's and in floor-ready status are charged specified fees depending upon the degree of non-compliance. Such fees are intended to offset higher costs associated with the processing of such merchandise. The Company is presently evaluating several alternatives for the expansion of its distribution center in the event the proposed acquisition of Lamonts is approved. The Company currently expects it will receive and process merchandise for the Lamonts stores at the Lamonts' distribution center, which is located in Kent, Washington, and managed by an independent operator. (See "Business Acquisitions Recent Developments.") Private-Label Credit Card. The Company issues its own credit card, which management believes enhances the Company's ability to generate and retain market acceptance and increase its sales and other revenues. As described more fully in Note 3 to the Consolidated Financial Statements, the Company sells its customer credit card receivables to its wholly-owned subsidiary, GCRC, on an ongoing basis in connection with a receivables securitization program. The Company has continued to service and administer the receivables under the program. The following table represents a summary of information related to the Company's credit card receivable portfolio for the fiscal years indicated:
Fiscal Years 1999 1998 1997 1996 1995 ----- ----- ---- ---- ----- (In thousands of dollars) Average credit card receivables serviced (1) $79,125 $69,143 $64,612 $64,162 $62,492 Service charge income 15,482 13,431 11,618 10,493 10,937 Credit sales as a % of total sales 44.2% 43.1% 43.7% 43.1% 43.6% _______________________
(1) Includes receivables sold, the retained interest in receivables sold, and other receivables, all of which are serviced by the Company. The Company has a variety of credit- related programs which management believes have improved customer service and have increased service charge revenues. Such programs include: - an "Instant Credit" program, through which successful credit applicants receive a discount ranging from 10% to 50% (depending on the results of the Instant Credit scratch-off card) on the first day's purchases made with the Company's credit card; - a "55-Plus" charge account program, which offers additional merchandise and service discounts to customers 55 years of age and older; - "Gold Card" and "55-Plus Gold Card" programs, which offer special services at a discount for customers who have a minimum net spending history on their charge accounts of $1,000 per year; and - The "Gottschalks Rewards" program, which offers an annual rebate certificate for up to 5% of annual credit purchases on the Company's credit card (up to a maximum of $10,000 of annual purchases) which can be applied towards future purchases of merchandise. As of March 31, 2000, the Company had approximately 650,000 active credit card holders. Management believes holders of the Company's credit card typically buy more merchandise from the Company than other customers. Competition and Seasonality. See Part I, Item I, "Risk Factors -- Competition" and "Risk Factors -- Seasonality and Weather". Employees. As of January 29, 2000, the Company had 6,550 employees, including 1,950 employees working part-time (less than 20 hours per week on a regular basis). The Company hires additional temporary employees and increases the hours of part-time employees during seasonal peak selling periods. None of the Company's employees are covered by a collective bargaining agreement. Management considers its employee relations to be good. Executive Officers of the Registrant. Information relating to the Company's executive officers is included in Part III, Item 10 of this report and is incorporated herein by reference. FORWARD-LOOKING STATEMENTS This Form 10-K contains certain "forward-looking statements" regarding activities, developments and conditions that the Company anticipates may occur or exist in the future relating to things such as: - revenues and earnings; - savings or synergies from acquisitions; - future capital expenditures; - its expansion strategy; - the impact of sales promotions and customer service programs on - consumer spending; the utilization of consumer credit programs. Such forward-looking statements can be identified by words such as: "believes", "anticipates", "expects", "intends", "seeks", "may", "will" and "estimates". The Company bases its forward-looking statements on its current views and assumptions. As a result, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those predicted. Some of the factors that could cause the Company's results to differ from those predicted include the following risk factors. The following list of important factors is not exclusive and the Company does not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the statement is made. RISK FACTORS General Economic and Market Conditions. The Company's stores are located primarily in non-major metropolitan and agricultural areas in the western United States. A substantial portion of the stores are located in California. The Company's success depends upon consumer spending, which may be materially and adversely affected by any of the following events or conditions: - a downturn in the national economy or in the California economy; - a downturn in the local economies where the stores are located; - a decline in consumer confidence; - an increase in interest rates; - inflation or deflation; - consumer credit availability; - consumer debt levels; - tax rates and policy; and unemployment trends. Seasonality and Weather. Seasonal influences affect the Company's sales and profits. The Company experiences its highest levels of sales and profits during the Christmas selling months of November and December, and, to a lesser extent, during the Easter holiday and Back-to-School seasons. The Company has increased working capital needs prior to the Christmas season to carry significantly higher inventory levels and generally increases its selling staff levels to meet anticipated demands. Any substantial decrease in sales during its traditional peak selling periods could materially adversely impact the Company's business, financial condition and results of operations. Factors that could cause results to vary include: - the timing and level of sales promotions; - the weather; - fashion trends; - local unemployment levels; and the overall health of the national and local economies. The Company depends on normal weather patterns across its markets. Historically, unusual weather patterns have significantly impacted its business. Consumer Trends. The Company's success partially depends on its ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. However, it is difficult to predict what merchandise consumers will demand, particularly merchandise that is trend driven. Failure to accurately predict constantly changing consumer tastes, preferences and spending patterns could adversely affect short and long term results. Expansion Strategy - Future Growth and Recent Acquisitions. The Company's expansion strategy involves remodeling and expanding existing stores and acquiring or opening new stores. The successful implementation of such expansion plans (including any potential acquisitions) depends upon many factors, including the ability of the Company to: - identify, negotiate, finance, obtain, construct, lease or refurbish suitable store sites; - hire, train and retain qualified personnel; and - integrate new stores into existing information systems and operations. The Company cannot guarantee that it will achieve its targets for remodeling or expanding existing stores or for opening new stores, or that such stores will operate profitably when opened or acquired. If the Company fails to effectively implement its expansion strategy, it could materially and adversely affect the Company's business, financial condition and results of operations. Competition. The retail business is highly competitive. The Company's primary competitors include national, regional and local chain department and specialty stores, general merchandise stores, discount and off- price retailers and outlet malls. Increased use and acceptance of the internet and other home shopping formats also creates increased competition. Some of these competitors offer similar or better branded merchandise and have greater financial resources to purchase larger quantities of merchandise at lower prices. The Company's success in counteracting these competitive pressures depends on its ability to: - offer merchandise which reflects the different regional and local needs of its customers; - differentiate and market itself as a home-town, locally-oriented store (as opposed to its more - nationally focused competitors); and continue to shift its merchandise mix to a higher proportion of better branded merchandise. Existing or new competitors, however, may begin to carry such brand-name merchandise or increase their offering of better quality merchandise which may negatively impact the Company's business, financial condition and results of operations. Vendor Relations. The Company believes its close relationships with its key vendors enhance its ability to purchase brand- name merchandise at competitive prices. If the Company loses key vendor support, is unable to participate in group purchasing activities or its vendors withdraw brand-name merchandise, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company cannot guarantee that it will be able to acquire brand-name merchandise at competitive prices or on competitive terms in the future. Leverage and Restrictive Covenants. Due to the level of the Company's indebtedness, any material adverse development affecting the Company could significantly limit its ability to withstand competitive pressures and adverse economic conditions, take advantage of expansion opportunities or to meet its obligations as they become due. The Company's existing debt agreements impose operating and financial restrictions that limit the Company's ability to make dividend payments and grant liens, among other matters. Interest Rate Risk. The Company's borrowings under its revolving line of credit facility bear a variable interest rate. If interest rates increase significantly, the Company's financial results could be materially adversely affected. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." Consumer Credit Risks. The Company's private-label credit card facilitates sales and generates additional revenue from credit card fees. Changes in credit card use, default rates or in the laws regulating the granting or servicing of credit (including late fees and finance charges applied to outstanding balances) could materially adversely affect the Company's business, financial condition and results of operations. In addition, the Company cannot guarantee that the credit card programs it has implemented will increase or maintain customer spending. Securitization of Accounts Receivable. The Company securitizes the receivables generated under its private-label credit card. Under the securitization program, the Company sells such receivables to a wholly- owned, special purpose entity which issues securities representing interests in the receivables to investors. The Company cannot guarantee that it will continue to generate receivables by credit card holders at the same rate, or that it will establish new credit card accounts at the rate it has in the past. Any material decline in the generation of receivables or in the rate of cardholder payments on accounts could have a material adverse effect on the Company's financial condition and results of operations. Dependence on Key Personnel. The Company's success depends to a large extent on its executive management team. The loss of the services of certain of its executives could have a material adverse effect on the Company. The Company cannot guarantee that it will be able to retain such key personnel or attract additional qualified members to its management team in the future. Labor Conditions. The Company depends on attracting and retaining a large number of qualified employees to maintain and increase sales and to execute its customer service programs. Many of the employees are in entry level or part-time positions with historically high levels of turnover. The Company's ability to meet its employment needs is dependent on a number of factors, including the following factors which affect the Company's ability to hire or retain qualified employees: - unemployment levels; - minimum wage legislation; and changing demographics in the local economies where stores are located. Item 2. PROPERTIES Corporate Offices and Distribution Center. The Company's corporate headquarters are located in an office building in northeast Fresno, California, constructed in 1991 by a limited partnership in which the Company is the sole limited partner holding a 36% interest in the partnership and the building constructed. The Company leases 89,000 square feet of the 176,000 square foot building under a twenty-year lease expiring in the year 2011. The lease contains two consecutive ten-year renewal options and the Company receives favorable rental terms under the lease. The Company believes that its current office space is adequate to meet its long-term office space requirements. The Company's distribution center, completed in 1989, was constructed and equipped to meet the Company's long-term merchandise distribution needs. The 420,000 square foot distribution facility is strategically located in Madera, California to economically service the Company's existing store locations in the western United States and its projected future market areas. The Company leases the distribution facility from an unrelated party under a 20-year lease expiring in the year 2009, with six consecutive five-year renewal options. Store Leases and Locations. The Company owns six of its forty-two department stores, and leases the remaining thirty-six department stores and all of its twenty specialty stores. While there is no assurance that the Company will be able to negotiate further extensions of any particular lease, management believes that satisfactory extensions or suitable alternative store locations will be available. Additional information pertaining to the Company's store leases is included in Note 8 to the Consolidated Financial Statements. The following table contains specific information about each of the Company's stores open as of the end of fiscal 1999. All locations are in the State of California except as noted: Expiration Gross(1) Date of Square Date Current Leased Feet Opened Lease (2) or Owned -------- ------ ---------- -------- DEPARTMENT STORES: Northern Region (19 Gottschalks locations): Antioch............. 80,000 1989 N/A (3) Owned Auburn.............. 40,000 1995 2005 Leased Carson City, Nevada. 68,000 1995 2005 Leased Chico............... 85,000 1988 2017 Leased Danville............ 42,200 1999 2009 Leased Davis............... 34,000 1999 2020 Leased Eureka.............. 96,900 1989 N/A (3) Owned Klamath Falls, Oregon............ 65,400 1992 2007 Leased Modesto: Vintage Faire.....161,500 1977 2007 Leased Century Center.... 65,000 1984 2013 Leased Reno, Nevada........138,000 1996 2016 Leased Sacramento..........194,400 1994 2014 Leased Santa Rosa..........131,300 1997 2017 Leased Sonora.............. 59,800 1997 2017 Leased Stockton............ 90,800 1987 2009 Leased Tacoma, Washington..119,300 1992 2012 Leased Tracy...............113,000 1995 2015 Leased Woodland............ 57,300 1987 2017 Leased Yuba City........... 80,000 1989 N/A(3) Owned Central Region (13 Gottschalks locations): Bakersfield, Valley Plaza...... 90,000 1987 2017 Leased Capitola............105,000 1990 2015 Leased Clovis..............101,400 1988 2018 Leased Fresno: Fashion Fair......163,000 1970 2016 Leased Fig Garden........ 36,000 1983 2005 Leased Manchester........175,600 1979 2009 Leased Hanford............. 98,800 1993 N/A(3) Owned Merced.............. 60,000 1983 2013 Leased Oakhurst............ 25,600 1994 2005 Leased San Luis Obispo..... 99,300 1986 N/A(3) Owned Santa Maria.........114,000 1976 2006 Leased Visalia.............150,000 1995 2014 Leased Watsonville......... 75,000 1995 2006 Leased Southern Region (10 Harris/Gottschalks locations) (4): Bakersfield, East Hills: Women's, Shoes and Accessories.....105,000 1998 2008(5) Leased Men's, Children's and Home........ 92,900 1988 2009 Leased Hemet............... 51,000 1998 2005 Leased Indio............... 60,000 1998 2005 Leased Moreno Valley.......153,000 1998 2008(5) Leased Palmdale: Women's, Shoes and Accessories.....114,000 1998 2008(5) Leased Men's, Children's and Home........114,900 1990 N/A(3) Owned Palm Springs........ 82,000 1991 2015 Leased Redlands............106,000 1998 2007 Leased Riverside...........208,000 1998 2002 Leased San Bernardino......204,000 1995 2017 Leased Victorville......... 71,000 1998 2006 Leased Total Department Store Square Footage........ 4,377,400 SPECIALTY STORES: Gottschalks: Aptos............... 11,200 1988 2004 Leased Redding............. 7,800 1993 Automatically Leased renews every 60 days Scotts Valley....... 11,200 1988 2001 Leased Village East: Antioch............. 2,100 1989 2005 Leased Capitola............ 2,360 1991 2009 Leased Carson City, Nevada. 3,400 1995 2005 Leased Chico............... 2,300 1988 2005 Leased Clovis.............. 2,300 1988 2009 Leased Eureka.............. 2,820 1989 2004 Leased Fresno, Fig Garden.. 2,800 1986 Monthly(6) Leased Hanford............. 2,800 1993 2008 Leased Modesto............. 2,730 1986 2005 Leased Sacramento.......... 2,700 1994 2004 Leased San Luis Obispo..... 2,500 1987 2011 Leased Stockton............ 1,800 1989 Monthly(6) Leased Tacoma, Washington.. 4,000 1992 2012 Leased Tracy............... 3,400 1995 2006 Leased Visalia............. 3,400 1975 2005 Leased Woodland............ 2,000 1987 Monthly(6) Leased Yuba City........... 3,200 1990 2000 Leased Total Specialty Store Square Footage.... 76,810 Total Square Footage.........4,454,210 __________________________ (1) Reflects total store square footage, including office space, storage, service and other support space that is not dedicated to direct merchandise sales. (2) Most of the Company's department store leases contain renewal options. Leases for specialty store locations generally do not contain renewal options. (3) These stores are Company owned and have been pledged as security for various mortgage obligations of the Company. (See Note 6 to the Consolidated Financial Statements.) (4) The Company acquired nine stores from Harris in August 1998, closing one of the acquired stores in January 1999, as planned. The Company also converted two of its Gottschalks stores located in close proximity to the Harris/Gottschalks stores, bringing the total number of Harris/Gottschalks stores operated to ten as of January 29, 2000. (5) These leases are with ECI, an affiliate of the Company. (6) These leases are renewable on a month-to- month basis. Item 3. LEGAL PROCEEDINGS The Company is party to legal proceedings and claims which have arisen during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered in this report. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on both the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange. The following table sets forth the high and low sales prices per share of common stock as reported on the NYSE Composite Tape under the symbol "GOT" during the periods indicated: 1999 1998 ------------- ------------ Fiscal Quarters High Low High Low ---- --- ---- --- 1st Quarter 7 13/16 6 3/4 9 1/4 6 13/16 2nd Quarter 9 3/16 7 3/16 8 7/8 7 3/4 3rd Quarter 9 3/16 8 1/16 8 3/4 6 9/16 4th Quarter 9 1/16 6 13/16 7 15/16 6 7/8 On March 31, 2000, the Company had 835 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. The sales price of the Company's common stock as reported by the NYSE on March 31, 2000 was $5 per share. The Company has not paid a cash dividend since its initial public offering in 1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future depending on the Company's earnings, financial condition and capital requirements. In addition, the Company's credit agreement with Congress Financial Corporation prohibits the Company from paying dividends without prior written consent from that lender. Item 6. SELECTED FINANCIAL DATA The Company reports on a 52/53 week fiscal year ending on the Saturday nearest to January 31. The fiscal years ended January 29, 2000, January 30, 1999, January 31, 1998, February 1, 1997, and February 3, 1996 are referred to herein as fiscal 1999, 1998, 1997, 1996 and 1995, respectively. All fiscal years noted include 52 weeks, except for fiscal 1995,which includes 53 weeks. The selected financial data below should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and related notes included elsewhere herein. The Company completed the acquisition of nine stores from Harris on August 20, 1998, closing one of the acquired stores on January 31, 1999, as planned. The acquisition has affected the comparability of the Company's financial results. In addition, effective fiscal 1999, the Company adopted the provisions of SAB No. 101, which requires that leased department sales no longer be combined with owned sales for financial reporting purposes. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales. All prior year amounts have been reclassified to conform with the required presentation.
RESULTS OF OPERATIONS: Fiscal Years 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands of dollars, except share data) Net sales $539,398 $476,925 $413,013 $389,378 $371,275 Net credit revenues 8,573 6,897 6,385 4,775 4,272 Net leased department revenues (1) 4,209 5,944 5,135 4,198 4,896 ------- ------- ------- ------- ------- Total revenues 552,180 489,766 424,533 398,351 380,443 Costs and expenses: Cost of sales 353,660 313,074 274,514 259,158 253,333 Selling, general and administrative expenses 166,027 150,884 130,922 123,860 120,637 Depreciation and amortization(2) 9,465 8,040 6,078 5,585 5,568 New store pre-opening costs 495 421 589 1,337 2,524 Asset impairment charge (3) 1,933 Acquisition related expenses 859 673 ------- ------- ------- ------- ------- Total costs and expenses 531,580 473,278 412,772 389,940 382,062 ------- ------- ------- ------- ------- Operating income (loss) 20,600 16,488 11,757 8,411 (1,619) Other (income) expense: Interest expense 11,279 9,470 7,325 8,111 7,718 Miscellaneous income (1,555) (2,011) (1,955) (2,792) (726) ------- ------- ------- ------- ------- 9,724 7,459 5,370 5,319 6,922 ------- ------- ------- ------- ------- Income (loss) before income tax expense (benefit) 10,876 9,029 6,387 3,092 (8,611) Income tax expense (benefit) 4,240 3,747 2,657 1,258 (2,972) ------- ------- ------ ------ ------- Net income (loss) $ 6,636 $ 5,282 $ 3,730 $ 1,834 $ (5,639) ======= ======= ======= ======= ======= Net income (loss) per common share - basic and diluted $ 0.53 $ 0.46 $ 0.36 $ 0.18 $ (0.54) ======= ======= ======= ======= ======= Weighted-average number of common shares outstanding: Basic 12,577 11,418 10,474 10,461 10,416 Diluted 12,616 11,449 10,491 10,461 10,416
SELECTED BALANCE SHEET DATA: Fiscal Years 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands of dollars) Retained interest in receivables sold $29,138 $ 37,399 $ 15,813 $ 20,871 $ 25,892 Credit card receivables, net 3,508 15,675 3,085 1,818 1,575 Merchandise inventories 130,028 123,118 99,294 89,472 87,507 Property and equipment, net 120,393 113,645 99,057 87,370 89,250 Total assets 314,004 324,304 242,311 232,400 239,041 Working capital 104,719 96,231 67,579 70,231 42,904 Long-term obligations, less current portion 80,674 74,114 62,420 60,241 34,872 Subordinated note payable to affiliate 20,961 20,618 --- --- --- Stockholders' equity 110,238 103,468 83,905 80,139 77,917
OTHER SELECTED DATA: Fiscal Years 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands of dollars, except other selected data) Sales growth: Total store sales 9.9% 15.4% 6.2% 5.3% 10.3% Comparable store sales, including leased departments 4.8% 2.1% 3.3% 1.4% (3.1%) Comparable store sales, excluding leased departments (4) 7.7% --- --- --- --- Comparable stores data (5): Sales per selling square foot $ 168 $ 170 $ 160 $ 170 $ 181 Selling square footage 2,758 2,621 2,642 2,161 1,892 Capital expenditures $16,059 $16,801 $14,976 $6,845 $12,773 Current ratio 2.42:1 1.98:1 2.01:1 2.10:1 1.45:1 _______________________________________ (1) Net leased department revenues consist of sales totaling $29.0 million, $40.2 million, $35.2 million, $32.8 million and $29.8 million in fiscal 1999, 1998, 1997, 1996 and 1995, respectively, less cost of sales. (2) Depreciation and amortization includes amortization of goodwill totaling $536,000 in fiscal 1999, $291,000 in fiscal 1998 and $116,000 in each of the fiscal years 1997 through 1995. (3) Represents a non- recurring charge related to an investment in a co-operative buying group. Excluding this amount, net income for fiscal 1999 was $7.8 million, or $0.62 per share. (4) Comparable store sales amounts for fiscal 1999 were materially affected by the termination of the shoe department leases in the twenty-eight Gottschalks stores effective August 1, 1999, and by the implementation of SAB No. 101, which requires the Company to report sales in leased departments separately from sales in owned departments. Comparable store sales data for fiscal years 1995 - 1998 would not be materially affected by the exclusion of leased department sales, due to the consistency of the contribution of those departments during those years. (5) Includes leased department sales in order to facilitate an understanding of the Company's sales relative to its selling square footage. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is management's discussion and analysis of significant factors which have affected the Company's financial position and its results of operations for the periods presented in the accompanying Consolidated Financial Statements. As described more fully in Note 2 to the Consolidated Financial Statements, the Company completed the acquisition of nine stores from Harris on August 20, 1998, closing one of the acquired stores on January 31, 1999, as planned. As noted below, the acquisition has affected the comparability of the Company's financial results. In addition, effective fiscal 1999, the Company implemented the provisions of SAB No. 101, which requires that leased department sales no longer be combined with owned sales for financial reporting purposes. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales. All prior year amounts have been reclassified to conform with the required presentation. Results of Operations The following table sets forth for the periods indicated certain items from the Company's Consolidated Income Statements, expressed as a percent of net sales:
Fiscal Years 1999 1998 1997 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Net credit revenues 1.6 1.5 1.5 Net leased department revenues 0.8 1.2 1.2 ----- ----- ----- 102.4 102.7 102.7 Costs and expenses: Cost of sales 65.6 65.6 66.4 Selling, general and administrative expenses 30.8 31.6 31.7 Depreciation and amortization 1.7 1.7 1.5 New store pre-opening costs 0.1 0.1 0.1 Asset impairment charge 0.4 Acquisition related costs 0.2 0.2 ----- ----- ----- 98.6 99.2 99.9 ----- ----- ----- Operating income 3.8 3.5 2.8 Other (income) expense: Interest expense 2.1 2.0 1.8 Miscellaneous income (0.3) (0.4) (0.5) ----- ----- ----- 1.8 1.6 1.3 ----- ----- ----- Income before income tax expense 2.0 1.9 1.5 Income tax expense 0.8 0.8 0.6 ----- ----- ----- Net income 1.2% 1.1% 0.9% ===== ===== =====
Fiscal 1999 Compared to Fiscal 1998 Net Sales Net sales increased by approximately $62.5 million, or 13.1%, to $539.4 million in fiscal 1999 as compared to $476.9 million in fiscal 1998. This increase is primarily due to additional sales volume generated by the eight new Harris/Gottschalks locations which were not open for the entire period in the prior year, and by two new stores opened in Davis and Danville, California in October and November 1999, respectively. The increase is also due to a 7.7% increase in comparable store sales, resulting partially from the conversion of the shoe departments in twenty- eight Gottschalks locations from leased to owned departments, effective August 1, 1999. Pursuant to SAB No. 101, sales generated in these shoe departments prior to the termination of the lease on August 1, 1999 are included in Net Leased Department Revenues, as described below. Net Credit Revenues Net credit revenues associated with the Company's private label credit card increased by approximately $1.7 million, or 24.3%, in fiscal 1999 as compared to fiscal 1998. As a percent of net sales, net credit revenues increased to 1.6% of net sales in fiscal 1999 as compared to 1.5% in fiscal 1998. Net credit revenues consist of the following:
(In thousands of dollars) 1999 1998 - ----------------------------------------------------------------------- Service charge revenues $15,482 $13,431 Interest expense on securitized receivables (4,069) (3,314) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (3,013) (3,175) Gain (loss) on sale of receivables 173 (45) ------ ------ $ 8,573 $ 6,897 ====== ======
Service charge revenues increased by approximately $2.1 million, or 15.3%, in fiscal 1999 as compared to fiscal 1998. This increase is primarily due to additional service charge revenues generated by customer credit card receivables acquired from Harris, a change in the method of assessing service charges to an average-daily balance method effective April 1999 (previously assessed based on the balance as of the end of a billing period), and an increase in the volume of late charge fees collected on delinquent credit card balances. The Company's credit sales as a percent of total sales increased to 44.2% in fiscal 1999 as compared to 43.1% in fiscal 1998. Interest expense on securitized receivables increased by $755,000, or 22.8%, in fiscal 1999 as compared to fiscal 1998. This increase is primarily due to a higher level of outstanding securitized borrowings during the period, combined with a higher weighted-average interest rate applicable to such borrowings (7.59% in fiscal 1999 as compared to 7.30% in fiscal 1998). Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale decreased by $162,000, or 5.1%, in fiscal 1999 as compared to 1998, primarily due to a favorable trend in credit losses during the period. The Company accounts for the sale of receivables pursuant to its securitization program in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 has not materially affected the Company's operating results since its initial implementation in fiscal 1997. Net Leased Department Revenues Net rental income generated by the Company's various leased departments decreased by approximately $1.7 million, or 29.2%, to $4.2 million in fiscal 1999 as compared to $5.9 million in fiscal 1998. This decrease is primarily due to the termination of the shoe department leases in twenty-eight Gottschalks locations effective August 1, 1999. Shoe department sales in those locations after August 1, 1999 are included in total sales for financial reporting purposes. As required by SAB No. 101, leased department revenues are presented net of the related costs for financial reporting purposes. Sales generated by the Company's leased departments, consisting primarily of the shoe departments (prior to August 1, 1999), fine jewelry departments and the beauty salons, totaled $29.0 million in fiscal 1999 and $40.2 million in fiscal 1998. Cost of Sales Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $40.6 million to $353.7 million in fiscal 1999 as compared to $313.1 million in fiscal 1998, an increase of 13.0%. These increases are due to the increase in sales. The Company's gross margin percentage remained unchanged at 34.4% in fiscal 1999 and fiscal 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $15.1 million to $166.0 million in fiscal 1999 as compared to $150.9 million in fiscal 1998, an increase of 10.0%. As a percent of net sales, selling, general and administrative expenses decreased to 30.8% in fiscal 1999 as compared to 31.6% in fiscal 1998, primarily due to higher sales volume gained through the acquisition of the Harris stores, combined with on-going Company-wide cost reduction efforts. Depreciation and Amortization Depreciation and amortization expense increased by approximately $1.5 million to $9.5 million in fiscal 1998 as compared to $8.0 million in fiscal 1998, an increase of 17.7%. As a percent of net sales, depreciation and amortization remained unchanged at 1.7% in fiscal 1999 and fiscal 1998. The dollar increase is primarily due to additional depreciation related to assets acquired from Harris and capital expenditures for the renovation of existing stores, and a full year of amortization of ($421,000 in fiscal 1999 as compared to $176,000 in fiscal 1998). New Store Pre-Opening Costs New store pre-opening costs of $495,000 were recognized in fiscal 1999, representing costs incurred in connection with the opening of two new stores in Davis and Danville, California in October and November 1999, respectively. New store pre-opening costs incurred in fiscal 1998, totaling $421,000, related to the amortization of costs arising from two new store openings in fiscal 1997. Non-Recurring Items The Company recognized a non- recurring asset impairment charge of $1.9 million in fiscal 1999 related to an investment in a cooperative merchandise buying group accounted for on the cost method. Fiscal 1998 results include acquisition related expenses of $859,000, consisting primarily of costs incurred prior to the elimination of duplicative operations of Harris, including merchandising, advertising, credit and distribution functions. By the end of fiscal 1998, all duplicative operations of Harris had been eliminated. Interest Expense Interest expense, which includes the amortization of deferred financing costs, increased by approximately $1.8 million to $11.3 million in fiscal 1999 as compared to $9.5 million in fiscal 1998, an increase of 19.1%. As a percent of net sales, interest expense increased to 2.1% in fiscal 1999 as compared to 2.0% in fiscal 1998. These increases are primarily due to additional interest associated with Subordinated Note issued to Harris (see Note 7 to the Consolidated Financial Statements), combined with higher average outstanding borrowings under the Company's working capital facility, which were required to facilitate increased inventory purchases for the newly owned shoe departments and for new stores. These increases were partially offset by a decrease in the weighted-average interest rate applicable to outstanding borrowings under the Company's working capital facility (7.52% in fiscal 1999 as compared to 7.88% in fiscal 1998), resulting primarily from a 1/4% interest rate reduction effective March 1999. Effective March 1, 2000, the Company received a 1/8% reduction in the interest rate on its working capital facility. It has been reported in the media that interest rates may increase during fiscal 2000. Any general increase in interest rates could offset or exceed the interest expense savings to the Company resulting from the interest rate reduction. Interest expense related to securitized receivables is reflected as a reduction to net credit revenues and is not included in interest expense for financial reporting purposes. Miscellaneous Income Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, decreased by approximately $400,000 to $1.6 million in fiscal 1999 as compared to $2.0 million in fiscal 1998. Miscellaneous income in fiscal 1998 includes a credit of approximately $350,000 to standardize the amortization periods of certain donated properties. Income Taxes The Company's effective tax rate decreased to 39.0% in fiscal 1999 as compared to 41.5% in fiscal 1998, primarily due to the implementation of tax planning strategies. (See Note 9 to the Consolidated Financial Statements.) Net Income As a result of the foregoing, the Company's net income increased by approximately $1.3 million to $6.6 million in fiscal 1999 as compared to $5.3 million in fiscal 1998. On a per share basis (basic and diluted), net income increased to $0.53 per share in fiscal 1999 as compared to $0.46 per share in fiscal 1998. Excluding the previously described non-recurring asset impairment charge, net income for fiscal 1999 was $7.8 million, or $0.62 per share. Fiscal 1998 Compared to Fiscal 1997 Net Sales Net sales in fiscal 1998 increased by $63.9 million to $476.9 million as compared to $413.0 million in fiscal 1997, a 15.5% increase. This increase is primarily due to additional sales volume generated by the nine new Harris/Gottschalks locations, beginning August 20, 1998, and by two new stores not open for the entire year in fiscal 1997. As planned, the Company closed one of the stores acquired from Harris on January 31, 1999. Comparable store sales increased by 2.1% in fiscal 1998 as compared to the prior year, despite unseasonably cold and wet weather conditions caused by the El Nino weather system. Net Credit Revenues Net credit revenues consist of the following: (In thousands of dollars) 1998 1997 - -------------------------------------------------- Service charge revenues $13,431 $11,618 Interest expense on securitized receivables (3,314) (3,579) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (3,175) (2,704) Gain (loss) on sale of receivables (45) 1,050 ------ ------ $ 6,897 $ 6,385 ====== ====== Net credit revenues increased by $512,000, or 8.0%, in fiscal 1998 as compared to fiscal 1997. As a percent of net sales, net credit revenues remained unchanged at 1.5% of net sales in fiscal 1998 and 1997. Service charge revenues increased by approximately $1.8 million, or 15.6%, in fiscal 1998 as compared to fiscal 1997. This increase is primarily due to additional service charge revenues generated by customer credit card receivables acquired from Harris, combined with an increase in the volume of late charge fees collected on delinquent credit card balances. Credit sales as a percent of total sales decreased to 43.1% in fiscal 1998 as compared to 43.7% in fiscal 1997, primarily due to lower credit sales volume in the newly acquired Harris/Gottschalks locations than in the Gottschalks locations. Interest expense on securitized receivables decreased by $265,000, or 7.4%, in fiscal 1998 as compared to fiscal 1997. This decrease relates to lower outstanding borrowings against securitized receivables during the period as a result of principal reductions made under the program prior to its refinancing on March 1, 1999. (See Note 3 to the Consolidated Financial Statements.) Charge- offs on receivables sold and the provision for credit losses on receivables ineligible for sale increased by $471,000, or 17.4%, in fiscal 1998 as compared to 1997. As a percent of sales, however, such amounts remained unchanged at 0.6% in fiscal 1998 and 1997. The gain on sale of receivables in fiscal 1997 includes a non-recurring credit of $898,000 related to a change in the estimate for the allowance for doubtful accounts for receivables which were ineligible for sale. Net Leased Department Revenues Net rental income generated by the Company's various leased departments increased by $809,000, or 15.8%, to $5.9 million in fiscal 1999 as compared to $5.1 million in fiscal 1998. This increase is primarily due to increased revenues generated by the newly acquired Harris/Gottschalks stores beginning August 1998. Sales generated by the Company's leased departments totaled $40.2 million in fiscal 1998 and $35.2 million in fiscal 1997. Cost of Sales Cost of sales increased by approximately $38.6 million to $313.1 million in fiscal 1998 as compared to $274.5 million in fiscal 1997, an increase of 14.0%. The Company's gross margin percentage increased to 34.4% in fiscal 1998 as compared to 33.6% in fiscal 1997, primarily due to increased sales of higher gross margin merchandise categories in certain of the Company's stores, combined with lower costs associated with the processing of merchandise at the Company's distribution center. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $20.0 million to $150.9 million in fiscal 1998 as compared to $130.9 million in fiscal 1997, an increase of 15.2%. As a percent of net sales, selling, general and administrative expenses decreased to 31.6% in fiscal 1998 as compared to 31.7% in fiscal 1997, primarily due to higher sales volume gained through the acquisition of the Harris stores, lower rental expense resulting from the modification of certain store lease agreements and from the refinancing and conversion of certain operating equipment leases into capital leases. This decrease was partially offset by increased payroll and payroll related costs in the Company's stores as a result of the mandatory minimum wage increase in California (from $5.15 to $5.75 per hour, an 11.7% increase) effective March 1, 1998, and other competitive wage adjustments. The Company also increased advertising and credit solicitation expenditures during the year in an attempt to improve sluggish apparel sales during the first half of the year caused by the El Nino weather system and in connection with the integration of the Harris stores. Depreciation and Amortization Depreciation and amortization expense increased by approximately $1.9 million to $8.0 million in fiscal 1998 as compared to $6.1 million in fiscal 1997, an increase of 32.3%. As a percent of net sales, depreciation and amortization increased to 1.7% in fiscal 1998 as compared to 1.5% in fiscal 1997. These increases are primarily due to additional depreciation related to capital expenditures for new stores and for the renovation of existing stores, new capital lease obligations, and assets acquired from Harris. These increases are also due to the amortization of goodwill associated with the August 1998 acquisition of the Harris stores. New Store Pre-Opening Costs The amortization of new store pre- opening costs totaled $421,000 in fiscal 1998 as compared to $589,000 in fiscal 1997. Non-Recurring Items Fiscal 1998 results include acquisition related expenses of $859,000, consisting primarily of costs incurred prior to the elimination of duplicative operations of Harris, including merchandising, advertising, credit and distribution functions. By the end of fiscal 1998, all duplicative operations of Harris had been eliminated. The Company had previously entered into negotiations for the acquisition of Harris in fiscal 1997. The parties were unable to agree on the terms of the transaction, however, and negotiations were discontinued. Fiscal 1997 results include $673,000 of costs related to the proposed transaction, consisting primarily of legal, accounting and investment banking fees. Interest Expense Interest expense increased by approximately $2.2 million to $9.5 million in fiscal 1998 as compared to $7.3 million in fiscal 1997, an increase of 29.3%. As a percent of net sales, interest expense increased to 2.0% in fiscal 1998 as compared to 1.8% in fiscal 1997. These increases are primarily due to higher average outstanding borrowings under the Company's working capital facilities, and additional interest associated with the Subordinated Note issued to Harris (see Note 7 to the Consolidated Financial Statements). These increases were partially offset by a decrease in the weighted-average interest rate applicable to outstanding borrowings under the Company's working capital facilities (7.88% in fiscal 1998 as compared to 8.16% in fiscal 1997) resulting from interest rate reductions during the year. Miscellaneous Income Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, remained unchanged at approximately $2.0 million in fiscal 1998 and 1997. Miscellaneous income in fiscal 1998 includes a credit of approximately $350,000 to standardize the amortization periods of certain donated properties. Miscellaneous income in fiscal 1997 includes a credit to a deferred lease incentive of $400,000, which resulted from the revision of certain terms of the related lease. Income Taxes The Company's effective tax rate was 41.5% in fiscal 1998 as compared to 41.6% in fiscal 1997. (See Note 9 to the Consolidated Financial Statements.) Net Income As a result of the foregoing, the Company's net income increased by approximately $1.6 million to $5.3 million in fiscal 1998 as compared to $3.7 million in fiscal 1997. On a per share basis (basic and diluted), net income increased to $0.46 per share in fiscal 1998 as compared to $0.36 per share in fiscal 1997. Liquidity and Capital Resources The Company's working capital requirements are currently met through a combination of cash provided by operations, short-term trade credit, and by borrowings under its revolving line of credit and its receivables securitization program. Working capital increased by approximately $8.5 million to $104.7 million in fiscal 1999 as compared to $96.2 million in fiscal 1998. The Company's liquidity position, like that of most retailers, is affected by seasonal influences, with the greatest portion of cash from operations generated in the fourth quarter of each fiscal year. The Company's ratio of current assets to current liabilities increased to 2.42:1 as of the end of fiscal 1999 as compared to 1.98:1 as of the end of fiscal 1998. Proposed Business Acquisition. On April 24, 2000, the Company entered into a definitive asset purchase agreement with Lamonts, providing for the Company to acquire all of Lamont's department store leases and store fixtures and equipment for a cash purchase price of $19.0 million. Lamonts is a Northwest-based regional department store chain currently operating thirty-eight department stores, with twenty-three located in the state of Washington, seven in Alaska, five in Idaho, two in Oregon and one in Utah. Lamonts filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in January 2000, and the purchase is subject to approval by the Bankruptcy Court. If approved, the transaction is expected to close in late July 2000. The Company has obtained a commitment from Congress Financial Corporation ("Congress") to provide a short-term acquisition financing facility for $10.0 million to finance a portion of the purchase price, with the remaining $9.0 million of the purchase price to be funded with working capital. The Company expects to repay the short-term financing, due December 31, 2000, with proceeds from a newly issued certificate under its receivables securitization program. The new certificate, which is expected to be issued by the end of the third quarter of fiscal 2000, will be collateralized by credit card receivables in excess of required amounts in the Company's current portfolio, and by new receivables expected to be generated in the acquired locations. The Company also expects to receive a $40.0 million increase to its working capital facility, effective upon court approval of the transaction, to provide for increased inventory requirements for the new stores. Revolving Line of Credit. The Company has a $140.0 million revolving line of credit facility with Congress through March 31, 2002. Borrowings under the arrangement are limited to a restrictive borrowing base equal to 75% of eligible merchandise inventories, increasing to 80% of such inventories during the period of November 1 through December 31 of each year to fund increased seasonal inventory requirements. Interest under the facility was charged at a rate of LIBOR plus 2.00% for substantially all of fiscal 1999 (reduced to LIBOR plus 1.875% on March 1, 2000), with no interest charged on the unused portion of the line of credit. The Company had $21.1 million of excess availability under the credit facility as of January 29, 2000. Receivables Securitization Program. As described more fully in Note 3 to the Consolidated Financial Statements, the Company sells all of its accounts receivable arising under its private-label credit cards on an ongoing basis under a receivables securitization facility. The facility provides the Company with an additional source of working capital and long-term financing that is generally more cost-effective than traditional debt financing. On March 1, 1999, the Company issued a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") to a single investor through a private placement. Proceeds from the issuance of the 1999-1 Series were used to repay the outstanding balances of previously issued certificates, totaling $26.9 million as of that date and the remaining funds were used to purchase additional receivables from the Company. The holder of the 1999-1 Series certificate earns interest on a monthly basis at a fixed interest rate of 7.66%, and the outstanding principal balance of the certificate, which is off-balance sheet for financial reporting purposes, is to be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. Monthly cash flows generated by the Company's credit card portfolio, consisting of principal and interest collections, are first used to pay certain costs of the program, which include interest payable to the investor, and are then available to fund the working capital requirements of the Company. Subject to certain conditions, the Company may expand the securitization program to meet future receivables growth. Uses of Liquidity. Capital expenditures in fiscal 1999, totaling $16.1 million, were primarily related to tenant improvements and fixtures and equipment for the two new department stores opened during the year, and to the renovation and refixturing of certain existing locations and certain of the Company's new Harris/Gottschalks locations. Commitments for fiscal 2000 currently include the remodeling and enlargement of the Company's existing store in San Luis Obispo, California, and the opening a new 45,000 square foot store in Grants Pass, Oregon. While these projects are expected to be completed by July and August 2000, respectively, there can be no assurance that they will not be delayed due to a variety of conditions precedent or other factors. The remaining estimated cost of these projects as of January 29, 2000 of approximately $4.3 million are expected to be funded through existing capital resources. As described more fully in Note 6 to the Consolidated Financial Statements, the Company has other long-term obligations with total outstanding balances of $27.9 million at January 29, 2000 ($30.2 million as of January 30, 1999). The loans mature at dates ranging from 2001 to 2010, bear interest at fixed rates ranging from 9.39% to 10.45%, and are collateralized by various properties and equipment of the Company. The scheduled annual principal maturities on the Company's various long-term obligations are $2.8 million, $2.5 million, $1.4 million, $1.4 million and $620,000 for fiscal 2000 through 2004, with $19.2 million due thereafter. In addition, in fiscal 1998 the Company issued a $22.2 million 8% Subordinated Note in connection with the Harris acquisition. The Subordinated Note is due August 20, 2003, but may be extended to August 2006 under certain circumstances. On February 23, 2000, the Board of Directors of the Company approved the repurchase of up to $2.0 million of Company common stock, in open market or private transactions, for a period of up to twelve months. Any shares that may be repurchased will be held as treasury shares initially and may be used in connection with the Company's stock option program and for other general corporate purposes or acquisitions. The Company expects to finance the repurchases from working capital. No shares have been repurchased as of the date of this report. The Company's revolving line of credit agreement, and certain of its long-term debt and lease arrangements contain various restrictive covenants. The Company was in compliance with all such restrictive covenants as of January 29, 2000. Management believes the previously described sources of liquidity are adequate to meet the Company's working capital, capital expenditure and debt service requirements for fiscal 2000. Management also believes it has sufficient sources of liquidity for its long- term growth plans at moderate levels. The Company may engage in other financing activities if they are necessary or deemed to be advantageous. Inflation Although inflation has not been a material factor in the Company's operations during the past several years, the Company has experienced increases in the costs of certain of its merchandise, salaries, employee benefits and other general and administrative costs. The Company is generally able to offset these increases by adjusting its selling prices or by modifying its operations. The Company's ability to adjust selling prices is limited by competitive pressures in its market areas. The Company accounts for its merchandise inventories on the retail method using last-in, first-out (LIFO) cost based upon the department store price indices published by the Bureau of Labor Statistics. Under this method, the cost of products sold reported in the financial statements approximates current costs and thus reduces the impact of inflation on reported income due to increasing costs. Seasonality The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of net sales, gross profit and operating results realized during the Christmas selling months of November and December of each year, and to a lesser extent, during the Easter and Back-to- School selling seasons. The Company's results may also vary from quarter to quarter as a result of, among other things, the timing and level of the Company's sales promotions, weather, fashion trends and the overall health of the economy, both nationally and in the Company's market areas. Working capital requirements also fluctuate during the year, increasing substantially prior to the Christmas selling season when the Company must carry significantly higher inventory levels. The following table sets forth unaudited quarterly results of operations for fiscal 1999 and 1998 (in thousands, except per share data). (See Note 16 to the Consolidated Financial Statements.)
1999 -------------------------------------------- Quarter Ended May 1 July 31 October 30 January 29 ------ ------- ---------- ---------- Net sales (1) $111,104 $118,718 $122,873 $186,703 Gross profit 37,647 41,000 43,980 63,111 Income (loss) before income tax expense (benefit)(2) (1,851) ( 180) 615 12,292 Net income (loss) (1,079) ( 105) 358 7,462 Net income (loss) per common share - basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59 Weighted-average number of common shares outstanding: Basic 12,575 12,575 12,575 12,581 Diluted 12,575 12,575 12,646 12,615
1998 -------------------------------------------- Quarter Ended May 2 August 1 October 31 January 30 ----- -------- ---------- ---------- Net sales (1) $ 87,389 $ 95,263 $113,880 $180,393 Gross profit 28,792 31,361 41,898 61,800 Income (loss) before income tax expense (benefit) (3,408) (2,310) 604 14,143 Net income (loss) (1,994) (1,352) 345 8,283 Net income (loss) per common share - basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66 Weighted-average number of common shares outstanding(3): Basic 10,479 10,479 12,138 12,575 Diluted 10,479 10,479 12,155 12,593
(1) The Company's net sales by quarter have been reclassified to exclude leased department sales, in accordance with the requirements of SAB No. 101. (2) Net income in the three month period ended January 29, 2000 includes a non-recurring, pre-tax charge of $1,933,000 to reflect the impairment of an investment accounted for under the cost method. (3) The increase in the weighted-average number of common shares outstanding during fiscal 1998 resulted from the issuance of 2,095,900 shares of common stock to Harris on August 20, 1998 in connection with a business acquisition (see Note 2 to the Consolidated Financial Statements.) Recently Issued Accounting Standards The Securities and Exchange Commission recently issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which is effective for fiscal 1999 and requires that leased department sales no longer be combined with net sales for financial reporting purposes, and that all prior periods presented be reclassified to conform with the required presentation. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales. The adoption of SAB No. 101 has no impact on the Company's prior or future operating results and relates only to financial statement presentation and disclosure. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as deferred by SFAS No. 137, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company currently does not have any derivatives and therefore does not expect that the adoption of this standard, effective beginning fiscal 2001, will have a material impact on the Company's financial position or the results of its operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks in the normal course of business due to changes in interest rates on short- term borrowings under its revolving line of credit. As of January 29, 2000, line of credit borrowings subject to a variable interest rate represented 38.6% of the Company's total outstanding borrowings (both on and off-balance sheet). The Company does not engage in financial transactions for speculative or trading purposes, nor does the Company purchase or hold any derivative financial instruments. The interest payable on the Company's revolving line of credit is based on a variable interest rate and is therefore affected by changes in market interest rates. An increase of 80 basis points on existing line of credit borrowings (a 10% change from the Company's weighted-average interest rate as of January 29, 2000) would reduce the Company's pre-tax net income and cash flow by approximately $500,000. This 80 basis point increase in interest rates would not materially affect the fair value of the Company's fixed rate financial instruments. (See Note 1 to the Consolidated Financial Statements.) Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is set forth under Part IV, Item 14, included elsewhere herein. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by Item 10 of Form 10-K, other than the following information required by Paragraph (b) of Item 401 of Regulation S-K, is incorporated by reference from those portions of the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 22, 2000, to be filed pursuant to Regulation 14A (the "2000 Proxy") under the headings "Nominees for Election as Director" and "Section 16(a) Beneficial Ownership Reporting Compliance." The following table lists the executive officers of the Company: Name Age(1) Position - ------------ ----- --------- Joe W. Levy 69 Chairman James R. Famalette 48 President and Chief Executive Officer Gary L. Gladding 60 Executive Vice President/General Merchandise Manager Michael S. Geele 49 Senior Vice President and Chief Financial Officer Michael J. Schmidt 58 Senior Vice President/ Director of Stores __________________________ (1) As of March 31, 2000 Joe W. Levy is Chairman of the Company. From 1986 to June 25, 1999, he was Chairman and Chief Executive Officer of the Company. He first joined the Company in 1956. (1) He serves on the Board of Directors of the National Retail Federation and the Executive Committee of Frederick Atkins. He was formerly Chairman of the California Transportation Commission and has served on numerous other boards, state and local commissions and public service agencies. James R. Famalette became President and Chief Executive Officer of the Company on June 25, 1999 after serving as President and Chief Operating Officer of the Company since April 14, 1997. Prior to joining the Company, Mr. Famalette was President and Chief Executive Officer of Liberty House, a department and specialty store chain based in Honolulu, Hawaii, from 1993 through 1997, and served in a variety of other positions with Liberty House from 1987 through 1993, including Vice President, Stores and Vice President, General Merchandise Manager. From 1982 through 1987, he served as Vice President, General Merchandise Manager and later as President of Village Fashions/Cameo Stores in Philadelphia, Pennsylvania, and from 1975 to 1982 served as a Divisional Merchandise Manager for Colonies, a specialty store chain, based in Allentown, Pennsylvania. Mr. Famalette serves on the Board of Directors of the National Retail Federation and Frederick Atkins. Gary L. Gladding has been Executive Vice President of the Company since 1987, and joined the Company as Vice President/General Merchandise Manager in 1983. (1) Prior to 1983, he served in a variety of management positions with Lazarus Department Stores, a division of Federated Department Stores, Inc., and the May Department Stores Co. Michael S. Geele became Senior Vice President and Chief Financial Officer of the Company on January 21, 1999. Prior to joining the Company, Mr. Geele was Chief Financial Officer of Southwest Supermarkets in Phoenix, Arizona from 1995 to 1998. From 1991 to 1995, Mr. Geele served as Vice President of Finance for Smitty's Super Valu in Phoenix, Arizona, and from 1981 to 1991 served in various financial positions with Smitty's, including Senior Director and Corporate Controller. Mr. Geele is a Certified Public Accountant. Michael J. Schmidt became Senior Vice President/Director of Stores of the Company in 1985 (1). From 1983 through 1985, he was Manager of the Gottschalks Fashion Fair store. Prior to joining the Company, he held management positions with Liberty House, Allied Corporation and R.H. Macy & Co., Inc. ____________________________ (1) References to the Company prior to 1986 are more specifically to the Company's predecessor and former subsidiary, E. Gottschalk and Co., Inc. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from those portions of the Company's 2000 Proxy under the headings "Executive Compensation" and "Director Compensation For Fiscal Year 1999." Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the portion of the Company's 2000 Proxy under the heading "Security Ownership of Certain Beneficial Owners and Management." Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the portion of the Company's 2000 Proxy under the heading "Certain Relationships and Related Transactions." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Gottschalks Inc. and Subsidiary as required by Item 8 are included in this Part IV, Item 14: Consolidated balance sheets - As of January 29, 2000 and January 30, 1999 Consolidated income statements -- Fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 Consolidated statements of stockholders' equity -- Fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 Consolidated statements of cash flows -- Fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 Notes to consolidated financial statements -- Three years ended January 29, 2000 Independent auditors' report (a)(2) The following financial statement schedule of Gottschalks Inc. and Subsidiary is included in Item 14(d): Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the consolidated financial statements, are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The following exhibits are required by Item 601 of Regulation S-K and Item 14(c): Incorporated by Reference From the Exhibit Following No. Description Document - ------- ------------- ------------- 3.1 Certificate of Incorporation Registration of the Registrant, as amended Statement on Form S-1 (File No. 33-3949) 3.2 By-Laws of the Registrant, Annual Report on as amended Form 10-K for the year ended February 3, 1996 (File No. 1-09100) 10.1 Agreement of Limited Partnership Annual Report on dated March 16, 1990, by and Form 10-K for the between River Park Properties I year ended February and Gottschalks Inc. relating to 2, 1991 (File No. the Company's corporate 1-09100) headquarters 10.2 Gottschalks Inc. Retirement Registration Savings Plan(*) Statement on Form S-1 (File No. 33-3949) 10.3 Participation Agreement dated Annual Report on as of December 1, 1988 among Form 10-K for the Gottschalks Inc., General Foods year ended January Credit Investors No. 2 Corporation 29, 1994 (File No. and Manufacturers Hanover Trust 1-09100) Company of California relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility 10.4 Lease Agreement dated December 1, AnnualReport on 1988 by and between Manufacturers Form 10-K for the Hanover Trust Company of California year ended January and Gottschalks Inc. relating to 29, 1994 (File No. the sale-leaseback of department 1-09100) stores in Stockton and Bakersfield, California and the Madera distribution facility 10.5 Ground Lease dated December 1, Annual Report on 1988 by and between Gottschalks Form 10-K for the Inc. and Manufacturers Hanover year ended January Trust Company of California 29, 1994 (File No. relating to the sale-leaseback 1-09100) of the Bakersfield department store 10.6 Memorandum of Lease and Lease Annual Report on Supplement dated July 1, 1989 by Form 10-K for the and between Manufacturers Hanover year ended January Trust Company of California and 29, 1994 (File No. Gottschalks Inc. relating to the 1-09100) sale-leaseback of the Stockton department store 10.7 Ground Lease dated August 17, Annual Report on 1989 by and between Gottschalks Form 10-K for the Inc. and Manufacturers Hanover year ended January Trust Company of California 29, 1994 (File No. relating to the sale-leaseback of 1-09100) the Madera distribution facility 10.8 Lease Supplement dated as of Annual Report on August 17, 1989 by and between Form 10-K for the Manufacturers Hanover Trust year ended January Company of California and 29, 1994 (File No. Gottschalks Inc. relating to the 1-09100) sale-leaseback of the Madera distribution facility 10.9 Tax Indemnification Agreement Annual Report on dated as of August 1, 1989 by Form 10-K for the and between Gottschalks Inc. year ended January and General Foods Credit 29, 1994 (File No. Investors No. 2 Corporation 1-09100) relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility 10.10 Lease Agreement dated as of Annual Report on March 16, 1990 by and between Form 10-K for the Gottschalks Inc. and River year ended January Park Properties I relating to the 29, 1994 (File No. Company's corporate headquarters 1-09100) 10.11 Consulting Agreement dated Quarterly Report on May 27, 1994 by and between Form 10-Q for the Gottschalks Inc. and Gerald quarter ended April H. Blum(*) 30, 1994 (File No. 1-09100) 10.12 Form of Severance Agreement Annual Report on dated March 31, 1995 by and Form 10-K for the between Gottschalks Inc. and year ended January the following senior executives 28, 1995 (File No. of the Company: Joseph W. Levy, 1-09100) Gary L. Gladding and Michael J. Schmidt(*) 10.13 1994 Key Employee Incentive Registration Stock Option Plan(*) Statement on Form S-8 (File #33-54789) 10.14 1994 Director Nonqualified Registration Stock Option Plan(*) Statement on Form S-8 (File #33-54783) 10.15 Promissory Note and Security Annual Report on Agreement dated December 16, Form 10-K for the 1994 by and between year ended January Gottschalks Inc. and 28, 1995 (File No. Heller Financial, Inc. 1-09100) 10.16 Agreement of Sale dated June 27, Quarterly Report on 1995, by and between Gottschalks Form 10-Q for the Inc. and Jack Baskin relating to quarter ended July the sale and leaseback of the 29, 1995 (File No. Capitola, California property 1-09100) 10.17 Lease and Agreement dated June 27, Quarterly Report on 1995, by and between Jack Baskin Form 10-Q for the and Gottschalks Inc. relating to quarter ended July the sale and leaseback of the 29, 1995 (File No. Capitola, California property 1-09100) 10.18 Promissory Notes and Security Quarterly Report on Agreements dated October 4, 1995 Form 10-Q for the and October 10, 1995 by and quarter ended between Gottschalks Inc. and October 28, 1995 Midland Commercial Funding (File No. 1-09100) 10.19 Promissory Note and Security Quarterly Report on Agreement dated October 2, Form 10-Q for the 1996, by and between Gottschalks year ended November Inc. and Heller Financial, Inc. 2, 1996 (File No. 1-09100) 10.20 Loan and Security Agreement dated Annual Report on December 29, 1996, by and between Form 10-K for the Gottschalks Inc. and Congress year ended February Financial Corporation 1, 1997 (File No. 1-09100) 10.21 Gottschalks Inc. 1998 Stock Registration Option Plan(*) Statement on Form S-8 (File #33-61471) 10.22 Gottschalks Inc. 1998 Registration Employee Stock Purchase Statement on Form Plan(*) S-8 (File #33-61473) 10.23 Asset Purchase Agreement dated Current Report on as of July 21, 1998 among Form 8-K dated July Gottschalks Inc., The Harris 21, 1998 (File No. Company and El Corte Ingles, 1-09100) S. A. together with all Exhibits thereto 10.24 Non-Negotiable, Extendable, Current Report on Subordinated Note due Form 8-K dated August 20, 2003 issued to August 20, 1998 The Harris Company (File No. 1-09100) 10.25 Registration Rights Agreement Current Report on between The Harris Company and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.26 Employee Lease Agreement between Current Report on The Harris Company and Gottschalks Form 8-K dated Inc. dated August 20, 1998 August 20,1998 (File No. 1-09100) 10.27 Tradename License Agreement Current Report on between The Harris Company and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.28 Stockholders' Agreement among Current Report on El Corte Ingles, S. A., Gottschalks Form 8-K dated Inc., Joseph Levy and Bret Levy August 20, 1998 dated August 20, 1998 (File No. 1-09100) 10.29 Standstill Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20,1998 August 20, 1998 (File No. 1-09100) 10.30 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: East Hills (File No. 1-09100) Mall, Bakersfield, California 10.31 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Moreno (File No. 1-09100) Valley Mall at Towngate, Moreno Valley, California 10.32 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Antelope (File No. 1-09100) Valley Mall at Palmdale, California 10.33 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Carousel (File No.1-09100) Mall at San Bernardino, California 10.34 Form of Severance Agreement Annual Report on dated January 21, 1999 by Form 10-K for the and between Gottschalks Inc. year ended January and Michael S. Geele (*) 30,1999 (File No. 1-09100) 10.35 Receivables Purchase Annual Report on Agreement dated March 1, 1999 Form 10-K for the By and between Gottschalks year ended January Credit Receivables Corporation 30, 1999 (File No. and Gottschalks Inc. 1-09100) 10.36 Pooling and Servicing Annual Report on Agreement dated as of March 1, Form 10-K for the 1999 by and among Gottschalks year ended January Credit Receivables Corporation, 30, 1999 (File No. Gottschalks Inc. and Bankers 1-09100) Trust Company 10.37 Series 1999-1 Supplement to Annual Report on Pooling and Servicing Form 10-K for the Agreement dated March 1, 1999 year ended January by and among Gottschalks Credit 30, 1999 (File No. Receivables Corporation, 1-09100) Gottschalks Inc. and Bankers Trust Company 10.38 Sixth Amendment to Loan and Quarterly Report on Security Agreement dated August Form 10-Q for the 12, 1999, by and between Gottschalks quarter ended July 31, Inc. and Congress Financial 1999 (File No. 1- Corporation (Western). 09100_ 10.39 Employment Agreement dated June Quarterly Report on 25, 1999 by and between Form 10-Q for the Gottschalks Inc. and James R. quarter ended July Famalette(*). 31, 1999 (File No. 1-09100) 10.40 Seventh Amendment to Loan and Filed electronically Security Agreement dated March herewith 27,2000, by and between Gottschalks Inc. and Congress Financial Corporation (Western). 10.41 Asset Purchase Agreement dated Filed electronically April 24, 2000 by and between herewith Gottschalks Inc. and Lamonts Apparel, Inc. 21. Subsidiary of the Registrant Annual Report on Form 10-K for the year ended January 28, 1995 (File No. 1-09100) 23. Independent Auditors' Consent Filed electronically herewith 27. Financial Data Schedule Filed electronically herewith (*) Management contract, compensatory plan or arrangement. ______________________________________________ (b) Reports on Form 8-K -- The Company did not file any Reports on Form 8-K during the fourth quarter of fiscal 1999. (c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedule-- The response to this portion of Item 14 is submitted as a separate section of this report. ANNUAL REPORT ON FORM 10-K ITEM 8, 14(a)(1) and (2), (c) and (d) CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE YEAR ENDED JANUARY 29, 2000 GOTTSCHALKS INC. AND SUBSIDIARY FRESNO, CALIFORNIA INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Gottschalks Inc. Fresno, California We have audited the accompanying consolidated balance sheets of Gottschalks Inc. and Subsidiary as of January 29, 2000 and January 30, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 29, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiary as of January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2000 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Fresno, California February 23, 2000 (April 24, 2000 as to Note 15)
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) January 29, January 30, ASSETS 2000 1999 - ------- ----------- ----------- CURRENT ASSETS: Cash $ 1,901 $ 1,693 Retained interest in receivables sold 29,138 37,399 Receivables - net 7,597 18,645 Merchandise inventories 130,028 123,118 Other 9,666 13,116 ------- ------- Total current assets 178,330 193,971 PROPERTY AND EQUIPMENT - net 120,393 113,645 OTHER ASSETS: Goodwill - net 8,708 9,244 Other 6,573 7,444 -------- -------- 15,281 16,688 ------- -------- $314,004 $324,304 ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) January 29, January 30, 2000 1999 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable and accrued expenses $ 58,976 $ 68,563 Revolving line of credit 5,479 20,273 Current portion of long-term obligations 4,479 4,434 Deferred income taxes 4,677 4,470 -------- ------- Total current liabilities 73,611 97,740 LONG-TERM OBLIGATIONS, less current portion 80,674 74,114 DEFERRED INCOME AND OTHER 20,911 24,111 DEFERRED INCOME TAXES 7,609 4,253 SUBORDINATED NOTE PAYABLE TO AFFILIATE - net 20,961 20,618 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value of $.10 per share; 2,000,000 shares authorized; none issued Common stock, par value of $.01 per share; 30,000,000 shares authorized; 12,596,837 and 12,575,565 issued 126 126 Additional paid-in capital 70,760 70,626 Retained earnings 39,352 32,716 ------- ------- 110,238 103,468 ------- ------- $314,004 $324,304 ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) 1999 1998 1997 -------- --------- -------- Net sales $539,398 $476,925 $413,013 Net credit revenues 8,573 6,897 6,385 Net leased department revenues 4,209 5,944 5,135 Total revenues 552,180 489,766 424,533 Costs and expenses: Cost of sales 353,660 313,074 274,514 Selling, general and administrative expenses 166,027 150,884 130,922 Depreciation and amortization 9,465 8,040 6,078 New store pre-opening costs 495 421 589 Asset impairment charge 1,933 Acquisition related expenses 859 673 ------- ------- ------- Total costs and expenses 531,580 473,278 412,776 ------- ------- ------- Operating income 20,600 16,488 11,757 Other (income) expense: Interest expense 11,279 9,470 7,325 Miscellaneous income (1,555) (2,011) (1,955) ------- ------ ------ 9,724 7,459 5,370 ------- ------ ------ Income before income tax expense 10,876 9,029 6,387 Income tax expense 4,240 3,747 2,657 ------- ------- ------- Net income $ 6,636 $ 5,282 $ 3,730 ======= ======= ======= Net income per common share - basic and diluted $ 0.53 $ 0.46 $ 0.36 ======= ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data) Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Total ----------------- --------- ---------- ----- BALANCE, FEBRUARY 1, 1997 10,472,915 $105 $56,330 $23,704 $ 80,139 Net income 3,730 3,730 Shares issued under stock option plan 5,500 36 36 ---------- ----- ------ ------ ------ BALANCE, JANUARY 31, 1998 10,478,415 105 56,366 27,434 83,905 Net income 5,282 5,282 Shares issued for business acquisition 2,095,900 21 14,252 14,273 Shares issued under stock option plan 1,250 8 8 ---------- ---- ------ ------ ------ BALANCE, JANUARY 30, 1999 12,575,565 126 70,626 32,716 103,468 Net income 6,636 6,636 Shares issued under stock purchase plan 21,272 134 134 ---------- --- ------ ------ ------ BALANCE, JANUARY 29, 2000 12,596,837 $126 $70,760 $39,352$110,238 ========== === ====== ====== =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1999 1998 1997 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 6,636 $ 5,282 $ 3,730 Adjustments: Depreciation and amortization 9,960 8,461 6,667 Deferred income taxes 3,562 633 2,557 Amortization of deferred items (3,201) (950) (888) Provision for credit losses 982 992 470 Net loss (gain) from sale of assets 86 26 (72) Asset impairment charge 1,933 Other non-cash items, net 343 (106) (1,170) Decrease (increase) in assets, excluding effect of business acquisition: Receivables (2,643) (972) (1,346) Merchandise inventories (6,117) (4,524) (9,227) Other current and long-term assets 2,268 2,678 2,594 Increase (decrease) in liabilities, excluding effect of business acquisition: Trade accounts payable and accrued expenses (7,868) (2,571) 1,873 Other current and long-term liabilities (136) 2,545 (1,546) ------- ------- ------- Net cash provided by operating activities 5,805 11,494 3,642 INVESTING ACTIVITIES: Available-for-sale securities: Maturities (305,926)(262,357) (230,433) Purchases 304,795 256,571 235,491 Purchases of property and equipment (16,059) (16,801) (14,976) Acquisition of business (1,369) Proceeds from property and equipment sales 123 680 365 Other 194 198 229 ------- ------- ------- Net cash used in investing activities (16,873) (23,078) (9,324) FINANCING ACTIVITIES: Net proceeds (repayments) under revolving line of credit (4,794) 29,506 (8,137) Proceeds from issuance of 1999-1 Series certificates 53,000 Proceeds from long-term obligations 500 3,214 Principal payments on retired certificates (30,900) (15,800) Principal payments on long-term obligations (4,515) (4,065) (3,054) Changes in cash management liability and other (2,015) 2,035 13,764 ------- ------- ------- Net cash provided by financing activities 11,276 11,676 5,787 ------- ------- ------- INCREASE IN CASH 208 92 105 CASH AT BEGINNING OF YEAR 1,693 1,601 1,496 ------- ------- ------- CASH AT END OF YEAR $ 1,901 $ 1,693 $ 1,601 ======= ======= ======= SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: INVESTING ACTIVITIES: Consideration for acquisition of business: Issuance of 2,095,900 shares of common stock $14,273 Issuance of 8% Subordinated Note 20,467 ------ $34,740 FINANCING ACTIVITIES: ====== Acquisition of equipment under capital leases $ 620 $ 1,273 $ 3,562 ======= ====== ======= See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California, currently consisting of forty-two full-line department stores, including thirty-two "Gottschalks" and ten "Harris/Gottschalks" department stores, and twenty specialty apparel stores. The Company's department stores are located primarily in non-major metropolitan cities throughout California and in Oregon, Washington and Nevada, and typically offer a wide range of moderate and better brand-name and private-label merchandise, including men's, women's, junior's and children's apparel, cosmetics, shoes and accessories, home furnishings and other consumer goods. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions are subject to inherent uncertainties which may cause actual results to differ from reported amounts. Principles of Consolidation - The accompanying financial statements include the accounts of Gottschalks Inc., and its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"), (collectively, the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Fiscal Year - The Company's fiscal year ends on the Saturday nearest January 31. Fiscal years 1999, 1998 and 1997, which ended on January 29, 2000, January 30, 1999 and January 31, 1998, respectively, each consist of 52 weeks. Revenue Recognition - Net retail sales are recorded at the point-of-sale and include sales of merchandise, net of estimated returns and exclusive of sales tax. Profits on special order sales are recognized when the merchandise is delivered to the customer and has been paid for in its entirety. The Company does not sell merchandise on layaway. Net leased department revenues consist of rental income from lessees and sub-lessees. Sales generated in such leased departments totaled $29,028,000, $40,215,000 and $35,179,000 in 1999, 1998 and 1997, respectively. Transfers and Servicing of Financial Assets - The Company accounts for the transfer of receivables pursuant to its receivables securitization program in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 requires the Company to recognize gains and losses on transfers of financial assets (securitizations) that qualify as sales and to recognize as assets certain financial components that are retained as a result of such sales, which consist primarily of the retained interest in receivables sold (Note 3), the retained rights to future interest income from the serviced assets in excess of the contractually specified servicing fee, and the right to service the receivables sold. The retained right to future interest income totaled $182,000 at January 29, 2000 and $237,000 at January 30, 1999. The estimated cost to service the assets is equal to the contractually specified servicing fee, resulting in no servicing asset or liability in 1999 or 1998. The certificated portion of the retained interest is considered readily marketable and is classified as available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Due to the short-term revolving nature of the credit card portfolio, the carrying value of the Company's retained interest approximates its fair value, resulting in no unrealized gains or losses. Receivables - Receivables consist primarily of customer credit card receivables that do not meet certain eligibility requirements of the Company's receivables securitization program and vendor claims (Note 3). The credit card receivables are not certificated and include revolving charge accounts with terms which, in some cases, provide for payments with terms in excess of one year. In accordance with usual industry practice such receivables are included in current assets. The Company maintains reserves for possible credit losses on such receivables which are based on their expected collectibility. Concentrations of Credit Risk - The Company extends credit to individual customers based on their credit worthiness and generally requires no collateral from such customers. Concentrations of credit risk with respect to the Company's credit card receivables are limited due to the large number of customers comprising the Company's customer base. Merchandise Inventories - Inventories, which consist of merchandise held for resale, are valued by the retail method and are stated at last-in, first-out (LIFO) cost, which is not in excess of market. Current cost, which approximates replacement cost, under the first-in, first-out (FIFO) method is equal to the LIFO value of inventories at January 29, 2000 and January 30, 1999. The Company includes in inventory the capitalization of certain indirect purchasing, merchandise handling and inventory storage costs to better match sales with these related costs. Store Pre-Opening Costs - New store pre-opening costs are expensed as incurred. Property and Equipment - Property and equipment is stated on the basis of cost or appraised value as to certain contributed land. Depreciation and amortization is computed by the straight-line method for financial reporting purposes over the estimated useful lives of the assets, which range from 20 to 40 years for buildings and leasehold improvements and 3 to 15 years for furniture, fixtures and equipment. The amortization of buildings and equipment under capital leases is computed by the straight-line method over the term of the lease or the estimated economic life of the asset, depending on the criteria used to classify the lease, and such amortization is combined with depreciation in the accompanying income statements. Software Development Costs - Effective the beginning of fiscal 1999, costs associated with the acquisition or development of software for internal use that meet the criteria of AICPA Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" are capitalized and amortized over the expected useful life of the software, which generally ranges from 3 to 10 years. No material software development costs were capitalized in 1999. Goodwill - Goodwill, net of accumulated amortization of $2,091,000 at January 29, 2000 and $1,554,000 at January 30, 1999, represents the excess of acquisition costs over the fair value of the net assets acquired, amortized on a straight- line basis over 20 years. Amortization of goodwill, totaling $536,000, $291,000 and $116,000 in 1999, 1998 and 1997, respectively, is included in depreciation and amortization in the accompanying income statements. The Company periodically analyzes the value of net assets acquired to determine whether any impairment in the value of such assets has occurred. The primary indicators of recoverability used by the Company are current or forecasted profitability of the related acquired assets as compared to their carrying values. Cash Management Liability - Under the Company's cash management program, checks issued by the Company and not yet presented for payment frequently result in overdraft balances for accounting purposes. Such amounts represent interest-free, short-term borrowings by the Company. (See Note 5). Deferred Income - Deferred income consists primarily of donated land and cash incentives received to construct a store and enter into a lease arrangement. Land contributed to the Company is included in land and recorded at appraised fair market values. Donated income is amortized to income over the average depreciable life of the related fixed assets built on the land for locations that are owned by the Company, and over the minimum lease periods of the related building leases with respect to locations that are leased by the Company, ranging from 10 to 32 years. Deferred income, net of accumulated amortization, totaled $15,344,000 as of January 29, 2000 and $16,347,000 as of January 30, 1999. Deferred Lease Payments - Certain of the Company's department store operating leases provide for rent abatements and scheduled rent increases during the lease terms. The Company recognizes rental expense for such leases on a straight-line basis over the lease term and records the difference between rental expense and amounts payable under the leases as deferred lease payments. Deferred lease payments totaled $5,058,000 at January 29, 2000 and $6,850,000 at January 30, 1999. Advertising Costs - Advertising costs, totaling $24,042,000, $22,270,000 and $17,489,000 in 1999, 1998 and 1997, are expensed when the related advertisement first takes place. Income Taxes - Deferred tax assets and liabilities are generally recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns, determined based on the differences between the financial statement and tax basis of assets and liabilities and net operating loss and tax credit carryforwards, and by using enacted tax rates in effect when the differences are expected to reverse. Fair Value of Financial Instruments - The carrying value of the Company's cash and cash management liability, receivables, notes receivable, trade payables and other accrued expenses, revolving line of credit and stand-by letters of credit approximate their estimated fair values because of the short maturities or variable interest rates underlying those instruments. The retained interest in receivables sold, the retained right to future interest income and the Subordinated Note are carried at their estimated fair values. The following methods and assumptions were used to estimate the fair value for each remaining class of financial instruments: Long-Term Obligations - The fair values of the Company's mortgage loans and notes payable are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Borrowings with aggregate carrying values of $27,937,000 and $30,216,000 at January 29, 2000 and January 30, 1999, had estimated fair values of $28,664,000 and $27,809,000 at January 29, 2000 and January 30, 1999, respectively. Off-Balance Sheet Financial Instruments - The Company's off-balance sheet financial instruments consist primarily of certificates issued under the securitization program. The aggregate estimated fair values of the certificates outstanding as of year end, based on similar issues of certificates at current rates for the same remaining maturities, with aggregate face values of $53,000,000 at January 29, 2000 and $30,667,000 at January 30, 1999 are $50,469,000 and $30,154,000, respectively. Stock-Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation expense has been recognized in the 1999, 1998 or 1997 financial statements for employee stock arrangements. Pro forma information regarding net income and earnings per share, as calculated under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation", is disclosed in Note 11. Long-Lived Assets - The Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. When the anticipated undiscounted cash flow from a long-lived asset is less than its carrying value, a loss is recognized based on the amount by which its carrying value exceeds its fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved. In 1999, the Company recognized a non-recurring asset impairment charge of $1,933,000 related to an investment in a cooperative merchandise buying group that is accounted for under the cost method. The Company recognized no impairment losses in 1998 or 1997. Segment Reporting - The Company operates in one reportable segment, which includes the Company's proprietary credit card operation. The proprietary credit card operation is considered an integral component of the Company's retail store segment, as its primary purpose is to support and enhance this segment's retail operations. Comprehensive Income - There were no items of comprehensive income in 1999, 1998 or 1997, and therefore net income is equal to comprehensive income for each of those years. Recently Issued Accounting Standards - The Securities and Exchange Commission recently issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which is effective for fiscal 1999 and requires that sales from leased department sales no longer be combined with owned sales for financial reporting purposes, and that all prior periods presented be reclassified to conform with the required presentation. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales, for financial reporting purposes. The adoption of SAB No. 101 has no impact on the Company's prior or future operating results and relates only to financial statement presentation and disclosure. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as deferred by SFAS No. 137, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company currently does not have any derivatives and therefore does not expect that the adoption of this standard, effective beginning fiscal 2001, will have a material impact on the Company's financial position or the results of its operations. Reclassifications - Certain amounts in the accompanying 1998 and 1997 consolidated financial statements have been reclassified to conform with the 1999 presentation. 2. BUSINESS ACQUISITION On August 20, 1998, the Company completed the acquisition of substantially all of the assets and business of The Harris Company ("Harris"), pursuant to an Asset Purchase Agreement entered into with Harris and El Corte Ingles, S. A. ("ECI") of Spain, the parent company of Harris. Harris operated nine full-line department stores located throughout southern California. The assets acquired consisted primarily of merchandise inventories, customer credit card receivables, fixtures and equipment and certain intangibles. The Company also assumed certain liabilities relating to the business, including trade accounts payable, store leases and certain other contracts. The purchase price for the assets consisted of the issuance to Harris of 2,095,900 shares of common stock of the Company and the issuance of an 8% Non-Negotiable, Extendable, Subordinated Note (the "Subordinated Note") in the principal amount of $22,179,000 (see Note 7). Direct fees and expenses incurred in the transaction consisted primarily of investment banking, legal and accounting fees, severance and costs associated with the closure of the former Harris store located in San Bernardino. The acquisition (hereinafter referred to as the "Harris acquisition") was accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired stores are included in the Company's financial statements from the acquisition date of August 20, 1998. The purchase price has been allocated to the acquired assets and assumed liabilities on the basis of their fair values as of the date of the acquisition, as follows (in thousands): Fair value of Subordinated Note (discounted to an effective interest rate of 10%) $20,467 Fair value of common stock issued to Harris (discounted by 20%) 14,273 Total direct fees and expenses 1,369 ------ Total purchase price $36,109 ====== Merchandise inventories $18,570 Customer credit card and other receivables 11,827 Leaseholds, fixtures and other equipment 5,731 Other current and long-term assets 3,809 Trade accounts payable and other current liabilities (11,713) Deferred income taxes (515) Excess of purchase price over the fair value of identifiable net assets acquired 8,400 ------ Total purchase price $36,109 ====== Unaudited Pro Forma Financial Information. The following unaudited pro forma financial information for the Company gives effect to the acquisition as if it had occurred at the beginning of fiscal 1998 and 1997, and includes certain adjustments, including the amortization of goodwill, interest expense associated with acquisition debt, adjustments to rental expense to reflect new store leases, adjustments to depreciation expense to reflect the fair value of assets acquired and the related income tax effects. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what would have occurred if the acquisition had been completed as of those dates. In addition, pro forma information is not intended to be a projection of future results nor does it reflect expected cost savings or synergies expected to result from the integration of the Harris stores into the Company's business. (In thousands, except per share data) 1998 1997 - ------------------------------------------------------------- Net sales $565,745 $545,595 Net income (loss) $ 870 $ (2,771) Net income (loss) per common share - basic and diluted $ 0.07 $ (0.22) Weighted-average number of common shares outstanding - basic and diluted 12,575 12,569 Acquisition Related Expenses. Acquisition related expenses of $859,000 were incurred in fiscal 1998, consisting primarily of costs incurred prior to the elimination of certain duplicative operations of Harris, including certain merchandising, advertising, credit and distribution functions. All duplicative operations of Harris were eliminated by the end of fiscal 1998. The Company had previously entered into negotiations for the acquisition of the stores from Harris in fiscal 1997. The parties were unable to agree on the terms of the transaction, however, and negotiations were discontinued during that year. Fiscal 1997 results include $673,000 of costs related to the proposed acquisition, consisting primarily of legal, accounting and investment banking fees. 3. RECEIVABLES Receivable Securitization Program. The Company's receivables securitization program provides the Company with a source of long-term financing that is generally more cost-effective than traditional debt financing. Under the program, the Company automatically sells all of its accounts receivable arising under its private label customer credit cards, servicing retained, to its wholly- owned subsidiary, GCRC, and those receivables that meet certain eligibility requirements of the program are simultaneously conveyed to Gottschalks Credit Card Master Trust ("GCC Trust"), to be used as collateral for securities issued to investors. GCC Trust is a qualified special purpose entity and is not consolidated in the Company's financial statements under SFAS No. 125. Accordingly, all transfers of receivables to GCC Trust are accounted for as sales for financial reporting purposes and such transferred receivables are removed from the Company's balance sheet. The Company retains an ownership interest in certain of the receivables sold under the program, represented by Exchangeable and Subordinated Certificates, and also retains an uncertificated ownership interest in receivables that do not meet certain eligibility requirements of the program. On March 1, 1999, GCC Trust issued a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") to a single investor through a private placement. Proceeds from the issuance of the 1999-1 Series were used to repay the outstanding balances of previously issued certificates, totaling $26,950,000 as of that date, and the remaining funds were used to purchase additional receivables from the Company. The holder of the 1999-1 Series certificate earns interest on a monthly basis at a fixed interest rate of 7.66%. The outstanding principal balance of the certificate, which is off-balance sheet for financial reporting purposes, is to be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. The Company is required, among other things, to maintain certain portfolio performance standards under the program. The portfolio performance has exceeded such standards since the issuance date. Subject to certain conditions, the master trust permits further expansion of the program to meet future receivables growth. Receivables. Receivables consist of the following: January 29, January 30, (In thousands) 2000 1999 - -------------------------------------------------------------- Credit card receivables $3,995 $17,331 Vendor claims 4,089 2,970 ----- ------ Less allowance for doubtful accounts ( 487) (1,656) ----- ------ $7,597 $18,645 ===== ====== Credit card receivables as of January 30, 1999 included $12,708,000 of receivables acquired from Harris which were incorporated into the securitization program in early fiscal 1999. Net Credit Revenues. Net credit revenues associated with the Company's credit card receivable portfolio, including securitized receivables, consists of the following: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------- Service charge revenues $15,482 $13,431 $11,618 Gain (loss) on sale of receivables 173 (45) 1,050 Interest expense on securitized receivables (4,069) (3,314) (3,579) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (3,013) (3,175) (2,704) ------ ------ ------ $ 8,573 $ 6,897 $ 6,385 ====== ====== ====== The Company adopted the provisions of SFAS No. 125 in fiscal 1997. The gain on sale of receivables of $1,050,000 in 1997 includes a credit of $898,000 related to a change in estimate for the allowance for doubtful accounts for receivables which were ineligible for sale. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: January 29, January 30, (In thousands) 2000 1999 - -------------------------------------------------------------------- Furniture, fixtures and equipment $ 86,155 $ 77,060 Buildings and leasehold improvements 69,196 62,561 Land 15,108 15,102 Buildings and equipment under capital leases 12,768 12,148 Construction in progress 892 909 ------ ------- 184,119 167,780 Less accumulated depreciation and amortization 63,726 54,135 ------ ------- $120,393 $113,645 ======= ======= 5. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES Trade accounts payable and accrued expenses consist of the following: January 29, January 30, (In thousands) 2000 1999 - ------------------------------------------------------------------- Trade accounts payable $15,617 $23,061 Cash management liability 10,027 12,176 Taxes, other than income taxes 11,141 11,078 Accrued expenses 9,958 10,654 Accrued payroll and related liabilities 6,861 6,416 Federal and state income taxes payable 5,372 5,178 ------ ------ $58,976 $68,563 ====== ====== 6. DEBT Revolving Line of Credit. The Company has a $140.0 million revolving line of credit facility with Congress Financial Corporation through March 30, 2001. Borrowings under the facility are limited to a restrictive borrowing base equal to 65% of eligible merchandise inventories, increasing to 70% during the period of September 1 through January 31 and, at the Company's option, to 80% for any period from November 1 through December 31 of each year, to fund increased seasonal inventory requirements. Interest on outstanding borrowings under the facility is currently charged at a rate of LIBOR plus 2.00% (7.84% at January 29, 2000), with no interest charged on the unused portion of the line of credit. The interest rate will be reduced to LIBOR plus 1.875% on March 1, 2000. The maximum amount available for borrowings under the line of credit was $76,581,000 as of January 29, 2000, of which $55,479,000 was outstanding as of that date. Of that amount, $50,000,000 has been classified as long-term in the accompanying financial statements as of January 29, 2000 ($40,000,000 as of January 30, 1999) as the Company does not anticipate repaying that amount prior to one year from the balance sheet date. The agreement contains one financial covenant, pertaining to the maintenance of a minimum tangible net worth, with which the Company was in compliance as of January 29, 2000. Long-Term Obligations. Long-term obligations consist of the following: January 29, January 30, (In thousands) 2000 1999 - ------------------------------------------------------------------- Revolving line of credit $50,000 $40,000 9.39% mortgage loans payable, due 2010 18,958 19,242 9.97% mortgage loan payable, due 2004 3,643 4,429 10.45% mortgage loan payable, due 2002 1,900 2,850 10% notes payable, due 2001 824 1,384 Capital lease obligations 7,216 8,332 Other notes payable 2,612 2,311 ------ ------ 5,153 78,548 Less current portion 4,479 4,434 ------ ------ $80,674 $74,114 ====== ====== The mortgage loans and notes payable are collateralized by certain real property, assets or equipment. The scheduled annual principal maturities of the Company's mortgage loans and notes payable are $2,814,000, $2,489,000, $1,380,000, $1,432,000 and $620,000 for 2000 through 2004, with $19,202,000 payable thereafter. Deferred debt issuance costs related to the Company's various financing arrangements are included in other current and long-term assets and are charged to income as additional interest expense on a straight-line basis over the life of the related indebtedness. Such costs, net of accumulated amortization, totaled $1,552,000 at January 29, 2000 and $1,263,000 at January 30, 1999. Interest paid, net of amounts capitalized, was $14,536,000 in 1999, $12,063,000 in 1998 and $10,302,000 in 1997. Capitalized interest expense was $188,000 in 1999, $134,000 in 1998 and $114,000 in 1997. The weighted-average interest rate charged on the Company's revolving line of credit was 7.52% in 1999, 7.88% in 1998 and 8.16% in 1997. Certain of the Company's long-term financing arrangements include various restrictive covenants. The Company was in compliance with all such covenants as of January 29, 2000. 7. SUBORDINATED NOTE PAYABLE TO AFFILIATE As described more fully in Note 2, the Company issued the Subordinated Note to Harris on August 20, 1998 in consideration for the Harris acquisition. The Subordinated Note, discounted to an effective interest rate of 10% at issuance, bears interest at a fixed rate of 8%, payable semi- annually. The principal portion of the Subordinated Note is due and payable on August 20, 2003, unless such payment would result in a default on any of the Company's other credit facilities, whereby its maturity would be extended by three years to August 2006. The Subordinated Note is unsecured, contains no restrictive financial covenants and is subordinate to the payment of all debt, including trade credit, of the Company. The discount on the Subordinated Note is being amortized as additional interest expense over the five year term of the note. The unamortized discount totaled $1,218,000 as of January 29, 2000 and $1,561,000 as of January 30, 1999. Interest paid to Harris totaled $2,117,000 in 1999 and $935,000 in 1998. 8. LEASES The Company leases certain retail department stores, specialty apparel stores, land, furniture, fixtures and equipment under capital and noncancellable operating leases that expire in various years through 2021. Certain of the leases provide for the payment of additional contingent rentals based on a percentage of sales, require the payment of property taxes, insurance and maintenance costs and have renewal options for one or more periods ranging from five to twenty years. The Company also leases three of its department stores from ECI, an affiliate of the Company. Rent paid to ECI, which reflects current market rates, totaled $900,000 in 1999 and $391,000 in 1998. Future minimum lease payments as of January 29, 2000, by year and in the aggregate, under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year are as follows: Capital Operating (In thousands) Leases Leases - -------------------------------------------------------------------- 2000 $ 2,317 $ 17,917 2001 1,123 17,325 2002 1,085 16,991 2003 988 16,634 2004 752 16,177 Thereafter 5,389 120,539 ------ ------- Total minimum lease payments $11,654 $205,583 ======= Amount representing interest (4,438) ------ Present value of minimum lease payments 7,216 Less current portion (1,665) ------ $ 5,551 ====== Rental expense consists of the following: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------- Operating leases: Buildings: Minimum rentals $15,441 $14,395 $13,099 Contingent rentals 2,461 2,236 1,911 Fixtures and equipment 3,158 3,275 4,358 ------ ------ ------ $21,060 $19,906 $19,368 ====== ====== ====== One of the Company's lease agreements contains a restrictive covenant pertaining to the debt to tangible net worth ratio with which the Company was in compliance at January 29, 2000. 9. INCOME TAXES The components of income tax expense are as follows: (In thousands) 1999 1998 1997 - ------------------------------------------------------------------- Current: Federal $ 219 $2,737 $ 92 State 459 377 8 ----- ----- ----- 678 3,114 100 Deferred: Federal 3,337 210 1,976 State 225 423 581 ----- ------ ----- 3,562 633 2,557 ----- ------ ----- $4,240 $3,747 $2,657 ===== ===== ===== The principal components of deferred tax assets and liabilities are as follows (in thousands): January 29, January 30, 2000 1999 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ------- ----------- ------ ----------- Current: Accrued employee benefits $ 1,213 $ 1,019 Credit losses 132 658 State income taxes 267 125 LIFO inventory reserve $ (2,958) $ (3,636) Supplies inventory (1,035) (1,340) Workers' compensation (542) (760) Gain on sale of receivables (120) (65) Other items, net 183 (1,817) 322 (793) ------ ------- ------- ------- 1,795 (6,472) 2,124 (6,594) Long-Term: Net operating loss and tax credit carryforwards 5,906 7,985 State income taxes 580 504 Depreciation expense (10,716) (9,221) Accounting for leases 805 (3,253) 945 (3,364) Deferred income 1,291 (2,571) 1,495 (2,313) Other items, net 973 (624) 724 (1,008) ------- -------- ------- -------- 9,555 (17,164) 11,653 (15,906) ------- -------- ------- -------- $11,350 $(23,636) $13,777 $(22,500) ======= ======== ======= ======== Income tax expense varies from the amount computed by applying the statutory federal income tax rate to the income before income taxes. The reasons for this difference are as follows: 1999 1998 1997 - -------------------------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 4.2 5.8 5.9 General business credits (2.2) (1.7) (1.2) Amortization of goodwill .4 .4 .6 Other items, net 1.6 2.0 1.3 ---- ----- ----- Effective rate 39.0% 41.5% 41.6% ==== ===== ===== The Company paid income taxes, net of refunds, of $109,000 in 1999 and $138,000 in 1998. At January 29, 2000, the Company has, for federal tax purposes, net operating loss carryforwards of approximately $7,354,000 which expire in the years 2008 through 2018, general business credits of approximately $1,158,000 which expire in the years 2009 through 2019, and alternative minimum tax credits of approximately $749,000 which may be used for an indefinite period. At January 29, 2000, the Company has, for state tax purposes, enterprise zone credits of approximately $1,345,000 and alternative minimum tax credits of approximately $153,000 which may be used for an indefinite period. These carryforwards are available to offset future taxable income and are expected to be fully utilized. 10. EARNINGS PER SHARE Net earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the year. Stock options represent potential common shares and are included in computing diluted earnings per share when the effect is dilutive. A reconciliation of the weighted- average shares used in the basic and diluted earnings per share calculation is as follows: (Shares in thousands) 1999 1998 1997 - ---------------------------------------------------------- Weighted average number of shares - basic 12,577 11,418 10,474 Effect of assumed option exercises 39 31 17 ------ ------ ------ Weighted average number of shares - diluted 12,616 11,449 10,491 ====== ====== ====== Options with an exercise price greater than the average market price of the Company's common stock during the period are excluded from the computation of the weighted-average number of shares on a diluted basis as such options are anti-dilutive. Anti-dilutive options outstanding totaled 511,861, 426,698 and 136,510 as of the end of 1999, 1998 and 1997, respectively. 11. STOCK OPTION PLANS The Company has stock option plans for directors, officers and key employees which provide for the grant of non-qualified and incentive stock options. Under the plans, the option exercise price may not be lower than 100% of the fair market value of such shares at the date of the grant. Options granted generally vest on a cumulative basis over five years and expire ten years from the date of the grant. At January 29, 2000, options for 601,000 shares were available for future grants under the plans. Option activity under the plans is as follows: 1999 1998 1997 -------------- --------------- --------------- Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ------- -------- ------ -------- ------ ------- Options outstanding at beginning of year 771,000 $8.45 500,500 $9.05 509,000 $9.36 Granted 209,000 8.45 329,000 7.73 74,000 5.87 Exercised (1,250) 5.75 (5,500) 6.55 Cancelled (27,000) 8.10 (57,250) 9.46 (77,000) 9.46 ------- ----- ------- ----- ------- ----- Options outstanding at end of year 953,000 $8.47 771,000 $8.45 500,500 $9.05 ======= ===== ======= ===== ======= ===== Options exercisable at end of year 465,750 $9.01 366,000 $9.50 298,500 $9.72 ======= ===== ======= ===== ======= ===== Additional information regarding options outstanding as of January 29, 2000 is as follows: Options Outstanding Options Exercisable ------------------- ------------------- Weighted-Avg. Remaining Range of Number Contractual Weighted-Avg. Number Exercise Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price - --------------- ---------- ----------- -------------- ----------- -------- $5.38 to $10.87 953,000 7.05 yrs. $8.47 465,750 $9.01 If the Company had elected to follow the measurement provisions of SFAS No. 123 in accounting for stock options, compensation expense would be recognized based on the fair value of the options at the date of grant. To estimate compensation expense which would be recognized under SFAS No. 123, the Company used the Black-Scholes options pricing model with the following weighted-average assumptions: 1999 1998 1997 ---- ----- ----- Risk-free interest rate 6.7% 4.6% 5.41% Expected dividend yield --- --- --- Expected volatility 47.95% 51.08% 51.09% Expected option life (years) 5 5 5 Fair value of options granted $5.10 $4.38 $4.26 Had the computed fair values of the 1999, 1998 and 1997 awards been amortized to expense over the vesting period of the awards, pro-forma net income and earnings per share (in thousands, except per share data) would have been as follows: 1999 1998 1997 ---- ----- ----- Pro forma net income $6,237 $5,176 $3,693 Pro forma net income per share - basic and diluted $ 0.50 $ 0.45 $ 0.35 12. EMPLOYEE BENEFIT PLANS The Company has a Retirement Savings Plan ("Plan") which qualifies as an employee retirement plan under Section 401(k) of the Internal Revenue Code. Full-time employees meeting certain requirements are eligible to participate in the Plan and may elect to have up to 20% of their annual eligible compensation, subject to certain limitations, deferred and deposited with a qualified trustee. Participants in the Plan may receive an employer matching contribution of up to 4% of the participants' eligible compensation, depending on the Company's quarterly and annual financial performance. The Company recognized $541,000, $424,000 and $875,000 in expense related to the Plan in 1999, 1998 and 1997, respectively. The Company also has a statutory Employee Stock Purchase Plan, which provides for its employees to purchase Company common stock at a 15% discount. Employees can make contributions to the Plan through payroll deductions ranging from 1% to 10% of their annual compensation, up to a maximum of $21,250 per year. A total of 500,000 shares were originally registered under the Plan, with 21,272 shares issued through January 29, 2000. 13. COMMITMENTS AND CONTINGENCIES The Company is party to legal proceedings and claims which have arisen during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations. The Company arranges for the issuance of letters of credit in the ordinary course of business. As of January 29, 2000, the Company had outstanding letters of credit amounting to $7.7 million. The Company is in the process of remodeling one of its existing store locations, and also expects to open a new 45,000 square foot store in Grants Pass, Oregon in August 2000. The remaining estimated cost of the projects as of January 29, 2000 is approximately $4.3 million, and such costs are expected to be funded through existing capital resources. 14. STOCK REPURCHASE PROGRAM On February 23, 2000, the Board of Directors of the Company approved the repurchase of up to $2.0 million of Company common stock, in open market or private transactions, for a period of up to twelve months. Any shares repurchased will be held as treasury shares initially and may be used in connection with the Company's stock option program and for other general corporate purposes or acquisitions. The Company expects to finance the repurchases from working capital. 15. SUBSEQUENT EVENT On April 24, 2000, the Company entered into a definitive asset purchase agreement with Lamonts Apparel, Inc. ("Lamonts"), providing for the Company to acquire all Lamont's department store leases and fixtures and equipment for a cash purchase price of $19.0 million. Lamonts is a regional department store chain based in Kirkland, Washington, currently operating thirty-eight department stores, with twenty-three located in the State of Washington, seven in Alaska, five in Idaho, two in Oregon and one in Utah. Lamonts filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in January 2000, and the purchase is subject to approval by the Bankruptcy Court. If approved, the transaction is expected to close in late July 2000. 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1999 and 1998 (in thousands, except per share data):
1999 --------------------------------------------- Quarter Ended May 1 July 31 October 30 January 29 - ------------- --------- --------- ----------- ---------- Net sales (1) $111,104 $118,718 $122,873 $186,703 Gross profit 37,647 41,000 43,980 63,111 Income (loss) before income tax expense (benefit)(2) (1,851) ( 180) 615 12,292 Net income (loss) (1,079) ( 105) 358 7,462 Net income (loss) per common share - basic and diluted $ (0.09) $ (0.01) $ 0.03 $ 0.59 Weighted-average number of common shares outstanding: Basic 12,575 12,575 12,575 12,581 Diluted 12,575 12,575 12,646 12,615
1998 --------------------------------------------- Quarter Ended May 2 August 1 October 31 January 30 - -------------- -------- -------- ---------- ----------- Net sales (1) $ 87,389 $ 95,263 $113,880 $180,393 Gross profit 28,792 31,361 41,898 61,800 Income (loss) before income tax expense (benefit) (3,408) (2,310) 604 14,143 Net income (loss) (1,994) (1,352) 345 8,283 Net income (loss) per common share - basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66 Weighted-average number of common shares outstanding (3): Basic 10,479 10,479 12,138 12,575 Diluted 10,479 10,479 12,155 12,593
(1) The Company's net sales by quarter have been reclassified to exclude leased department sales, in accordance with the requirements of SAB No. 101. (2) Net income in the three month period ended January 29, 2000 includes a non- recurring, pre-tax charge for $1,933,000 to reflect the impairment of an investment accounted for under the cost method. (3) The increase in the weighted-average number of common shares outstanding during fiscal 1998 resulted from the issuance of 2,095,900 shares of common stock to Harris on August 20, 1998 in connection with a business acquisition (see Note 2 to the Consolidated Financial Statements.)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS GOTTSCHALKS INC. AND SUBSIDIARY ________________________________________________________________________________ COL. A COL. B COL. C COL. D COL. E COL. F ________________________________________________________________________________ ADDITIONS Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of DESCRIPTION of Period Expenses Describe Describe Period Year ended January 29, 2000: - --------------------------- Allowance for doubtful accounts... $1,535,165 $ 982,260(1) $ (177,000)(2) $(1,933,737)(3)$406,688 ========= ========= ========= ========== ======= Allowance for vendor claims receivable. $ 120,700 $ ( 40,700)(4)$ 80,000 ========= ========= ========= ========== ======= Year ended January 30, 1999: Allowance for doubtful accounts... $ 437,179 $ 991,523(1) $ 881,759(5) $(775,296)(3)$1,535,165 ========= ========= ======== ======== ========= Allowance for vendor claims receivable. $ 80,000 $ 40,700(6) $ 120,700 ========= ========= ======== ======== ========= Year ended January 31, 1998: Allowance for doubtful accounts... $1,322,107 $ 469,935(1) $( 898,000)(2) $(456,863)(3)$ 437,179 ========= ========= ========= ======== ========= Allowance for vendor claims receivable.. $ 80,000 $ $ 80,000 ========= ========= ========= ======== =========
Notes: (1) Represents the provision for credit losses on receivables ineligible for sale. (2) Represents a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. (See Note 3 to the Consolidated Financial Statements.) These amounts are included in net credit revenues in the fiscal 1999 and 1997 consolidated income statements, respectively. (3) Represents uncollectible accounts written off, net of recoveries, pertaining to receivables ineligible for sale and for receivables acquired from Harris. (4) Represents uncollectible accounts written off, net of recoveries, pertaining to vendor claims receivable acquired from Harris. (5) Represents the allowance for doubtful accounts applicable to the receivables acquired from Harris (see Note 2 to the Consolidated Financial Statements). (6) Represents the allowance for vendor claims receivable applicable to the outstanding vendor claims acquired from Harris (see Note 2 to the Consolidated Financial Statements.) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 28, 2000 GOTTSCHALKS INC. By: \s\ James R. Famalette James R. Famalette President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - ----------- ------ ------------- /s/ Joseph W. Levy Chairman April 28, 2000 President, Chief Executive Officer April 28, 2000 /s/ James R. Famalette and Director (principal executive officer) Senior Vice President and Chief Financial Officer (principal April 28, 2000 financial and /s/ Michael S. Geele accounting officer) /s/ O. James Woodward III Director April 28, 2000 /s/ Bret W. Levy Director April 28, 2000 /s/ Sharon Levy Director April 28, 2000 /s/ Joseph J. Penbera Director April 28, 2000 /s/ Fred Ruiz Director April 28, 2000 /s/ Max Gutmann Director April 28, 2000 /s/ Isidoro Alvarez Alvarez Director April 28, 2000 /s/ Jorge Pont Sanchez Director April 28, 2000 EX-23 2 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-54783, 33- 54789, 33-61471, and 33-61473 of Gottschalks Inc. on Form S-8 of our report dated February 23, 2000 (April 24, 2000 as to Note 15), appearing in this Annual Report on Form 10-K of Gottschalks Inc. for the year ended January 29, 2000. /s/ DELOITTE & TOUCHE LLP Fresno, California April 24, 2000 EX-27 3
5 THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T AND INCLUDES SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 2000. 12-MOS JAN-29-2000 JAN-29-2000 1,901 29,138 7,986 389 130,028 178,330 184,119 63,726 314,004 73,610 101,635 0 0 126 110,113 314,004 539,398 552,180 353,660 353,660 9,465 3,013 11,279 10,876 4,240 6,636 0 0 0 6,636 .53 .53
EX-10.40 4 SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment"), dated as of March 27, 2000, is entered into between CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender), and GOTTSCHALKS INC., a Delaware corporation ("Borrower"), with its corporate office located at 7 River Park Place East, Fresno, California 93720. RECITAL A. Borrower and Lender have previously entered into that certain Loan and Security Agreement dated December 20, 1996, as amended by the First Amendment to Loan and Security Agreement, dated as of August 20, 1998, the Second Amendment to Loan and Security Agreement, dated as of September 1, 1998, the Third Amendment to Loan and Security Agreement, dated as of December 18, 1998, the Fourth Amendment to Loan and Security Agreement, dated as of January 29, 1999, the Fifth Amendment to Loan and Security Agreement, dated as of March 1, 1999 and the Sixth Amendment to Loan and Security Agreement, dated as of August 12, 1999 (as amended, supplemented or modified from time to time, the "Loan Agreement"), pursuant to which Lender has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Loan Agreement. B. Lender and Borrower wish to further amend the Loan Agreement under the terms and conditions set forth in this Amendment. Lender and Borrower are entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Lender's rights or remedies as set forth in the Loan Agreement is being waived or modified by the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. (a) Section 1.59 is hereby added to the Loan Agreement and reads in its entirety as follows: "1.59 "Net Income" shall mean, with respect to any Person, for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (excluding to the extent included therein any extraordinary or one- time gains or losses) after deducting all charges which should be deducted before arriving at the net income (loss) for such period and after deducting the Provision for Taxes for such period, all as determined in accordance with GAAP." (b) Section 1.60 is hereby added to the Loan Agreement and reads in its entirety as follows: "1.60 "Provision for Taxes" shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State or local, whether current or deferred, and whether foreign or domestic, that are paid or payable by any Person and its Subsidiaries in respect of such fiscal year on a consolidated basis in accordance with GAAP." 2. Interest Rate. Section 1.34 of the Loan Agreement is hereby amended to read in its entirety as follows: "1.34 "Interest Rate" shall mean, (a) as to Prime Rate Loans, a rate of one quarter of one (.25) percentage point per annum less than the Prime Rate and, as to Eurodollar Rate Loans, a rate of two (2.00) percentage points per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by Borrower as in effect three (3) Business Days after the date of receipt by Lender of the request of Borrower for such Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is higher or lower than any rate previously quoted to Borrower); and (b) with respect to Revolving Loans outstanding during any period in which Borrower shall have elected to use the advance rate option provided for in Section 2.1(a)(i)(B) and in which the sum of the Revolving Loans and Letter of Credit Accommodations exceeds the least of seventy five percent (75%) of the Value of the Eligible Inventory, thirty-eight and one half percent (38.5%) of the Retail Sales Price of the Eligible Inventory, or eighty-five percent (85%) of the Appraised Value of the Eligible Inventory, a rate of two and one-quarter (2.25) percentage points per annum in excess of the Adjusted Eurodollar Rate; provided, however, that (y) in the event Borrower's Net Income for its fiscal year ending January 29, 2000 exceeds Six Million Dollars ($6,000,000) and (z) Borrower has average Excess Availability for the ninety (90) days preceding such date of not less than Ten Million Dollars ($10,000,000) and Twenty Million Dollars ($20,000,000) thereafter (it being understood that Lender may reduce such Excess Availability amount upon the completion of an acquisition of another entity permitted by Lender), the applicable Interest Rate provided for in the preceding clause (a) of this Section 1.34 shall be reduced by one-eighth of one (.125) percentage point, such reduction in the applicable Interest Rate to be effective as of the first day of the month immediately following the date of receipt by Lender of Borrower's audited annual financial statements, as provided by Borrower to Lender pursuant to Section 9.6(a)(iii) hereof, indicating the required pretax income (and such reduction shall continue to be in effect for so long as the Excess Availability is not less than Twenty Million Dollars ($20,000,000) (it being understood that Lender may reduce such Excess Availability amount upon the completion of an acquisition of another entity permitted by Lender) and continues to be met as measured on a quarterly basis); and provided further, however, the Interest Rate shall mean the rate of two and one-quarter (2.25) percentage points per annum in excess of the Prime Rate as to Prime Rate Loans and the rate of four and one-half (4.50) percentage points per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Lender's option, without notice, (a) for the period on and after the date of termination or non-renewal hereof, or the date of the occurrence of any Event of Default or event which with notice or passage of time or both would constitute an Event of Default, and for so long as such Event of Default or other event is continuing as determined by Lender and until such time as all Obligations are indefeasibly paid in full (notwithstanding entry of any judgment against Borrower) and (b) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es) arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default)." 3. Revolving Loans. Section 2.1(a)(i) of the Loan Agreement is hereby amended to read in its entirety as follows: "(i) either (A) the least of: (I) seventy-five percent (75%) of the Value of the Eligible Inventory, (II) eighty- five percent (85%) of the Appraised Value of the Eligible Inventory, or (III) thirty-seven and one-half percent (37.5%) of the Retail Sales Price of the Eligible Inventory; or (B) provided no Event of Default shall have occurred and be continuing, then at Borrower's option and upon one (1) day's prior written notice to Lender, from November 1 through December 31 of each calendar year, the least of (I) eighty percent (80%) of the Value of Eligible Inventory, (II) eighty- five percent (85%) of the Appraised Value of the Eligible Inventory, or (III) thirty-nine percent (39%) of the Retail Sales Price of the Eligible Inventory, which percentages shall remain in effect through December 31 unless revoked by Borrower upon one (1) day's prior written notice to Lender; provided, however, that advances against Eligible Domestic In- Transit Inventory shall not, at any one time, exceed Five Million Dollars ($5,000,000); minus" 4. Inventory Covenants. Section 7.3(d) of the Loan Agreement is hereby amended to read in its entirety as follows: "(d) upon Lender's request, Borrower shall, at its expense, no more than once in any calendar quarter, but at any time or times as Lender may request upon the occurrence and during the continuance of an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology reasonably acceptable to Lender by an appraiser reasonably acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely (with the understanding that Lender may revise the definition of "Eligible Inventory" hereunder or establish Availability Reserves as Lender may deem advisable in good faith based upon the results of such updated appraisals), but in any event, at least two of such appraisals delivered in any calendar year shall be conducted to include the full scope of Inventory and at least two other of such appraisals shall be conducted to include gross recovery updates of the Inventory;" 5. Adjusted Net Worth. Section 9.14 of the Loan Agreement is hereby amended to read in its entirety as follows: "Borrower shall, at all times, maintain Adjusted Net Worth of not less than One Hundred Fifteen Million Dollars ($115,000,000) and beginning with fiscal January 31, 2002, One Hundred Fifteen Million Dollars ($115,000,000) plus fifty percent (50%) of Borrower's Net Income; provided, however, Lender will only test for Borrower's compliance with this financial covenant only in the event that Borrower's Excess Availability is less than Ten Million Dollars ($10,000,000)." 6. Term. Lender and Borrower hereby agree to renew the term of the Loan Agreement and the other Financing Agreements pursuant to Section 12.1(a) of the Loan Agreement. The Loan Agreement and the other Financing Agreements shall continue in force and effect for a term ending on March 31, 2002. 7. Consent to Acquisition Financing. Notwithstanding Sections 9.8 and 9.9 of the Loan Agreement, Lender hereby consents to Borrower obtaining acquisition financing for the purpose of acquiring all of the assets or stock of an entity up to the amount of Twenty Million Dollars ($20,000,000) on terms and conditions reasonably acceptable to Lender in its sole discretion. Lender's consent is contingent upon its receipt of certain documentation as reasonably required by Lender, including without limitation a subordination agreement, intercreditor agreement and access agreement, delivered to Lender and reasonably satisfactory to Lender in form and substance. 8. Effectiveness of this Amendment. Lender must have received the following items, in form and content acceptable to Lender, before this Amendment is effective and before Lender is required to extend any credit to Borrower as provided for by this Amendment. The date on which all of the following conditions have been satisfied is the "Closing Date". (a) Amendment. This Amendment fully executed in a sufficient number of counterparts for distribution to Lender and Borrower. (b) Authorizations. Evidence that the execution, delivery and performance by Borrower and any instrument or agreement required under this Amendment have been duly authorized. (c) Representations and Warranties. The representations and warranties set forth herein and in the Loan Agreement must be true and correct. (d) Accommodation Fee. Lender shall have received from Borrower a fee in the amount of Seventy Five Thousand Dollars ($75,000) for the processing and approval of this Amendment. (e) Other Required Documentation. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Lender. 7. Representations and Warranties. The Borrower represents and warrants as follows: (a) Authority. The Borrower and each other Loan Party has the requisite corporate power and authority to execute and deliver this Amendment, as applicable, and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and by each other Loan Party of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of such Loan Party and no other corporate proceedings on the part of such Loan Party are necessary to consummate such transactions. (b) Enforceability. This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of each Loan Party hereto or thereto, enforceable against such Loan Party in accordance with its terms, and is in full force and effect. (c) Representations and Warranties. The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof. (d) No Default. No event has occurred and is continuing that constitutes an Event of Default. 8. Choice of Law. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State. 9. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment. 10. Due Execution. The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approval, if any, and do not contravene any law or any contractual restrictions binding on Borrower. 11. Reference to and Effect on the Loan Documents. (a) Upon and after the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to "the Loan Agreement", "thereof" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as modified and amended hereby. (b) Except as specifically amended above, the Loan Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Lender. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. (d) To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Loan Agreement as modified or amended hereby. 12. Ratification. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the Loan Documents effective as of the date hereof. 13. Estoppel. To induce Lender to enter into this Amendment and to continue to make advances to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Lender with respect to the Obligations. IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written. "BORROWER" GOTTSCHALKS INC., a Delaware corporation By:/s/Michael S. Geele Title: Senior Vice President/CFO "LENDER" CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation By:/s/Kristine Metchikian Title: Vice President EX-10.41 5 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT dated as of April 24, 2000 by and between LAMONTS APPAREL, INC., a Delaware corporation ("Seller"), in its capacity as debtor-in- possession in Case No. 00-00045 (TTG) (the "Bankruptcy Case") in the United States Bankruptcy Court for the Western District of Washington (the "Bankruptcy Court"), and GOTTSCHALKS INC., a Delaware corporation ("Buyer"). W I T N E S S E T H WHEREAS, subject to the terms and conditions of this Agreement, Buyer desires to purchase, acquire and accept from Seller, and Seller desires to sell, assign, and transfer to Buyer, certain assets of Seller used in Seller's department store business and certain associated liabilities. NOW THEREFORE, in consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, Seller and Buyer do hereby agree as follows: ARTICLE I DEFINITIONS 1.1 General Provisions. For all purposes of this Agreement, except as otherwise expressly provided: (a) The terms defined in this Article I have the meanings assigned to them in this Article I and include the plural as well as the singular. (b) All accounting terms used herein have the meanings assigned to them under generally accepted accounting principles. (c) All references in this Agreement to designated "Articles," "Sections" and other subdivisions and to "Exhibits," the "Disclosure Schedule" and the "Buyer Disclosure Schedule" are to the designated Articles, Sections and other subdivisions of the body of this Agreement and to the Exhibits, the Disclosure Schedule and the Buyer Disclosure Schedule to this Agreement. (d) Pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms. (e) The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision hereof, unless otherwise expressly stated. 1.2 Specific Provisions. As used in this Agreement the following definitions shall apply: (1) "Acquisition Proposal" means an inquiry, offer or proposal regarding any of the following (other than the transactions contemplated by this Agreement) involving Seller or its subsidiaries: (a) any merger, reorganization, consolidation, share exchange, recapitalization, business combination, liquidation, dissolution or other similar transaction, or any sale, lease, exchange, mortgage, pledge, transfer or other disposition of any portion of the Purchased Assets or equity securities of Seller or any of its subsidiaries, in each instance whether in a single transaction or a series of related transactions, or any other transaction which could reasonably be expected to interfere with the consummation of the transactions contemplated by this Agreement, (b) any tender offer or exchange offer for the outstanding shares of capital stock of Seller or the filing of any registration statement in connection therewith, or (c) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (2) "Action" means any action, complaint, petition, investigation, suit or other proceeding, whether civil or criminal, in law or in equity, by or before any arbitrator or Governmental Entity, other than the Bankruptcy Case. (3) "Agreement" means this Asset Purchase Agreement, including all Exhibits hereto, the Disclosure Schedule and the Buyer Disclosure Schedule, as it may be amended, supplemented or otherwise modified from time to time in accordance with its terms. (4) "Approval" means any approval, authorization, consent, qualification or registration, or any waiver of any of the foregoing, required to be obtained from, or any notice, statement or other communication required to be filed with or delivered to, any Governmental Entity or any other person. (5) "Approval Motion" means a motion pursuant to Sections 363 and 365 of the Bankruptcy Code for the approval by the Bankruptcy Court of the execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby, including, but not limited to, the sale of the Purchased Assets by Seller to Buyer in accordance with the terms and conditions of this Agreement. (6) "Approval Order" means a final, unappealable order of the Bankruptcy Court granting the Approval Motion which order has not been amended, modified or stayed. (7) "Assumed Contracts" means the contracts, agreements and leases of equipment, machinery, installations and other personal property listed in Section 1.2(7) of the Disclosure Schedule. (8) "Assumed Liabilities" is defined in Section 2.2. (9) "Assumed Mall Agreements" means the Mall Agreements listed in Section 1.2(9) of the Disclosure Schedule. (10) "Bankruptcy Case" is defined in the preamble hereto. (11) "Bankruptcy Code" means Title 11 of the United States Code. (12) "Bankruptcy Court" is defined in the preamble hereto. (13) "Business" means the department store business of Seller. (14) "Business Day" means any day other than a Saturday, Sunday or a day on which banks in the State of Washington are generally closed for regular banking business. (15) "Cash Portion" is defined in Section 3.1. (16) "Closing" is defined in Section 3.2. (17) "Closing Date" means the date of the Closing. (18) "Code" means the Internal Revenue Code of 1986, as amended. (19) "Employee Plan" is defined in Section 4.10(a). (20) "Encumbrance" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. (21) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and related regulations and published interpretations. (22) "Excluded Assets" is defined in Section 2.3. (23) "Excluded Liabilities" is defined in Section 2.3. (24) "Governmental Entity" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. (25) "Hart-Scott-Rodino Act" means the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended, and related regulations and published interpretations. (26) "Hazardous Substance" means (but shall not be limited to) substances that are defined or listed in, or otherwise classified pursuant to, any applicable Laws as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances," or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitibility, corrosivity, reactivity, radioactivity, carcinogenicity, reproductive toxicity or "EP toxicity," and petroleum and drilling fluids, produced waters and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy. (27) "Law" means any constitutional provision, statute, ordinance or other law, rule, regulation, or interpretation of any Governmental Entity and any Order. (28) "Leases" means the leases of real property listed in Section 1.2(28) of the Disclosure Schedule. (29) "Letter of Intent" means that certain letter agreement dated April 12, 2000 by and between Buyer and Seller. (30) "Loss" means any claim, cost, damage, expense, judgment, liability, loss, obligation, penalty or settlement including, but not limited to, penalties and reasonable legal, accounting and other professional fees and expenses incurred in the investigation, collection, prosecution and defense of claims and amounts paid in settlement. (31) "Mall Agreement" means any reciprocal easement agreement, development agreement, agreement of covenants, conditions and restrictions, or other such agreement among (or binding on) tenants or owners of portions of any mall, shopping center or other development at which real property leased under the Leases is located which is binding on or benefits Seller. (32) "Minimum Overbid Proposal" means a bona fide Acquisition Proposal (or combination of Acquisition Proposals) for the acquisition of not less than 75% (in number) of the Leases that offers cash consideration at least $1,900,000 in excess of the Cash Portion, and is otherwise on terms and conditions (including, but not limited to, conditions to closing and timing of closing) substantially the same as, and in any event no less favorable to Seller than, those set forth in this Agreement. (33) "Order" means any decree, injunction, judgment, order, ruling, assessment or writ issued by any Governmental Entity. (34) "Permit" means any license, permit, franchise, certificate of authority, or order, or any waiver of the foregoing, required to be issued by any Governmental Entity. (35) "Purchased Assets" is defined in Section 2.1. (36) "Stores" means Seller's department stores, all of which are listed in Section 1.2(36) of the Disclosure Schedule. (37) "Tax" or "Taxes" means all federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, business and occupation, excise, franchise, employment, withholding, transfer, payroll, goods and services, value-added or minimum tax, or any other tax, custom, duty, governmental fee, or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Entity. (38) "Total Purchase Price" is defined in Section 3.1. (39) "WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988. ARTICLE II PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES 2.1 Purchase and Sale of Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell, assign, transfer and deliver to Buyer, and Buyer shall purchase, acquire and accept from Seller, all of Seller's right, title and interest in and to each of the following assets (the "Purchased Assets"): (a) Except for such as constitute inventory held for sale in the ordinary course of business consistent with past practice and except for materials and supplies that are consumed during the period between the date hereof and the Closing Date in the ordinary course of business consistent with past practice, all of Seller's machinery, equipment, installations, furniture, tools, spare parts, supplies, maintenance equipment and supplies, materials, deposits relating to the foregoing and other items of personal property of every kind and description owned by Seller and located, as of the date hereof, at the Stores including, but not limited to, those items listed in Section 2.1(a) of the Disclosure Schedule. (b) The Leases. (c) All of Seller's store fixtures, shelving and business fixtures and all storage and office facilities owned by Seller and located on the real property leased under the Leases. (d) The Assumed Contracts. (e) The Assumed Mall Agreements. (f) All of Seller's licenses, permits, variances, interim permits, permit applications, approvals, consents, certifications, qualifications and other authorizations under any law, statute, rule, regulation, order or ordinance applicable to the Business or otherwise required by any Governmental Entity in connection with the Business or operations of the Business that may be assigned or transferred by Seller. (g) All claims of Seller under any insurance policies (and proceeds therefrom) covering any of the Purchased Assets or any of the Assumed Liabilities. (h) Originals or copies, at Seller's election, of Seller's information, books and records relating to the Business (other than customer lists and files), including but not limited to all product files, software, confidential information (to the extent that the same may be disclosed to Buyer under applicable Law), price lists, marketing information, sales records, property and excise tax, historical and financial records and files, all blueprints, building specifications and "as built" plans, all personnel and labor relations records relating to Seller's employees hired by Buyer (to the extent that the same may be transferred to Buyer under applicable Law), all environmental control, monitoring and test records, all facility cost records, all maintenance and production records, all plats and surveys of the real property leased under the Leases and all plans and designs of buildings, structures, fixtures and equipment. 2.2 Assumed Liabilities. Subject to the terms and conditions of this Agreement, at the Closing, Buyer shall assume only the following liabilities and obligations (the "Assumed Liabilities"): (a) Seller's obligations to perform under the Leases, but only if and to the extent that the same arise after the Closing Date. (b) Seller's obligations to perform under the Assumed Mall Agreements, but only if and to the extent that the same arise after the Closing Date. (c) Seller's obligations to perform under the Assumed Contracts, but only if and to the extent that the same arise after the Closing Date or are required to be discharged by Buyer under the terms of Section 3.5. 2.3 No Other Assets Purchased or Liabilities Assumed. Buyer shall not purchase, acquire or accept from Seller any assets of Seller other than the Purchased Assets (all such other assets of Seller being the "Excluded Assets"). Buyer shall not assume, shall not take subject to and shall not be liable for any liabilities or obligations of any kind or nature whatsoever, whether absolute, contingent, accrued, known or unknown, of Seller other than the Assumed Liabilities (all such other liabilities of Seller being the "Excluded Liabilities"). ARTICLE III PURCHASE PRICE; CLOSING 3.1 Total Purchase Price; Cash Portion; Allocation. The total purchase price (the "Total Purchase Price") to be paid to Seller by Buyer for the Purchased Assets shall be (a) the assumption of the Assumed Liabilities, plus (b) $19,000,000 in cash (the "Cash Portion"). Buyer and Seller agree that the Total Purchase Price , including amounts attributable to the Assumed Liabilities, shall be allocated in accordance with the requirements of Section 1060(a) of the Code, which allocation shall be made in good faith by Buyer as prescribed by the Code and Treasury Regulations thereunder and followed by both Buyer and Seller in the preparation of their respective Tax returns. 3.2 Closing. The consummation of the purchase and sale of the Purchased Assets and the assumption of the Assumed Liabilities pursuant to this Agreement (the "Closing") shall be held at the offices of Ryan, Swanson & Cleveland, PLLC, 1201 Third Avenue, Suite 3400, Seattle, Washington 98101-3034, on July 24, 2000; provided, however, that if any of the conditions specified in Articles VII, VIII and IX (other than conditions that can only be satisfied on the Closing Date) shall not have been satisfied at such date, the Closing shall be held on the fifth Business Day following the first date on which such conditions shall have been satisfied, or such other date as Seller and Buyer may agree. 3.3 Items to be Delivered at the Closing by Seller. At the Closing, Seller shall deliver or cause to be delivered to Buyer: (a) An executed Bill of Sale and Assignment in the form of Exhibit A. (b) Subject to the provisions of Section 3.5, an executed Assignment and Assumption Agreement with respect to the Assumed Contracts and the Assumed Mall Agreements in the form of Exhibit B. (c) An executed Lease Assignment and Assumption Agreement with respect to the Leases in the form of Exhibit C. (d) If and to the extent obtained, executed landlord consent and estoppel statements, landlord lien waivers and subordination, nondisturbance and attornment agreements with respect to each of the Leases and the Assumed Mall Agreements, as described in Section 6.4(b). (e) Such other instruments of transfer necessary or appropriate to transfer to and vest in Buyer all of Seller's right, title and interest in and to the Purchased Assets. (f) Such other certificates and other documents as are specified herein as then deliverable by Seller. 3.4 Items to be Delivered at the Closing by Buyer. At the Closing, Buyer shall deliver or cause to be delivered to Seller: (a) The Cash Portion, by wire transfer of immediately available funds to an account designated by Seller. (b) Subject to the provisions of Section 3.5, an executed Assignment and Assumption Agreement with respect to the Assumed Contracts and the Assumed Mall Agreements in the form of Exhibit B. (c) An executed Lease Assignment and Assumption Agreement with respect to the Leases in the form of Exhibit C. (d) Such other certificates and other documents as are specified herein as then deliverable by Buyer. 3.5 Circumstances Under Which Certain Assumed Contracts May Be Excluded. (a) Section 4.2(a) of the Disclosure Schedule includes a list of Seller defaults under or with respect to the Assumed Contracts. Buyer has agreed, pursuant to Section 6.4(d), if the Closing occurs, to make the payments to the parties and in the amounts specified with respect to each of the Assumed Contracts listed in Section 4.2(a) of the Disclosure Schedule immediately prior to the Closing in order to cure such defaults so that such Assumed Contract may be assumed by Seller and assigned to Buyer at the Closing. (b) If and as received by Seller, Seller shall promptly provide to Buyer copies of each Statement of Default (as defined in the Approval Motion) with respect to an Assumed Contract that alleges any defaults that are greater than those disclosed with respect to such Assumed Contract in Section 4.2(a) of the Disclosure Schedule. Notwithstanding any other provision of this Agreement, in the event that any such Statement of Default with respect to an Assumed Contract is received, then Buyer may, in its sole discretion, by notice to Seller given not less than one Business Day prior to the date of the hearing on the Approval Motion, elect to exclude such Assumed Contract from the Closing, in which event such Assumed Contract shall no longer be an Assumed Contract within the meaning of this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Except as otherwise indicated in the Disclosure Schedule by specific reference to the Section and statement intended to be qualified, Seller represents and warrants to Buyer as follows: 4.1 Organization and Related Matters. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has all necessary corporate power and, upon receipt of the Approval Order, will have all necessary corporate authority to execute, deliver and perform this Agreement and any related agreements to which it is a party. 4.2 Leases, Mall Agreements and Assumed Contracts. (a) Each of the Mall Agreements known to Seller is listed in Section 1.2(9) of the Disclosure Schedule. True, correct and complete copies of each of the Leases, the Assumed Mall Agreements and the Assumed Contracts, including any and all amendments, modifications or supplements thereto, have been provided to Buyer. Each Lease, each Assumed Mall Agreement and each Assumed Contract is valid and in full force and effect, Seller has duly performed all of its obligations thereunder to the extent that such obligations to perform have accrued, and, with respect to the Assumed Contracts, no breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a breach or default thereunder by Seller has occurred or will occur as a result of the execution, delivery and performance of this Agreement, and, with respect to the Leases and the Assumed Mall Agreements, at and upon the Closing there will be no breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a breach or default by Seller thereunder. To Seller's best knowledge, no breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a breach or default under any Lease, Assumed Mall Agreement or Assumed Contract by any party thereto other than Seller has occurred or will occur as a result of the execution, delivery and performance of this Agreement. Assuming the Approval Order is obtained, the consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any rights of, or accelerate or augment any obligation of, Seller under any Lease, Assumed Mall Agreement or Assumed Contract. (b) Section 1.2(28) of the Disclosure Schedule accurately sets forth the term of each Lease. Except as indicated in Section 1.2(28) of the Disclosure Schedule, there are no deposits held by the landlord under any of the Leases. Seller has accepted possession of each property leased under a Lease and is in actual possession thereof and has not sublet, assigned or hypothecated its leasehold interest thereunder. Except for proofs of claim filed in the Bankruptcy Case, no lessor has asserted a defense to, or offset or claim against, its obligations under any Lease, and all such defenses, offsets and claims will be remedied or cured upon receipt of the Approval Order. Seller has not paid any rent under any Lease more than one month in advance. All space and improvements leased by Seller have been fully and satisfactorily completed and furnished in accordance with the provisions of each Lease. There are no brokerage or leasing fees or commissions or other compensation that will be due or payable by Buyer on an absolute or contingent basis to any person, firm, corporation, or other entity, with respect to or on account of any of the Leases and no such fees, commissions or other compensation shall, by reason of any existing agreement, become due during the terms of any of the Leases or with respect to any renewal or extension thereof or the leasing of additional space by Seller. There are no outstanding contracts made by or on behalf of Seller for the construction or repair of any improvements to any of the properties leased under the Leases (including, without limitation, tenant improvements) that have not been fully paid for. 4.3 Title. Seller has good and marketable title to each of the Purchased Assets, free and clear of any Encumbrances. Assuming that the Approval Order is obtained, Seller has all right, power and authority to sell, convey, assign, transfer and deliver the Purchased Assets to Buyer in accordance with the terms of this Agreement. At the Closing, Buyer will acquire good title to and complete ownership of the Purchased Assets, free and clear of any Encumbrances. 4.4 Authorization; No Conflicts. The execution, delivery and performance of this Agreement and any related agreements by Seller have been duly and validly authorized by the Board of Directors of Seller and by all other necessary corporate action on the part of Seller. Upon issuance of the Approval Order, this Agreement and any related agreements will constitute the legally valid and binding obligation of Seller, enforceable against it in accordance with their terms except as such enforceability may be limited by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. Assuming issuance of the Approval Order, the execution, delivery and performance of this Agreement by Seller and the execution, delivery and performance of any related agreements by Seller will not (a) violate or constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under, the Certificate of Incorporation and Bylaws of Seller, (b) constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under any Lease, Assumed Mall Agreement or Assumed Contract or result in the imposition of any Encumbrance against any of the Purchased Assets or (c) violate any Law applicable to Buyer. Section 4.4 of the Disclosure Schedule lists all Approvals and Permits required to be obtained by Seller to consummate the transactions contemplated by this Agreement. Except for matters indicated in Section 4.4 of the Disclosure Schedule as requiring that certain actions be taken by or with respect to a third party or Governmental Entity, the execution and delivery of this Agreement by Seller and the performance of this Agreement and any related agreements by Seller will not require any notice to, filing or registration with, or the issuance of any Permit by, any third party or Governmental Entity under the terms of any applicable Laws, the Leases, the Assumed Mall Agreements or the Assumed Contracts. 4.5 Condition of Property. Each of the Purchased Assets that is an item of personal property of Seller, and all of the personal property leased to Seller pursuant to any Assumed Contract, is in all material respects in a reasonable and prudent state of maintenance and repair, has in all material respects been regularly and appropriately maintained, repaired and replaced, and is not in any material respect defective except for ordinary wear and tear. All of the real property leased to Seller pursuant to the Leases is in all material respects in a reasonable and prudent state of maintenance and repair and has no material physical, structural, or mechanical defects (including, without limitation, material defects in the plumbing, heating, sprinkler, air conditioning, ventilation and electrical systems and roof). In all material respects, each of the Purchased Assets that is an item of personal property of Seller, all personal property or equipment leased to Seller under any Assumed Contract and all store fixtures located on the real property leased under any of the Leases are located on or at premises leased under one or more of the Leases. 4.6 Legal Proceedings; Labor Matters. Section 4.6 of the Disclosure Schedule sets forth a true and complete list of all Actions (other than routine collection matters in the ordinary course of business consistent with past practice) to which Seller is a party. Seller is not in default under any Order. There is no organized labor strike, dispute, slowdown or stoppage, or collective bargaining or unfair labor practice claim, pending or to the best knowledge of Seller threatened, against or affecting Seller or the Business. 4.7 Insurance. Section 4.7 of the Disclosure Schedule sets forth a true and complete list of all insurance policies and all self- insurance arrangements administered by Seller covering the ownership and operations of the Purchased Assets. 4.8 Permits. Section 4.8 of the Disclosure Schedule sets forth a true and complete list of all Permits owned or held by Seller in connection with the ownership of the Purchased Assets, all of which are in effect and in good standing. 4.9 Compliance with Law; Environmental Matters. Seller is organized and has conducted the Business in accordance with applicable Laws, including environmental Laws. Seller has not received any communication from a Governmental Entity that alleges that Seller is not in compliance with all applicable Laws, including environmental Laws. To Seller's best knowledge, no Hazardous Substances are located on any of the real property leased to Seller under the Leases. Seller has not generated, used, transported, treated, stored, released or disposed of, or has suffered or permitted anyone else to generate, use, transport, treat, store, release or dispose of any Hazardous Substance which is regulated or prohibited by any Law, or has created or might reasonably be expected to create any liability under any Law or which would require reporting to or notification of any Governmental Entity. There has not been any generation, use, transportation, treatment, storage, release or disposal of any Hazardous Substance in connection with the conduct of the Business or Seller's use of any real property leased to Seller under the Leases or to the best knowledge of Seller any nearby or adjacent properties that is regulated or prohibited by any Law, or has created or might reasonably be expected to create any liability under any Law or which would require reporting to or notification of any Governmental Entity. To Seller's best knowledge, no asbestos, lead- based paint or polychlorinated biphenyl or storage tank (aboveground or underground) is contained in or located at any of the real property leased to Seller under the Leases. 4.10 Employee Benefits. (a) Section 4.10(a) of the Disclosure Schedule lists (by employer or by plan sponsor, as applicable) all employee benefit plans and collective bargaining, employment, retention or severance agreements and other similar arrangements to which Seller is a party or contributes that are (a) profit- sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plans, agreements or arrangements, (b) plans, agreements or arrangements providing for material "fringe benefits" or perquisites to employees, including but not limited to benefits relating to company automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, workers' compensation, medical, dental, hospitalization, life insurance and other types of insurance, (c) employment agreements not terminable on 30 days (or less) written notice or terminable at will by the employer without penalty, or (d) other "employee benefit plans" (within the meaning of Section 3(3) of ERISA) (each of the foregoing being a "Employee Plan"). (b) Seller has provided to Buyer true and complete copies of all documents and summary plan descriptions with respect to the Employee Plans, including, but not limited to the plan and trust documents or summary descriptions of any Employee Plans not otherwise in writing, Form 5500 for the most recent three years filed for each Employee Plan subject to such filing requirement, including all required schedules, and the most recent Internal Revenue Service determination letter for each Employee Plan which is intended to constitute a qualified plan under Section 401 of the Code. (c) There are no negotiations, demands or proposals that are pending or have been made which concern matters now covered, or that would be covered, by the Employee Plans. (d) Except as required under Section 4980B of the Code, Seller has no obligation to provide health or other welfare benefits to any employee following termination of employment. Section 4.10(d) of the Disclosure Schedule sets forth (i) a list (including the name, gender, age and, where applicable, relationship to or with the employee or former employee) of all "qualified beneficiaries" as defined in Section 4980B of the Code, (ii) such additional information as would be required to be provided to an insurance carrier in order for Buyer to obtain health insurance coverage for such individuals, and (iii) Seller's total actual costs incurred for claims under COBRA continuation coverage during the preceding three years. (e) Except as otherwise provided herein, no event has occurred that will result in liability to Buyer under or with respect to any Employee Plan. (f) Seller has classified all individuals who perform services for Seller correctly under the Employee Plans, ERISA and the Code as common law employees, independent contractors or leased employees. (g) No Employee Plan is a "multi employer plan" within the meaning of Section 3(37) of ERISA. Neither Seller nor any ERISA Affiliate has ever had an obligation to contribute to a "multiemployer plan" within the meaning of Section 3(37) of ERISA. The term "ERISA Affiliate" means any trade or business (whether or not incorporated) that is or was a member of a group of which the Seller is or was a member and which is or was under common control or treated as a single employer with Seller within the meaning of Section 414 (b), (c), (m) or (o) of the Code. 4.11 Year 2000 Compliance. Seller has taken steps to review identify and analyze its computer software and hardware used in the conduct of the Business to determine its year 2000 compliance. Such computer software and hardware is year 2000 compliant. As used herein, the term "year 2000 compliance" means the ability unambiguously to handle date information before, at and after January 1, 2000 and to function without interruption before, at and after January 1, 2000. 4.12 No Brokers or Finders. No agent, broker, finder, or investment or commercial banker, or other person or firm engaged by or acting on behalf of Seller in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder's or similar fee or other commission as a result of this Agreement or such transactions except for The Buxbaum Group, whose fees and expenses will be paid by Seller. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Except as otherwise indicated in the Buyer Disclosure Schedule by specific reference to the Section and matter intended to be qualified, Buyer represents and warrants to Seller as follows: 5.1 Organization and Related Matters. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has all necessary corporate power and authority to execute, deliver and perform this Agreement and any related agreements to which it is a party. 5.2 Authorization; No Conflicts. The execution, delivery and performance of this Agreement and any related agreements by Buyer have been duly and validly authorized by the Board of Directors of Buyer and by all other necessary corporate action on the part of Buyer. This Agreement and any related agreements constitute the legally valid and binding obligation of Buyer, enforceable against it in accordance with their terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. The execution, delivery and performance of this Agreement by Buyer and the execution, delivery and performance of any related agreements by Buyer will not (a) violate or constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under, the Certificate of Incorporation and Bylaws of Buyer, (b) constitute a breach or default (whether upon lapse of time and/or the occurrence of any act or event or otherwise) under any contract, lease or other agreement to which Buyer is a party or by which it is bound or (c) violate any Law applicable to Buyer. Section 5.2 of the Buyer Disclosure Schedule lists all Approvals and Permits required to be obtained by Buyer to consummate the transactions contemplated by this Agreement. Except for matters indicated in Section 5.2 of the Buyer Disclosure Schedule as requiring that certain actions be taken by or with respect to a third party or Governmental Entity, the execution and delivery of this Agreement by Buyer and the performance of this Agreement and any related agreements by Buyer will not require any notice to, filing or registration with, or the issuance of any Permit by, any third party or Governmental Entity under the terms of any applicable Laws or any contract, lease or other agreement to which Buyer is a party or by which it is bound. 5.3 Ability to Perform. No Action or Order is outstanding, pending or, to the best knowledge of Buyer, threatened against Buyer or its business or assets that reasonably could be expected to affect Buyer's right, capacity or ability to carry out the terms of and perform its obligations under this Agreement. Buyer has received commitment letters (copies of which have been provided to Seller) from lenders with respect to the financing of Buyer's payment of the Cash Portion. Receipt of the consent of Congress Financial Corporation described in Paragraph 2, Section 5.2 of the Buyer Disclosure Schedule is not a requirement of or condition to Closing. 5.4 No Brokers or Finders. No agent, broker, finder, or investment or commercial banker, or other person or firm engaged by or acting on behalf of Buyer or any of its Affiliates in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder's or similar fee or other commission as a result of this Agreement or such transactions except for Lehman Brothers Inc., whose fees and expenses will be paid by Buyer. ARTICLE VI INTERIM COVENANTS 6.1 Access. Seller will authorize and permit Buyer and its representatives (which term shall be deemed to include its independent accountants and outside legal counsel) to have reasonable access during normal business hours to all of the books and records of the Business and all other information with respect to the conduct of the Business as Buyer may from time to time reasonably request for the purposes of familiarizing itself with the Business, the Purchased Assets or the Assumed Liabilities and obtaining any necessary Approvals or Permits required for the consummation of the transactions contemplated by this Agreement. 6.2 Notice of Certain Developments. Each of Seller and Buyer shall promptly notify the other of them in writing of all events, circumstances, facts and occurrences, whether arising prior to or subsequent to the date of this Agreement, that will or are reasonably likely to result in any breach of a representation or warranty or covenant made by the notifying party in this Agreement or any failure to be satisfied of any condition to the obligations of the party receiving such notice under this Agreement. 6.3 Conduct of Business. Seller shall not, without the prior written consent of Buyer: (a) Amend, terminate, fail to renew or renegotiate any Lease, Assumed Mall Agreement or Assumed Contract or default (or take or omit to take any action that with or without the giving of notice or passage of time or both, would constitute a default) in any of its obligations under any Lease, Assumed Mall Agreement or Assumed Contract. (b) Sell, transfer, mortgage, encumber or otherwise dispose of any of the Purchased Assets. (c) Terminate or fail to renew any existing insurance coverage covering any of the Purchased Assets or any of the Assumed Liabilities. (d) Terminate, amend or fail to renew or preserve any Permits. (e) Fail to maintain or repair any Purchased Asset in accordance with reasonable and prudent maintenance and repair procedures. (f) Agree to or make any commitment to take any action that is or would be prohibited by this Section 6.3. (g) Fail to make any and all payments required of Seller under the Leases, the Assumed Contracts and the Assumed Mall Agreements for the period between the filing of the petition initiating the Bankruptcy Case to the Closing. 6.4 Permits and Approvals; Lease and Mall Agreement Cure Payments. (a) Each of the parties shall, as promptly as practicable (except with respect to filings required under the Hart-Scott-Rodino Act, which each of the parties shall prepare, submit and file promptly following receipt of the Approval Order), prepare, submit and file (or cause to be prepared, submitted and filed) all applications, notices and requests for, and shall use all reasonable efforts to obtain as promptly as practicable, all Permits and Approvals of all Governmental Entities that, with respect to Seller, are listed in Section 4.4 of the Disclosure Schedule, and with respect to Buyer, are listed in Section 5.2 of the Buyer Disclosure Schedule, and will cooperate fully with each other in promptly seeking to obtain all such Permits and Approvals. Without limiting the foregoing, Seller shall, not later than three Business Days after receipt of Buyer's approval thereof, file the Approval Motion with the Bankruptcy Court. (b) Seller shall prepare and give promptly all such notices to third parties and use all commercially reasonable efforts to obtain such third party Approvals as are listed in Section 4.4 of the Disclosure Schedule. Buyer shall prepare and give promptly all such notices to third parties and use all commercially reasonable efforts to obtain such third party Approvals as are listed in Section 5.2 of the Buyer Disclosure Schedule. Seller shall use commercially reasonable efforts to obtain executed lessor estoppel certificates, in the form of Exhibit D hereto, and executed landlord agreements, in the form of Exhibit E hereto, from each lessor under a Lease, and executed estoppel certificates, in the form of Exhibit F hereto, from each person which is known by Seller to be a party to an Assumed Mall Agreement other than Seller. Seller shall use commercially reasonable efforts to obtain executed subordination, nondisturbance and attornment agreements, in the form of Exhibit G hereto, with respect to all Leases executed by the person holding the subject encumbrance and the lessor under the subject Lease. Seller shall use commercially reasonable efforts to obtain and furnish to Buyer any and all certificate(s) of occupancy or similar documents required from any Governmental Entity in connection with Buyer's possession of the real property leased under the Leases. Buyer acknowledges that for purposes of this Section 6.4(b) "all commercially reasonable efforts" do not include making out-of-pocket money payments, granting of concessions or accommodations or provision of other out-of-pocket consideration. (c) Buyer shall pay the fees of any Hart- Scott-Rodino Act filing. Each of the parties shall bear its own costs and expenses incurred or other fees paid to Governmental Entities to obtain the Approvals and Permits referred to in this Section 6.4. (d) Seller shall be responsible for, and at or prior to the Closing shall take all actions necessary to cure all breaches or defaults under the Leases and the Assumed Mall Agreements that are required by the Approval Order to be cured. Subject to the provisions of Section 3.5, if the Closing occurs, Buyer shall be responsible for, and at or prior to the Closing shall take all actions necessary to cure the defaults under the Assumed Contracts that are required by the Approval Order to be cured. (e) The parties acknowledge and agree that neither of them shall comply with any of the requirements of any bulk sales or transfer law. 6.5 Prorations; Sales and Transfer Taxes. (a) At the Closing, any and all real estate, leasehold and personal property taxes paid or payable in 2000, payments made by or due from Seller under the Leases, the Assumed Contracts and the Assumed Mall Agreements for the period between the filing of the petition initiating the Bankruptcy Case to the Closing, and utility, water, sewer and similar charges, shall be apportioned and prorated between Seller and Buyer as of the Closing Date, with Seller to pay and be responsible for all of the foregoing as relate to periods ending on or prior to the Closing Date, and Buyer to pay and be responsible for all of the foregoing as relate to periods beginning after the Closing Date. (b) Seller shall pay and be responsible for any and all real property excise or transfer Taxes, if any, and Buyer shall pay and be responsible for any and all sales, use, personal property excise, leasehold, personal property transfer or other similar Taxes, if any, imposed on or in connection with the sale or transfer of the Purchased Assets to, and the assumption of the Assumed Liabilities by, Buyer pursuant to this Agreement. Any and all registration, filing or recording fees or costs, if any, shall be paid by and be the responsibility of Buyer. 6.6 Certain Employee Matters. (a) Not later than May 14, 2000, Buyer shall deliver to Seller a list of those employees of Seller to whom Buyer desires to offer employment on the Closing Date. On the Closing Date, Buyer shall offer employment commencing on the first Business Day after the Closing Date and on an "at will" basis to those employees listed in such notice. (b) Seller shall comply with the provisions of the WARN Act with respect to any termination of its employees, and shall provide terminated employees with all legally required notices relating to the Employee Plans. (c) Buyer agrees to offer "COBRA Continuation Coverage" under a group health plan or insurance policy maintained by or issued to Buyer to each "M&A Qualified Beneficiary" of Seller beginning on the later of the Closing Date or the date the "Selling Group" which includes Seller ceases to provide any group health plan to any employee. The term "COBRA Continuation Coverage" shall have the meaning set forth in Treasury Regulations Section 54.4980B-5 Q&A-1. The terms "M&A Qualified Beneficiary" and "Selling Group" shall have the meanings set forth in Proposed Treasury Regulations Sections 54.4980B-9 Q&A-4 and Q&A- 3 respectively. 6.7 Acquisition Proposals; Minimum Overbid Proposals; Expense Reimbursement. Seller shall immediately cease and cause to be terminated any existing activities, discussions, or negotiations with any parties regarding any Acquisition Proposal. From the date of this Agreement until the Closing Date or the termination of this Agreement pursuant to Section 10.1, Seller shall not and shall not permit any of its subsidiaries, or any of its or their officers, directors, employees, representatives, agents, or affiliates, including, without limitation, any investment banker, attorney or accountant retained by Seller or any of its subsidiaries (collectively, "Representatives"), to, directly or indirectly, (i) initiate, solicit, encourage or otherwise facilitate (except by way of furnishing information, but then only by Seller's special reorganization counsel), any inquiries or the making of any proposal or offer that constitutes, or may reasonably be expected to lead to an Acquisition Proposal (as defined below), or (ii) enter into or maintain or continue discussions or negotiate with any person in furtherance of such inquiries or to obtain an Acquisition Proposal, or (iii) agree to, approve, recommend, or endorse any Acquisition Proposal, or authorize or permit any of its subsidiaries or Representatives to take any such action, and Seller shall promptly notify Buyer of any such inquiries and proposals received by Seller or any of its subsidiaries or Representatives, relating to any of such matters; provided, however, that Seller may, if and only Seller has complied with the provisions of subsection 6.7(i) above, in response to a Minimum Overbid Proposal, furnish information to, or engage in discussions or negotiations with, the proponent of such Minimum Overbid Proposal. Prior to furnishing any information to any person, Seller shall cause Seller's special reorganization counsel to give written notice to Buyer to the effect that it intends to furnish information to such person, which notice shall identify the recipient and describe the information to be provided. Prior to entering into discussions or negotiations with any person concerning any Acquisition Proposal, Seller shall give written notice to Buyer to the effect that it intends to enter into discussions or negotiations with such person, which notice shall describe in detail the nature and terms of the Acquisition Proposal. Seller shall keep Buyer fully and timely informed of the status of any discussions or negotiations relating to any Acquisition Proposal. ARTICLE VII GENERAL CONDITIONS TO OBLIGATIONS OF THE PARTIES 7.1 General Conditions. The obligations of the parties to effect the Closing shall be subject to the following conditions unless waived in writing by all parties: (a) No Orders; Legal Proceedings. No Law or Order shall have been enacted, entered, issued, promulgated or enforced by any Governmental Entity, nor shall any Action have been instituted and remain pending by any Governmental Entity at what would otherwise be the Closing Date, that prohibits or restricts or would (if successful) prohibit or restrict the transactions contemplated by this Agreement. No Governmental Entity shall have notified any party to this Agreement that consummation of the transactions contemplated by this Agreement would constitute a violation of any Laws of any jurisdiction or that it intends to commence proceedings to restrain or prohibit such transactions or force divestiture or rescission, unless such Governmental Entity shall have withdrawn such notice and abandoned any such proceedings prior to the otherwise timely Closing. (b) Governmental Approvals. The Approval Order and all other Permits from and Approvals of Governmental Entities that are listed in Section 4.4 of the Disclosure Schedule and Section 5.2 of the Buyer Disclosure Schedule shall have been received or obtained on or prior to the Closing Date, and any applicable waiting period under the Hart-Scott-Rodino Act shall have expired or been terminated, in each instance without the imposition of any material condition or restriction upon Buyer. ARTICLE VIII CONDITIONS TO OBLIGATIONS OF BUYER 8.1 Conditions to Obligations of Buyer. The obligations of Buyer to effect the Closing shall be subject to the following conditions except to the extent waived in writing by Buyer: (a) Representations and Warranties and Covenants of Seller. The representations and warranties of Seller set forth in Section 4.5 shall be true and correct and the other representations and warranties of Seller set forth in Article IV shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time, Seller shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date, and Seller shall have delivered to Buyer a certificate of Seller dated the Closing Date and signed by the Chief Executive Officer of Seller to such effect. (b) Condition of Stores. The Stores shall be in suitable condition for possession to be transferred to Buyer. The Stores shall be in all material respects free of dirt, rubbish and debris. ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER 9.1 Conditions to Obligations of Seller. The obligations of Seller to effect the Closing shall be subject to the following conditions, except to the extent waived in writing by Seller: (a) Representations and Warranties and Covenants of Buyer. The representations and warranties of Buyer set forth in Article V shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time, Buyer shall have in all material respects performed all obligations and complied with all covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date, and Buyer shall have delivered to Seller a certificate of Buyer dated the Closing Date and signed by the Chief Executive Officer of Buyer. ARTICLE X TERMINATION OF OBLIGATIONS; SURVIVAL 10.1 Termination of Agreement. Anything herein to the contrary notwithstanding, this Agreement and the transactions contemplated by this Agreement shall terminate at the close of business on August 31, 2000 unless extended by mutual consent in writing of the parties and may otherwise be terminated at any time before the Closing as follows and in no other manner: (a) Mutual Consent. By mutual consent in writing of the parties. (b) Conditions to Buyer's Performance Impossible. By Buyer upon written notice to Seller if any event occurs which would render impossible the satisfaction of one or more conditions to the obligations of Buyer to consummate the transactions contemplated by this Agreement as set forth in Article VII or VIII. (c) Conditions to Seller' Performance Impossible. By Seller upon written notice to Buyer if any event occurs which would render impossible the satisfaction of one or more conditions to the obligations of Seller to consummate the transactions contemplated by this Agreement as set forth in Article VII or IX. (d) Material Breach. By Buyer on the one hand, and Seller on the other hand, by written notice to the other of them, if there has been a material misrepresentation or material breach on the part of the other in its representations, warranties or covenants set forth herein; provided, however, that with respect to any misrepresentation or breach of any provision of this Agreement other than Section 6.7, if such misrepresentation or breach is susceptible to cure, the breaching party shall have ten Business Days after receipt of notice from the other party of its intention to terminate this Agreement pursuant to this Section 10.1 if such misrepresentation or breach continues in which to cure such misrepresentation or breach before the other party may so terminate this Agreement. (e) Acquisition Proposal. By Buyer by written notice to Seller if Seller shall have entered into any agreement with respect to an Acquisition Proposal, or Seller shall have engaged in discussions or negotiations with the proponent of any Acquisition Proposal and such discussions or negotiations shall have continued for more than 15 Business Days. 10.2 Effect of Termination. In the event that this Agreement shall be terminated pursuant to Section 10.1, all further obligations of the parties under this Agreement shall terminate without further liability of any party to another except as set forth in this Section 10.2. The obligations of the parties contained in this Section 10.2 shall survive any termination of this Agreement pursuant to Section 10.1. A termination under Section 10.1 shall not relieve any party of any liability for a breach of any provision of this Agreement, or be deemed to constitute a waiver of any available remedy (including specific performance if available) for any such breach. 10.3 Survival of Representations and Warranties. The representations and warranties of Seller and of Buyer contained in this Agreement shall expire upon the Closing. ARTICLE XI GENERAL 11.1 Amendments; Waivers. This Agreement and any Schedule or Exhibit attached hereto may be amended only by agreement in writing of all parties. No waiver of any provision nor consent to any exception to the terms of this Agreement or any agreement contemplated hereby shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. 11.2 Disclosure Schedule; Buyer Disclosure Schedule; Exhibits; Integration. The Disclosure Schedule, the Buyer Disclosure Schedule and each Exhibit delivered pursuant to the terms of this Agreement shall be in writing and shall constitute a part of this Agreement, although the Disclosure Schedule and the Buyer Disclosure Schedule need not be attached to each copy of this Agreement. This Agreement, together with the Disclosure Schedule, the Buyer Disclosure Schedule and such Exhibits, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith including, but not limited to, the Letter of Intent. 11.3 Best Efforts; Further Assurances; Power of Attorney. Each party will use its best efforts to cause all conditions to its obligations hereunder to be timely satisfied and to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms as soon as reasonably practicable. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as may be reasonably necessary to consummate or implement the transactions contemplated hereby or to evidence such events or matters. 11.4 Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and performed in such State and without regard to conflicts of law doctrines. Each of the parties recognizes and consents to the continuing jurisdiction of the Bankruptcy Court over any Action, controversy, claim or dispute arising out of or relating to this Agreement or the transactions contemplated hereby. 11.5 No Assignment. Neither this Agreement nor any related agreements nor any rights or obligations under any of them shall be assignable by any of the parties hereto. Notwithstanding the foregoing, Buyer may assign its rights and obligations hereunder to any wholly owned subsidiary of Buyer, provided that Buyer shall nevertheless remain liable to Seller for the performance of Buyer's obligations hereunder. 11.6 Headings. The descriptive headings of the articles, sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement. 11.7 Counterparts. This Agreement and any amendment hereto or any other agreement (or document) delivered pursuant hereto may be executed in one or more counterparts and by different parties in separate counterparts, all of which shall constitute one and the same agreement (or other document). 11.8 Publicity and Reports. The parties shall coordinate all publicity relating to the transactions contemplated by this Agreement, and no party shall issue any press release, publicity statement or other public notice relating to this Agreement, or the transactions contemplated by this Agreement without obtaining the prior consent of both Seller and Buyer (which consent shall not be unreasonably withheld or delayed), except to the extent that independent legal counsel to Seller or Buyer, as the case may be, shall have advised its client that a particular action is required by applicable Law. 11.9 Parties in Interest. This Agreement shall be binding upon and inure to the benefit of each party and its successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Nothing in this Agreement is intended to relieve or discharge the obligation of any third person to any party to this Agreement. 11.10 Notices. Any notice or other communication hereunder must be given in writing and (a) delivered in person, (b) transmitted by telex, telefax or telecommunications mechanism, provided that any notice so given is also mailed or sent as provided in clause (c), or (c) mailed by certified or registered mail, postage prepaid, receipt requested or sent by reputable overnight courier as follows: If to Buyer, addressed to: Gottschalks Inc. 7 River Park Place East P.O. Box 28920 Fresno, CA 93729 Telecopy: 559-434-4666 Attention: Warren L. Williams, Esq. With copies to: O'Melveny & Myers LLP 400 South Hope St., 15th Floor Los Angeles, CA 90071-2899 Telecopy: 213-430-6407 Attention: Avery R. Brown, Esq. Charles C. Wolf, Esq. If to Seller, addressed to: Lamonts Apparel, Inc. 12413 Willows Road N.E. Kirkland, WA 98034 Telecopy: 425-814-9749 Attention: Debbie A. Brownfield With copies to: Heller Ehrman White & McAuliffe LLP 701 Fifth Avenue, Suite 6100 Seattle, WA 98104-7098 Telecopy: 206-447-0849 Attention: Bruce M. Pym, Esq. and Stutman, Treister & Glatt, Professional Corporation 3699 Wilshire Boulevard, Suite 900 Los Angeles, CA 90010 Telecopy: 213-251-5288 Attention: Eve H. Karasik, Esq. and Kronish Lieb Weiner & Hellman LLP 1114 Avenue of the Americas New York, NY 10036-7798 Telecopy: 212-479-6275 Attention: Lawrence C. Gottlieb or to such other address or to such other person as either party shall have last designated by such notice to the other party. Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number specified in (or pursuant to) this Section 11.10 and an appropriate answerback is received, (ii) if given by mail or courier or any other means, when actually delivered. 11.11 Expenses. Except as otherwise expressly provided in this Agreement, each of the parties shall pay its own expenses incident to the negotiation, preparation and performance of this Agreement and the transactions contemplated hereby, including but not limited to the fees, expenses and disbursements of its investment bankers, accountants and counsel. 11.12 Remedies. To the extent permitted by Law, and except as otherwise expressly provided herein to the contrary, all rights and remedies existing under this Agreement and any Related Agreements or documents are cumulative to, and not exclusive of, any rights or remedies otherwise available under applicable Law. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right. 11.13 Attorneys' Fees. In the event of any Action for the breach of this Agreement or misrepresentation by any party, the prevailing party shall be entitled to reasonable attorneys' fees, costs and expenses incurred in such Action. Attorneys' fees incurred in enforcing any judgment in respect of this Agreement are recoverable as a separate item. The preceding sentence is intended to be severable from the other provisions of this Agreement and to survive any judgment and, to the maximum extent permitted by law, shall not be deemed merged into any such judgment. 11.14 Representation by Counsel; Interpretation. The parties each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of Law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties. 11.15 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Entity, the remaining provisions of this Agreement shall remain in full force and effect provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable. 11.16 Calendar Days; Holidays. All references made in this Agreement to the word "days," whether for notices, schedules or other miscellaneous time limits, shall at all times herein be deemed to mean calendar days, unless specifically referenced as Business Days. When performance of an obligation or satisfaction of a condition set forth in this Agreement is required on or by a date that is a Saturday, Sunday, or a legal holiday, such performance or satisfaction shall instead be required on or by the next Business Day following that Saturday, Sunday or holiday, notwithstanding any other provision of this Agreement. 11.17 Effectiveness. Notwithstanding any provision herein to the contrary, this Agreement shall be effective and binding upon the parties only upon issuance of the Approval Order (except for the provisions of Section 6.7, which shall be effective and binding upon the parties upon the execution and delivery of this Agreement). 11.18 Disclosure Schedule. The parties acknowledge that with respect to information required under this Agreement to be provided (as distinguished from information constituting exceptions to Seller's representations and warranties), Sections 2.1(a), 4.8, and 4.10(d) of the Disclosure Schedule are incomplete. Seller shall, with respect to information called for by Sections 2.1(a) and 4.10(d) of the Disclosure Schedule, deliver, and, with respect to information called for by Section 4.8 of the Disclosure Schedule, Seller shall use commercially reasonable efforts to deliver, to Buyer and its counsel complete and final versions of such Sections of the Disclosure Schedule as soon as practicable but in any event not later than 5:00 p.m. PDT on Friday, April 28. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officers as of the day and year first above written. LAMONTS APPAREL, INC. By: /s/ Alan R. Schlesinger Title: CEO GOTTSCHALKS INC. By: /s/ Michael S. Geele Title: Senior Vice President and Chief Financial Officer EXHIBIT A FORM OF BILL OF SALE AND ASSIGNMENT For good and valuable consideration, receipt of which is hereby acknowledged, and pursuant to that certain Asset Purchase Agreement dated as of April 24, 2000 (the "Agreement;" capitalized terms used but not defined herein being used herein as therein defined) by and between LAMONTS APPAREL, INC., a Delaware corporation ("Seller"), and GOTTSCHALKS INC., a Delaware corporation ("Buyer"), and intending to be legally bound hereby, Seller does hereby unconditionally and irrevocably sell, convey, grant, assign and transfer to Buyer all of its right, title and interest in and to the Purchased Assets including, but not limited to, those listed on Schedule 1 hereto. IN WITNESS WHEREOF, Seller has caused this Bill of Sale and Assignment to be executed this _____ day of ______________, 2000. LAMONTS APPAREL, INC. By:___________________________ Name:________________________ Title:__________________________ SCHEDULE 1 to BILL OF SALE AND ASSIGNMENT (To Come) EXHIBIT B FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT This ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into as of __, 2000 by and between LAMONTS APPAREL, INC., a Delaware corporation ("Seller"), and GOTTSCHALKS INC., a Delaware corporation ("Buyer"). W I T N E S S E T H WHEREAS, pursuant to that certain Asset Purchase Agreement dated as of April 24, 2000 (the "Agreement;" capitalized terms used but not defined herein being used herein as therein defined) by and between the parties hereto, Seller desires to transfer to Buyer, and Buyer desires to acquire from Seller, Seller's interest in the Assumed Mall Agreements and the Assumed Contracts. NOW THEREFORE, in consideration of the transfer contemplated hereby and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer do hereby agree as follows: 1. Seller hereby assigns and transfers to Buyer, and Buyer accepts the assignment and transfer of, all of Seller's right, title and interest in, to and under the Assumed Mall Agreements and the Assumed Contracts, and Buyer assumes and undertakes to perform Seller's obligations under the Assumed Mall Agreements and the Assumed Contracts, but only if and to the extent that the same arise after the Closing Date. 2. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. IN WITNESS WHEREOF, Seller and Buyer have caused this Assignment and Assumption Agreement to be executed as of the date first above written. LAMONTS APPAREL, INC. By:___________________________ Name:________________________ Title:__________________________ GOTTSCHALKS INC. By:___________________________ Name:________________________ Title:_________________________ EXHIBIT C FORM OF LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: _______________________ _______________________ _______________________ _______________________ Attn: __________________ ______________________________________________ _____________________ LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT THIS LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment") is made as of the ______________________ day of _____________, 2000, by and between LAMONTS APPAREL, INC., a Delaware corporation ("Assignor"), and GOTTSCHALKS INC., a Delaware corporation ("Assignee"). Terms used herein and not otherwise defined shall have the meanings assigned to them in the Asset Purchase Agreement dated April 24, 2000, by and between Assignor and Assignee (the "Agreement"). W I T N E S S E T H : WHEREAS, pursuant to the Agreement, Assignor has agreed to assign, transfer and convey and Assignee has agreed to acquire and accept the interest of Assignor under the leases described on Exhibit 1 attached hereto (the "Leases"), which Leases relate to that certain real property described on Exhibit 2 attached hereto; and WHEREAS, Assignee has agreed under the Agreement to assume Assignor's obligations to perform under the Leases, but only if and to the extent that the same arise after the Closing Date. NOW, THEREFORE, with reference to the foregoing recitals, which are incorporated herein by this reference and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Assignor does hereby assign, grant, transfer and convey to Assignee all of its right, title and interest as lessee under the Leases. 2. Assignee accepts the foregoing assignment and assumes Seller's obligations to perform under the Leases, but only if and to the extent that the same arise after the Closing Date. 3. Assignor shall not further assign, grant, transfer, sell, convey, mortgage, pledge or otherwise encumber all or any portion of its interest in the Leases. Any attempted further assignment, grant, transfer, sale, conveyance, mortgage, pledge or other encumbrance, whether made voluntarily or otherwise, shall be void and of no effect. 4. The persons executing this Assignment hereby represent and warrant that they are duly authorized to execute and deliver this Agreement on behalf of Assignor or Assignee, as the case may be. 5. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute only one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed as of the date first above written. "Assignor" LAMONTS APPAREL, INC. By Name: Title: "Assignee" GOTTSCHALKS INC. By Name: Title: EXHIBIT 1 (to Exhibit C of Asset Purchase Agreement) THE LEASE [insert copy of Lease] EXHIBIT 2 (to Exhibit C of Asset Purchase Agreement) DESCRIPTION OF PROPERTY [Use only if Exhibit 1 does not include this information] EXHIBIT D FORM OF LESSOR ESTOPPEL CERTIFICATE Gottschalks Inc. 7 River Park Place East Fresno, California 92729 Attn: ___________________ RE: [reference lease] (the "Lease") with respect to certain premises (the "Leased Premises)") in the [reference mall and location] (the "Shopping Center") The undersigned (the "Landlord"), the landlord under the Lease covering the Leased Premises, has been informed by Lamonts Apparel, Inc. ("Lamonts"), the tenant under the Lease, that Lamonts has assigned or will assign the Lease to Gottschalks Inc. ("Gottschalks") and that Gottschalks has assumed or will assume the obligations of Lamonts under the Lease (collectively, the "Assignment"). As a condition precedent to the Assignment, Gottschalks is requiring and will be relying on this landlord estoppel certificate (this "Certificate"). Accordingly, Landlord hereby certifies to Gottschalks the following to Landlord's best knowledge as of the date hereof: 1. Landlord is the lessor under the Lease, pursuant to which Lamonts leases the Leased Premises. The Lease has not been modified, changed, altered, supplemented or amended in any respect, nor have any provisions thereof been waived [except as described in the reference line of this letter]. 2. The lease is valid and in full force and effect on the date hereof. Landlord does not have any other agreements with Lamonts with respect to the Lease or the Leased Premises. 3. Lamonts is the current tenant under the Lease. All rents or other sums (including, but not limited to, taxes, utilities, maintenance fees, and insurance) due and payable under the Lease have been paid through the date of this Certificate. No rents or other charges (including, but not limited to, taxes, utilities, maintenance fees and insurance) have been prepaid, other than as provided in the Lease. 4. No event has occurred and no condition exists that constitutes, or that would constitute with the giving of notice or the lapse of time or both, a default by Landlord or by Lamonts under the Lease. Landlord has no existing credits, defenses, offsets or counterclaims against the enforcement of the Lease by Lamonts. 5. All work required to be performed by Lamonts under the Lease has been completed, and all conditions of the Lease required to be satisfied by Lamonts have been satisfied, other than ongoing obligations such as the payment of rent. 6. The term of the Lease is _____________. 7. The security deposit held by the Landlord under the Lease is $________. 8. Landlord has no knowledge of and has received no notice of any assignment, hypothecation and pledge of Lamonts' interest in the Lease (other than the "Assignment"). 9. Landlord has not received any notice of any present violation of any laws, regulations or ordinances relating to the use or condition of the Leased Premises or the Shopping Center. 10. Landlord does not currently engage in or permit, and has not in the past engaged in or permitted, within or upon the Leased Premises or the Shopping Center, any use or disposal of any toxic or hazardous substances which are regulated under any federal, state, county or municipal laws, regulations or ordinances, other than minimal, non-reportable quantities of substances used in the ordinary course of business. To Landlord's knowledge, no occupant of any portion of the Shopping Center has used or disposed of any toxic or hazardous substances on the Shopping Center premises, other than minimal, non-reportable quantities of substances used by such occupant in the ordinary course of business. 11. Landlord is not the subject of any voluntary actions or, to Landlord's knowledge, involuntary actions under any insolvency or bankruptcy laws. 12. This Certificate binds Landlord and its representatives, successors and assigns. Landlord shall notify all successor owners, assignees and mortgagees of the existence and terms of this Certificate. Landlord understands that Gottschalks is relying upon the truth of the statements made in this Certificate in entering into the Assignment, and this Certificate shall inure to the benefit of Gottschalks, Lamonts and their respective representatives, successors and assigns. The undersigned has the power and authority to render this certificate on behalf of Landlord. Date: ___________, 2000 "LANDLORD" [NAME OF LANDLORD] By:_________________________ Name: Title: EXHIBIT E FORM OF LANDLORD AGREEMENT CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Lender") has entered into financing agreements with Gottschalks Inc., a Delaware corporation ("Debtor") pursuant to which Lender has been granted a security interest in any or all of Debtor's or its affiliates' personal property, including, but not limited to, inventory and equipment (hereinafter "Personal Property"). For purposes of this landlord agreement (this "Agreement"), the term "Personal Property" does not include plumbing and electrical fixtures, heating, ventilation and air conditioning, wall and floor coverings, walls or ceilings and other fixtures not constituting trade fixtures. Some or part of the Personal Property has or may from time to time become affixed to or be located on, wholly or in part, the real property leased by Debtor or its affiliates located at [location], the legal description of which is attached as Exhibit A (the "Premises"). The undersigned is the owner or lessor of the Premises. The undersigned agrees as follows: 1. The undersigned waives and relinquishes any landlord's lien, rights or levy or distraint, claim, security interest or other interest the undersigned may now or hereafter have in or with respect to any of the Personal Property, whether for rent or otherwise. 2. The Personal Property may be installed in or located on the Premises and is not and shall not be deemed a fixture or part of the real property but shall at all times be considered personal property. 3. Lender, at its option, may enter and use the Premises for the purposes of repossessing, removing, selling or otherwise dealing with any of the Personal Property, and such license shall be irrevocable and shall continue from the date Lender enters the Premises for a period of up to ninety (90) days after the receipt by Lender of written notice from the undersigned directing removal of the Personal Property; provided, that (a) for each day that Lender uses the Premises pursuant to the rights granted to it hereunder, unless the undersigned has otherwise been paid rent in respect to any of such period, Lender shall pay the regularly scheduled rent provided under the lease relating to such Premises between the undersigned and Debtor (the "Lease"), prorated on a per diem basis to be determined on a thirty (30) day month, without hereby assuming the Lease or incurring any other obligations of Debtor and (b) any damage to the Premises caused by Lender or its representatives will be repaired by Lender at its sole expense. 4. The undersigned agrees to send notice in writing of any default under the Lease to: Congress Financial Corporation 251 South Lake Avenue, Suite 900 Pasadena, California 91101 Attention: Kristine Metchikian Upon receipt of such notice, Lender shall have the right, but not the obligation, to cure such default within ten (10) days thereafter. Any payment made or act done by Lender to cure any such default shall not constitute an assumption of the Lease or any obligations of Debtor. 5. This waiver may not be changed or terminated orally or by a course of conduct and is binding upon the undersigned and the heirs, personal representatives, successors and assigns of the undersigned and inures to the benefit of Lender and the successors and assigns of Lender. 6. LANDLORD WAIVES ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT. Dated this ____ day of ____________,2000. [LANDLORD] By:________ Name: Title: EXHIBIT F FORM OF MALL AGREEMENT ESTOPPEL CERTIFICATE FORM OF ESTOPPEL CERTIFICATE FOR MALL AGREEMENTS TO: Gottschalks Inc. 7 River Park Place East Fresno, California 93729 Attn: Re: Reciprocal Easement Agreement - [name of shopping center] (the "Shopping Center"), [city],Washington The undersigned has been informed by Lamonts Apparel, Inc. ("Lamonts") that Gottschalks Inc. ("Gottschalks") intends to purchase certain assets of Lamonts (the "Acquisition"). Lamonts presently [owns/leases] and operates a department store in the Shopping Center. After the Acquisition, Gottschalks will continue to operate the department store currently operated by Lamonts in the Shopping Center. The department store will be operated under the trade name "Gottschalks". The Shopping Center premises are encumbered and benefited by that certain [title of reciprocal easement agreement] described in Schedule 1 hereto (the "REA"). As a condition precedent to the Acquisition, Gottschalks is requiring and will be relying on this Estoppel Certificate (this "Certificate"). The undersigned, a "Party" to the REA [and a party to the Additional Agreement described in Schedule 2 hereto (the "Additional Agreement")], hereby confirms, as of the date of this Certificate, as follows: 1. To the knowledge of the undersigned, no party is in default under the REA [or the Additional Agreement]. 2. There has been no assignment, modification or amendment of the REA [or the Additional Agreement]. 3. The REA [and the Additional Agreement] [is/are] in full force and effect. This Certificate is for the benefit of and may be relied upon by Gottschalks and its successors and assigns from time to time. Very truly yours, By: Name: Title: Date: ____________________, 2000 SCHEDULE 1 Description of REA [Insert description of REA] [SCHEDULE 2] [Description of Additional Agreement] [[Insert description of Additional Agreement]] EXHIBIT G FORM OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT PREPARED BY AND RETURN TO WHEN RECORDED: Gottschalks Inc. 7 River Park Place East Fresno, California 93729 Attn: SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT is made and entered into as of the _____ day of ____________, 2000, by and between _____________________________ ("Lender") and GOTTSCHALKS INC., 7 River Park Place East, Fresno, California 93729 ("Tenant"). WITNESSETH: WHEREAS, by the lease described on Schedule 1 hereto (the "Lease"), the Tenant has leased from ______________________ ("Landlord") certain premises ("Premises") located in the City of _____________, County of _______________, State of ______________, which Premises are legally described on Schedule 2 attached hereto, together with and subject to various easements and rights as referenced in the Lease. WHEREAS, Lender is the holder of a [deed of trust and assignment of rents] on the Premises, given to the Lender by Landlord, dated as of ___________ ____, 19___, recorded in the Official Records of ______________ County, _______________ as Instrument No. _____________ (collectively referred to herein with any other documents securing the debt secured by the deed of trust as the "Mortgage"). NOW, THEREFORE, in consideration of the premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Lender hereby consents to the Lease. The Lease and all extensions, renewals, replacements or modifications thereof are and shall be subject and subordinate to the Mortgage and all terms and conditions thereof insofar as it affects the Premises, and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of amounts secured thereby and interest thereon. 2. Tenant shall attorn to and recognize any purchaser at a foreclosure sale under the Mortgage, any transferee who acquires the Premises by deed in lieu of foreclosure, and the successors and assigns of such purchaser(s), as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease on the same terms and conditions set forth in the Lease. 3. If it becomes necessary to foreclose the Mortgage, Lender shall neither terminate the Lease nor join Tenant in summary or foreclosure proceedings so long as Tenant is not in default under any of the terms, covenants or conditions of the Lease. 4. Nothing herein contained shall impose any obligations upon Lender to perform any of the obligations of Landlord as landlord under the Lease, unless and until Lender shall become owner or lender in possession of the Premises. 5. Any notice required or desired to be given under this Agreement shall be in writing and shall be deemed given (a) upon receipt if delivered personally; (b) two (2) business days after being deposited into the U.S. mail if being sent by certified or registered mail, return receipt requested, postage prepaid; or (c) one (1) business day after being sent by reputable overnight courier service (e.g., Federal Express, Airborne, etc.) with guaranteed overnight delivery, and addressed as follows: If to Lender: If to Tenant: GOTTSCHALKS INC. [Store Address] Attn: Manager With a copy to: GOTTSCHALKS INC. 7 River Park Place East Fresno, California 93729 Attn: General Counsel 6. This Agreement shall be binding upon and inure to the benefit of any person or entity acquiring rights to the Premises by virtue of the Mortgage, and the successors, administrators and assigns of the parties hereto. [SIGNATURES APPEAR ON NEXT PAGE] IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. LENDER: By: Name: Title: TENANT: GOTTSCHALKS INC., a Delaware corporation By: Name: Title: State of___________ ) ) SS. County of _______________ ) On ______________________, 2000 before me, ___________________________, personally appeared ______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) State of Washington ) ) SS. County of ___________________) On ______________________, 2000 before me, ___________________________, personally appeared ______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) SCHEDULE 1 Description of Lease [Insert description of Lease] SCHEDULE 2 Description of Premises [Insert description of Premises] ARTICLE I DEFINITIONS 1.1 General Provisions 1 1.2 Specific Provisions 1 ARTICLE II PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES 2.1 Purchase and Sale of Assets 5 2.2 Assumed Liabilities 6 2.3 No Other Assets Purchased or Liabilities Assumed 6 ARTICLE III PURCHASE PRICE; CLOSING 3.1 Total Purchase Price; Cash Portion; Allocation 6 3.2 Closing 7 3.3 Items to be Delivered at the Closing by Seller 7 3.4 Items to be Delivered at the Closing by Buyer 7 3.5 Circumstances Under Which Certain Assumed Contracts May Be Excluded 8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER 4.1 Organization and Related Matters 8 4.2 Leases, Mall Agreements and Assumed Contracts 8 4.3 Title 9 4.4 Authorization;No Conflicts 10 4.5 Condition of Property 10 4.6 Legal Proceedings; Labor Matters 10 4.7 Insurance 11 4.8 Permits 11 4.9 Compliance with Law; Environmental Matters 11 4.10 Employee Benefits 11 4.11 Year 2000 Compliance 12 4.12 No Brokers or Finders 13 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER 5.1 Organization and Related Matters 13 5.2 Authorization; No Conflicts 13 5.3 Ability to Perform 14 5.4 No Brokers or Finders 14 ARTICLE VI INTERIM COVENANTS 6.1 Access 14 6.2 Notice of Certain Developments 14 6.3 Conduct of Business 14 6.4 Permits and Approvals; Lease and Mall Agreement Cure Payments 15 6.5 Prorations; Sales and Transfer Taxes 16 6.6 Certain Employee Matters 16 6.7 Acquisition Proposals; Minimum Overbid Proposals; Expense Reimbursement 17 ARTICLE VII GENERAL CONDITIONS TO OBLIGATIONS OF THE PARTIES 7.1 General Conditions 18 ARTICLE VIII CONDITIONS TO OBLIGATIONS OF BUYER 8.1 Conditions to Obligations of Buyer 18 ARTICLE IX CONDITIONS TO OBLIGATIONS OF SELLER 9.1 Conditions to Obligations of Seller 19 ARTICLE X TERMINATION OF OBLIGATIONS; SURVIVAL 10.1 Termination of Agreement 19 10.2 Effect of Termination 20 10.3 Survival of Representations and Warranties 20 ARTICLE XI GENERAL 11.1 Amendments; Waivers 20 11.2 Disclosure Schedule; Buyer Disclosure Schedule; Exhibits; Integration 20 11.3 Best Efforts; Further Assurances; Power of Attorney 20 11.4 Governing Law 21 11.5 No Assignment 21 11.6 Headings 21 11.7 Counterparts 21 11.8 Publicity and Reports 21 11.9 Parties in Interest 21 11.10Notices 21 11.11Expenses 23 11.12Remedies 23 11.13Attorneys' Fees 23 11.14Representation by Counsel; Interpretation 23 11.15Severability 23 11.16Calendar Days; Holidays 24 11.17Effectiveness 24 11.18Disclosure Schedule 24 EXHIBITS A Form of Bill of Sale and Assignment B Form of Assignment and Assumption Agreement C Form of Lease Assignment and Assumption Agreement D Form of Lessor Estoppel Certificate E Form of Landlord Agreement F Form of Mall Agreement Estoppel Certificate G Form of Subordination,Nondisturbance and Attornment Agreement ASSET PURCHASE AGREEMENT dated as of APRIL 24, 2000 by and between LAMONTS APPAREL, INC. and GOTTSCHALKS INC. -----END PRIVACY-ENHANCED MESSAGE-----