10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT For the transition period from _________________ to ______________________. Commission file number 1-09100 Gottschalks Inc. ------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 77-0159791 -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7 River Park Place East, Fresno, California 93720 ------------------------------------------- ------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (559) 434-4800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days: Yes X No ---- The number of shares of the Registrant's common stock outstanding as of August 31, 2000 was 12,621,406. INDEX GOTTSCHALKS INC. AND SUBSIDIARY Page No. PART I. FINANCIAL INFORMATION --------- Item 1. Financial Statements (Unaudited): Condensed consolidated balance sheets - July 29, 2000, January 29, 2000 and July 31, 1999 3 Consolidated statements of operations - thirteen and twenty-six weeks ended July 29, 2000 and July 31, 1999 4 Condensed consolidated statements of cash flows - twenty-six weeks ended July 29, 2000 and July 31, 1999 5 Notes to condensed consolidated financial statements - twenty-six weeks ended July 29, 2000 and July 31, 1999 6 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 23-24 SIGNATURES 25
PART I. FINANCIAL INFORMATION Item I. GOTTSCHALKS INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1) (In thousands of dollars) ------------------------------------------------------------------------------ July 29, January 29, July 31, 2000 2000 1999 -------- ------------ ---------- (Unaudited) (Unaudited) ASSETS ------- CURRENT ASSETS: Cash $ 2,387 $ 1,901 $ 2,242 Retained interest in receivables sold 19,318 29,138 17,116 Receivables - net 7,070 7,597 5,699 Merchandise inventories 165,830 130,028 136,504 Other 7,684 9,666 8,921 ------- ------- ------- Total current assets 202,289 178,330 170,482 PROPERTY AND EQUIPMENT, NET 136,207 120,393 117,526 OTHER LONG-TERM ASSETS 20,806 15,281 16,776 ------- ------- ------- $359,302 $314,004 $304,784 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Trade accounts payable and other current liabilities $ 82,138 $ 63,653 $ 57,630 Revolving line of credit 993 5,479 20,801 Current portion of long-term obligations 7,067 4,479 4,559 ------- ------- ------- Total current liabilities 90,198 73,611 82,990 LONG-TERM OBLIGATIONS (less current portion): Line of credit 75,000 50,000 40,000 Notes and mortgage loans payable 30,448 25,123 26,565 Capitalized lease obligations 5,323 5,551 5,689 ------- ------- ------- 110,771 80,674 72,254 DEFERRED INCOME & OTHER 27,662 28,520 26,467 SUBORDINATED NOTE PAYABLE TO AFFILIATE 21,132 20,961 20,789 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY 109,539 110,238 102,284 ------- ------- ------- $ 359,302 $314,004 $304,784 ======= ======= ======= See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1) (In thousands of dollars, except share data) ----------------------------------------------------------------------------- Thirteen Weeks Twenty-Six Weeks Ended Ended -------------------- -------------------- July 29, July 31, July 29, July 31, 2000 1999 2000 1999 ------- ------- ------- ------- Net sales $129,478 $118,718 $250,405 $229,822 Net credit revenues 1,989 1,926 4,299 4,162 Net leased department revenues 791 1,123 1,492 2,308 ------- ------- ------- ------- 132,258 121,767 256,196 236,292 Costs and expenses: Cost of sales 84,784 77,735 164,972 151,212 Selling, general & administrative expenses 41,336 39,744 81,601 78,164 Depreciation & amortization 2,608 2,307 5,186 4,584 New store pre-opening expenses 977 977 129,705 119,786 252,736 233,960 ------- ------- ------- ------- Operating income 2,553 1,981 3,460 2,332 Other (income) expense: Interest expense 2,865 2,575 5,517 5,127 Miscellaneous income (329) (414) (683) (763) ------- ------- ------- ------- 2,536 2,161 4,834 4,364 ------- ------- ------- ------- Income (loss) before income tax expense (benefit) 17 (180) (1,374) (2,032) Income tax expense (benefit) 6 (75) (543) (848) ------- ------- ------- ------- Net income (loss) $ 11 $ (105) $ (831) $(1,184) ======= ======= ======= ======= Net income (loss) per common share - basic and diluted $ 0.00 $ (0.01) $ (0.07) $ (0.09) ======= ======= ======= ======= See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - Note 1) (In thousands of dollars) ----------------------------------------------------------------------------- Twenty-Six Weeks Ended ------------------------ July 29, July 31, 2000 1999 OPERATING ACTIVITIES: ------- -------- Net loss $ (831) $ (1,184) Adjustments: Depreciation and amortization 5,186 4,584 Provision for credit losses 1,612 1,521 Other adjustments, net (590) (1,756) Changes in operating assets and liabilities: Receivables (1,183) (812) Merchandise inventories (35,427) (12,948) Other current and long-term assets 1,781 3,462 Trade accounts payable 26,853 (2,305) Other current and long-term liabilities (8,910) (9,464) ------- ------- Net cash used in operating activities (11,509) (18,902) INVESTING ACTIVITIES: Available-for-sale securities: Maturities (135,492) (143,679) Purchases 145,312 154,570 Lamonts acquisition (Note 2) (19,165) Capital expenditures (7,492) (8,736) Other 97 97 ------- ------- Net cash (used in) provided by investing activities (16,740) 2,252 FINANCING ACTIVITIES: Net proceeds under revolving line of credit 20,514 528 Proceeds from issuance of 1999-1 Series certificate 53,000 Principal payments on outstanding Series certificates (30,900) Principal payments on long-term obligations (2,454) (2,235) Proceeds from long-term obligations 10,000 500 Changes in cash management liability and other 675 (3,694) ------- ------- Net cash provided by financing activities 28,735 17,199 ------- ------- INCREASE IN CASH 486 549 CASH AT BEGINNING OF PERIOD 1,901 1,693 ------- ------- CASH AT END OF PERIOD $ 2,387 $ 2,242 ======= ======= See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Twenty-Six Weeks Ended July 29, 2000 and July 31, 1999 --------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Gottschalks Inc. is a regional department store chain based in Fresno, California. As of the end of the second quarter of fiscal 2000, the Company operated forty-two full-line department stores located in four Western states, with 38 stores in California, two in Nevada and one each in Oregon and Washington. The Company also operates nineteen specialty apparel stores which carry a limited selection of merchandise. In addition, as described more fully in Note 2, the Company completed the largest acquisition in its operating history on July 24, 2000, acquiring 34 store leases and related store fixtures and equipment from Lamonts Apparel, Inc. ("Lamonts"), a bankrupt apparel store chain operating in the Pacific Northwest and Alaska. The Company's department stores typically offer a wide range of better to moderate brand-name and private-label merchandise for the entire family, including men's, women's, junior's and children's apparel, cosmetics, shoes and accessories. The Company's department stores also offer a wide array of home furnishings, including domestics, china, housewares, small electrics, as well as furniture and mattresses in certain locations. The Company operates in one reportable operating segment. The accompanying unaudited condensed consolidated financial statements include the accounts of Gottschalks Inc. and its wholly- owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") (see Note 3). Such financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twenty-six week period ended July 29, 2000 are not necessarily indicative of the results that may be expected for the year ending February 3, 2001 (fiscal 2000), due to the seasonal nature of the Company's business, the acquisition of 34 store leases from Lamonts (Note 2) and its LIFO inventory valuation adjustment ("LIFO adjustment"), currently recorded only at the end of each fiscal year (Note 4). These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended January 29, 2000 (the "1999 Annual Report on Form 10-K"). Effective as of the end of fiscal 1999, the Company implemented the provisions of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which requires that leased department sales no longer be combined with owned sales for financial reporting purposes. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales. All prior year amounts have been reclassified to conform with the required presentation. In addition, certain other amounts in the accompanying financial statements for the fiscal 1999 interim period have been reclassified to conform with current years presentation. The condensed consolidated balance sheet at January 29, 2000 has been derived from the audited consolidated financial statements at that date. 2. ACQUISITION OF STORES FROM LAMONTS APPAREL, INC. On April 24, 2000, the Company entered into a definitive asset purchase agreement (the "Agreement") with Lamonts Apparel, Inc. ("Lamonts"), a bankrupt regional apparel store chain operating 38 stores located throughout the Pacific Northwest and Alaska. The Agreement, as amended, provided for the Company to acquire 37 of Lamonts' 38 store leases and related store fixtures and equipment for a cash purchase price of $20.1 million. Concurrent with the closing of the transaction on July 24, 2000, the Company sold one of the store leases for $2.5 million, and subsequently terminated two other store leases, resulting in a net cash purchase price of $17.6 million for 34 store leases and related store fixtures and equipment. The Company did not acquire any of Lamonts' merchandise inventory, customer credit card receivables or other corporate assets in the transaction, nor did the Company assume any material liabilities, other than the 34 store leases. The 34 stores are located in five Western states, with 19 stores in Washington, seven in Alaska, five in Idaho, two in Oregon and one in Utah. The acquisition significantly expands the Company's presence in the Pacific Northwest. The newly acquired stores were converted to the Gottschalks' banner, re- merchandised and reopened in stages, beginning in late August with all stores completely open by September 7, 2000. The $17.6 million net cash purchase price for the assets was partially financed with proceeds from a $10.0 million note payable (Note 6), with the remainder provided from existing financial resources. Direct transaction costs include investment banking, legal and accounting fees and other costs. The acquisition (hereinafter referred to as the "Lamonts acquisition") was accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired stores, consisting only of new store pre-opening costs and acquisition related expenses in the second quarter and first half of fiscal 2000, are included in the Company's financial statements from the acquisition date of July 24, 2000. The financial statements reflect the preliminary allocation of the purchase price to the acquired assets on the basis of their estimated fair values as of the date of the acquisition. The final purchase price allocation is subject to the completion of an independent appraisal of the acquired assets. In addition, estimates of certain direct transaction costs have not yet been finalized. The preliminary allocation of the purchase price is summarized below (in thousands of dollars): Fair value of note payable $10,000 Cash 7,580 Direct transaction costs 1,585 ------ Total purchase price $19,165 ====== Property and equipment $13,483 Favorable lease rights 5,682 ------ Total purchase price $19,165 ====== 3. RECEIVABLES SECURITIZATION PROGRAM As described more fully in the Company's 1999 Annual Report on Form 10-K, the Company's receivables securitization program provides the Company with a source of working capital and long-term financing that is generally more cost-effective than traditional debt financing. Under the program, the Company automatically sells all of its accounts receivable arising under its private-label credit cards to its wholly-owned subsidiary, GCRC, and those receivables that meet certain eligibility requirements of the program are simultaneously conveyed to Gottschalks Credit Card Master Trust ("GCC Trust"), to be used as collateral for securities issued to investors. GCC Trust is a qualified special purpose entity and is not consolidated in the Company's financial statements. The Company accounts for the transfer of receivables to GCC Trust as sales for financial reporting purposes, pursuant to the provisions of Statement of Financial Accounting Standards No. 125. Under the program, a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") was issued on March 1, 1999 to a single investor through a private placement. The holder of the 1999-1 Series certificate earns interest on a monthly basis at a fixed interest rate of 7.66%, and the outstanding principal balance of the certificate, which is treated as off-balance sheet for financial reporting purposes, is to be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. Monthly cash flows generated by the Company's credit card portfolio, consisting of principal and interest collections, are first used to pay certain costs of the program, which include the payment of monthly interest to the investor, and are then available to fund the working capital requirements of the Company. The Company is required, among other things, to maintain certain portfolio performance standards under the program. The portfolio performance has substantially exceeded such standards since the issuance date. Subject to certain conditions, the Company may expand the program to meet future receivables growth. 4. MERCHANDISE INVENTORIES Inventories, which consist of merchandise held for resale, are valued by the retail method and are stated at last-in, first-out (LIFO) cost, which is not in excess of market value. The Company includes in inventory the capitalization of certain indirect costs related to the purchasing, handling and storage of merchandise. Current cost, which approximates replacement cost, under the first- in, first-out (FIFO) method was equal to the LIFO value of inventories at January 29, 2000. A valuation of inventory under the LIFO method is presently made only at the end of each year based on actual inventory levels and costs at that time. Since these factors are subject to variability beyond the control of management, interim results of operations are subject to the final year-end LIFO inventory valuation adjustment. Management does not currently anticipate that its year-end LIFO adjustment will materially affect fiscal 2000 operating results. 5. TRADE ACCOUNTS PAYABLE AND OTHER CURRENT LIABILTIIES
Trade accounts payable and other current liabilities consist of the following: July 29, January 29, July 31, (In thousands of dollars) 2000 2000 1999 ----------------------------------------------------------------------------- Trade accounts payable $42,470 $15,617 $20,872 Cash management liability 10,701 10,027 8,482 Accrued expenses 10,333 9,958 9,334 Accrued payroll and related liabilities 6,833 6,861 5,737 Taxes, other than income taxes 5,318 11,141 5,624 Deferred income taxes 4,677 4,677 4,470 Federal and state income taxes payable 1,806 5,372 3,111 ------ ------ ------ $82,138 $63,653 $57,630 ====== ====== ====== 6. DEBT The Company has a $180.0 million revolving line of credit arrangement with Congress Financial Corporation ("Congress") through March 30, 2002. Borrowings under the facility are limited to a restrictive borrowing base equal to 75% of eligible merchandise inventories, which, at the Company's option, may be increased to 80% from November 1 through December 31 of each year to fund increased seasonal inventory requirements. Interest under the facility is currently charged at a rate of approximately LIBOR plus 1.875% (8.66% at July 29, 2000), with no interest charged on the unused portion of the line of credit. The maximum amount available for borrowings under the line of credit was $107.5 million as of July 29, 2000, of which $76.0 million was outstanding as of that date. Outstanding borrowings under the facility which are not expected to be repaid within one year of the respective balance sheet dates, totaling $75.0 million, $50.0 million and $40.0 million as of July 29, 2000, January 29, 2000 and July 31, 1999, respectively, are classified as long-term in the accompanying financial statements. The agreement contains one financial covenant, pertaining to the maintenance of a minimum tangible net worth, with which the Company was in compliance as of July 29, 2000. The Company issued a $10.0 million note payable to a third party lender on July 24, 2000, using the proceeds to finance a portion of the purchase price for the Lamonts acquisition (Note 2). The note is payable in thirty-six monthly principal installments of $278,000 each, bears interest at a variable rate equal to LIBOR plus 3.0%, and is collateralized by fixtures and equipment in the newly acquired stores and by the equity in two owned stores subject to mortgage loans with the same lender. The Company's other long- term borrowing arrangements are described more fully in its 1999 Annual Report on Form 10-K. 7. WEIGHTED AVERAGE NUMBER OF SHARES
Second Quarter First Half -------------- ------------- 2000 1999 2000 1999 ----- ---- ---- ---- (Share data in thousands) Weighted average number of shares - basic 12,605 12,575 12,601 12,575 Incremental shares from assumed issuance of stock options (treasury stock method) 24 --- --- --- ------ ------ ------ ------ Weighted average number of shares - diluted 12,629 12,575 12,601 12,575 ====== ====== ====== ======
Options with an exercise price greater than the average market price of the Company's common stock during the period, or outstanding in a period in which the Company reports a net loss, are excluded from the computation of the weighted average number of shares on a diluted basis, as such options are anti-dilutive. 8. COMMITMENTS AND CONTINGENCIES The Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations. In addition to the stores acquired from Lamonts, the Company opened one new department store in the third quarter of 2000 and has entered into an agreement to open one additional department store in the fourth quarter of fiscal 2000. The Company is also in the process of completing the remodeling and refurbishing of certain of its existing locations and certain of the locations recently acquired from Lamonts. The estimated remaining cost of such projects, totaling $10.0 million as of July 29, 2000, is expected to be financed from existing financial resources. Such projects are expected to be fully complete in fiscal 2000. However, there can be no assurance that the completion of such projects will not be delayed subject to a variety of conditions precedent or other factors. GOTTSCHALKS INC. AND SUBSIDIARY Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------- Following is management's discussion and analysis of significant factors which have affected the Company's financial position and its results of operations for the periods presented in the accompanying condensed consolidated financial statements. The Company's operating results, like those of most retailers, are subject to seasonal influences, with the major portion of sales, gross margin and operating results realized during the fourth quarter of each fiscal year. In addition, as described more fully in Note 2 to the accompanying financial statements, the Company completed the largest acquisition in its operating history on July 24, 2000, acquiring 34 store leases and related store fixtures and equipment from Lamonts. This business seasonality and the acquisition of the 34 store leases may result in performance for the thirteen and twenty-six week periods ended July 29, 2000 (hereinafter referred to as the "second quarter" and "first half" of fiscal 2000) which is not necessarily indicative of performance for the remainder of the year. Effective as of the end of fiscal 1999, the Company implemented the provisions of SAB No. 101, which requires that leased department sales no longer be combined with owned sales for financial reporting purposes. The Company, like most retailers, previously combined sales from leased departments with owned sales, with the related costs combined with cost of sales. All prior year amounts have been reclassified to conform with the required presentation. Results of Operations ----------------------- The following table sets forth the Company's Consolidated Statements of Operations as a percent of net sales:
Second Quarter First Half 2000 1999 2000 1999 ------ ------ ---- ----- Net sales 100.0% 100.0% 100.0% 100.0% Net credit revenues 1.5 1.6 1.7 1.8 Net leased department revenues 0.6 0.9 0.6 1.0 ----- ----- ----- ----- 102.1 102.5 102.3 102.8 Costs and expenses: Cost of sales 65.5 65.5 65.9 65.8 Selling, general and administrative expenses 31.9 33.4 32.6 34.0 Depreciation and amortization 2.0 1.9 2.1 2.0 New store pre-opening costs 0.7 0.3 100.1 100.8 100.9 101.8 ----- ----- ----- ----- Operating income 2.0 1.7 1.4 1.0 Other (income) expense: Interest expense 2.2 2.2 2.2 2.2 Miscellaneous income (0.2) (0.3) (0.3) (0.3) ----- ----- ----- ----- 2.0 1.9 1.9 1.9 ----- ----- ----- ----- Income (loss) before income tax expense (benefit) 0.0 (0.2) (0.5) (0.9) Income tax expense (benefit) 0.0 (0.1) (0.2) (0.4) ----- ----- ----- ----- Net income (loss) 0.0% (0.1)% (0.3)% (0.5)% ===== ===== ===== =====
Second Quarter of Fiscal 2000 Compared to Second Quarter of Fiscal 1999 ------------------------------------------------------------------------ Net Sales --------- Net sales increased by approximately $10.8 million to $129.5 million in the second quarter of fiscal 2000 as compared to $118.7 million in the second quarter of fiscal 1999, an increase of 9.1%. This increase is primarily due to a 7.2% increase in comparable store sales, resulting partially from the conversion of the shoe departments in twenty- eight Gottschalks locations from leased to owned departments, effective August 1, 1999. Pursuant to SAB No. 101, sales generated in these shoe departments prior to the termination of the lease on August 1, 1999 are included in net leased department revenues and are not included in net sales for financial reporting purposes. The increase is also due to additional sales volume generated by two new stores opened in Danville and Davis, California, in October and November 1999, respectively. The Company operated forty-two department stores and nineteen specialty apparel stores as of the end of the second quarter of fiscal 2000. On August 23, 2000, the Company opened a new store in Grants Pass, Oregon, and during the period from August 26 through September 7, 2000, reopened all of the 34 stores acquired from Lamonts on July 24, 2000. The Company also plans to open a new department store in Redding, California, as a replacement for a specialty store currently existing in that location. The new store in Redding is expected to be opened in November 2000, however no assurance can be given that the stores will open as scheduled, or that their openings will not be delayed. Including the 35 new stores opened early in the third quarter and the new store expected to be opened in the fourth quarter, by the end of fiscal 2000 the Company expects to be operating a total of 78 department stores and 18 specialty stores, located in seven Western states, with 39 department stores in California, 20 in Washington, seven in Alaska, five in Idaho, four in Oregon, two in Nevada and one in Utah. Net Credit Revenues --------------------- Net credit revenues related to the Company's credit card receivables portfolio increased by $63,000, or 3.3%, in the second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999. As a percent of net sales, net credit revenues were 1.5% of net sales in the second quarter of fiscal 2000 as compared to 1.6% in the second quarter of fiscal 1999. Net credit revenues consist of the following: Second Quarter (In thousands of dollars) 2000 1999 ------------------------------------------------------ Service charge revenues $3,819 $3,756 Interest expense on securitized receivables (1,016) (1,029) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (822) (875) Gain on sale of receivables 8 74 ----- ----- $1,989 $1,926 ===== ===== Service charge revenues increased by $63,000, or 1.7%, in the second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999. This increase is primarily due to an increase in the volume of late charge fees collected on delinquent credit card balances as compared to the same period of the prior year. Interest expense on securitized receivables remained unchanged at approximately $1.0 million in the second quarters of fiscal 2000 and 1999. Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale decreased by $53,000, or 6.1%, in the second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999 and, as a percent of sales, decreased to 0.6% in the second quarter of fiscal 2000 as compared to 0.7% in the second quarter of fiscal 1999. The gain on the sale of receivables decreased by $66,000 in the second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999. Net Leased Department Revenues --------------------------------- Net rental income generated by the Company's various leased departments decreased by $332,000, or 29.6%, to $791,000 in the second quarter of fiscal 2000 as compared to approximately $1.1 million in the second quarter of fiscal 1999. This decrease is primarily due to the termination of the shoe department leases in twenty-eight Gottschalks locations effective August 1, 1999. Shoe department sales in those locations after August 1, 1999 are included in net sales for financial reporting purposes. As required by SAB No. 101, leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of the shoe departments (prior to August 1, 1999), fine jewelry departments and beauty salons, decreased by $2.2 million, or 28.6%, to $5.5 million in the second quarter of fiscal 2000 as compared to $7.7 million in the second quarter of fiscal 1999. Cost of Sales -------------------- Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $7.1 million to $84.8 million in the second quarter of fiscal 2000 as compared to $77.7 million in the second quarter of fiscal 1999, an increase of 9.1%. The Company's gross margin percentage remained unchanged at 34.5% in the second quarters of fiscal 2000 and 1999. Selling, General and Administrative Expenses --------------------------------------------- Selling, general and administrative expenses increased by approximately $1.6 million to $41.3 million in the second quarter of fiscal 2000 as compared to $39.7 million in the second quarter of fiscal 1999, an increase of 4.0%. As a percent of net sales, selling, general and administrative expenses decreased to 31.9% in the second quarter of fiscal 2000 as compared to 33.4% in the second quarter of fiscal 1999. This decrease as a percent of net sales arose from the leveraging of fixed costs and corporate overhead against a higher sales base and from continued efforts to reduce costs and improve efficiencies in all areas of the Company's operations. Depreciation and Amortization ---------------------------------- Depreciation and amortization expense, which includes the amortization of goodwill, increased by approximately $300,000 to $2.6 million in the second quarter of fiscal 2000 as compared to $2.3 million in the second quarter of fiscal 1999, an increase of 13.0%. As a percent of net sales, depreciation and amortization expense increased to 2.0% in the second quarter of fiscal 2000 as compared to 1.9% in the second quarter of 1999. These increases are primarily due to additional depreciation related to capital expenditures for the renovation of existing stores, and for the two new stores opened in Danville and Davis, California, in late fiscal 1999. New Store Pre-Opening Costs ---------------------------- New store pre-opening costs, which are expensed as incurred, totaled $977,000 in the second quarter of fiscal 2000. Such costs relate primarily to the stores recently acquired from Lamonts and consist of payroll and fringe benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs incurred after the July 24, 2000 acquisition date and through the end of the quarter. The Company expects to incur additional new store pre-opening costs throughout the second half of fiscal 2000 with respect to the newly acquired stores, and in connection with other planned new store openings. No new store pre-opening costs were incurred in the second quarter of fiscal 1999. Interest Expense -------------------- Interest expense, which includes the amortization of deferred financing costs, increased by approximately $300,000 to $2.9 million in the second quarter of fiscal 2000 as compared to $2.6 million in the second quarter of fiscal 1999, an increase of 11.3%. As a percent of net sales, however, interest expense remained unchanged at 2.2% in the second quarters of fiscal 2000 and 1999. The dollar increase is primarily due to higher average outstanding borrowings on the Company's working capital facility and an increase in the weighted-average interest rate applicable to the facility (8.4% in the second quarter of fiscal 2000 as compared to 7.1% in the second quarter of fiscal 1999) resulting from higher LIBOR and prime interest rates in effect as compared to the same period of the prior year. Interest expense related to securitized receivables is reflected as a reduction of net credit revenues and is not included in interest expense for financial reporting purposes. Miscellaneous Income ------------------------ Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, decreased by approximately $85,000 to $329,000 in the second quarter of fiscal 2000 as compared to $414,000 in the second quarter of fiscal 1999. As a percent of net sales, miscellaneous income also decreased to 0.2% of net sales in the second quarter of fiscal 2000 as compared to 0.3% in the second quarter of fiscal 1999. Income Taxes ----------------- The Company's interim effective tax rate of 39.5% in the second quarter of fiscal 2000 and effective tax credit of (41.7%) in the second quarter of fiscal 1999 relate to the net income (loss) incurred in those periods and represent the Company's best estimates of the annual effective tax rates for those fiscal years. Net Income (Loss) ------------------- As a result of the foregoing, the Company's net income increased by $116,000 to $11,000 in the second quarter of fiscal 2000 as compared to a net loss of ($105,000) in the second quarter of fiscal 1999. On a per share basis (basic and diluted), net income was $0.00 per share in the second quarter of fiscal 2000 as compared to a net loss of ($0.01) per share in the second quarter of fiscal 1999. This improvement was achieved despite significant new store pre-opening costs incurred in connection with the Lamonts acquisition. Excluding those amounts, net income was $602,000, or $0.05 per share, in the second quarter of fiscal 2000. First Half of Fiscal 2000 Compared to First Half of Fiscal 1999 --------------------------------------------------------------- Net Sales --------- Net sales increased by approximately $20.6 million to $250.4 million in the first half of fiscal 2000 as compared to $229.8 million in the first half of fiscal 1999, an increase of 9.0%. This increase is primarily due to a 7.1% increase in comparable store sales, resulting partially from the conversion of the shoe departments in twenty-eight Gottschalks locations from leased to owned departments, effective August 1, 1999. Shoe department sales in those stores in the first half of fiscal 1999 are included in net leased department revenues for financial reporting purposes. The increase is also due to additional sales volume generated by two new stores opened in Danville and Davis, California, in October and November 1999, respectively. Net Credit Revenues ---------------------- Net credit revenues related to the Company's credit card receivables portfolio increased by $137,000, or 3.3%, in the first half of fiscal 2000 as compared to the first half of fiscal 1999. As a percent of net sales, net credit revenues were 1.7% of net sales in the first half of fiscal 2000 as compared to 1.8% in the first half of fiscal 1999. Net credit revenues consist of the following: First Half (In thousands of dollars) 2000 1999 ------------------------------------------------------------- Service charge revenues $7,843 $7,591 Interest expense on securitized receivables (2,031) (2,039) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (1,612) (1,521) Gain on sale of receivables 99 131 ----- ------ $4,299 $4,162 ===== ===== Service charge revenues increased by approximately $250,000, or 3.3%, in the first half of fiscal 2000 as compared to the first half of fiscal 1999. This increase is primarily due to a change in the method of assessing service charges to an average-daily balance method effective April 1999 (previously assessed based on the balance as of the end of a billing period) and an increase in the volume of late charge fees collected on delinquent credit card balances as compared to the same period of the prior year. Interest expense on securitized receivables remained unchanged at approximately $2.0 million in the first half of both fiscal 2000 and 1999. Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale increased by $91,000, or 6.0%, in the first half of fiscal 2000 as compared to the first half of fiscal 1999. As a percent of sales, however, such losses decreased to 0.6% in the first half of fiscal 2000 as compared to 0.7% in the first half of fiscal 1999. The gain on the sale of receivables during the first half of fiscal 2000 was not materially different from the first half of fiscal 1999. Net Leased Department Revenues -------------------------------- Net rental income generated by the Company's various leased departments decreased by approximately $800,000, or 35.4%, to $1.5 million in the first half of fiscal 2000 as compared to $2.3 million in the first half of fiscal 1999. This decrease is primarily due to the termination of the shoe department leases in twenty-eight Gottschalks locations effective August 1, 1999. Shoe department sales in those locations after August 1, 1999 are included in total sales for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of the shoe departments (prior to August 1, 1999), fine jewelry departments and beauty salons, decreased by $5.5 million, or 34.8%, to $10.3 million in the first half of fiscal 2000 as compared to $15.8 million in the first half of fiscal 1999. Cost of Sales --------------- Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $13.8 million to $165.0 million in the first half of fiscal 2000 as compared to $151.2 million in the first half of fiscal 1999, an increase of 9.1%. The Company's gross margin percentage decreased slightly to 34.1% in the first half of fiscal 2000 as compared to 34.2% in the first half of fiscal 1999. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses increased by approximately $3.4 million to $81.6 million in the first half of fiscal 2000 as compared to $78.2 million in the first half of fiscal 1999, an increase of 4.4%. As a percent of net sales, selling, general and administrative expenses decreased to 32.6% in the first half of fiscal 2000 as compared to 34.0% in the first half of fiscal 1999. This decrease as a percent of net sales arose from the leveraging of fixed costs and corporate overhead against a higher sales base and from continued efforts to reduce costs and improve efficiencies in all areas of the Company's operations. Depreciation and Amortization -------------------------------- Depreciation and amortization expense, which includes the amortization of goodwill, increased by approximately $600,000 to $5.2 million in the first half of fiscal 2000 as compared to $4.6 million in the first half of fiscal 1999, an increase of 13.1%. As a percent of net sales, depreciation and amortization expense increased to 2.1% in the first half of fiscal 2000 as compared to 2.0% in the first half of fiscal 1999. These increases are primarily due to additional depreciation related to capital expenditures for the renovation of existing stores, and for the two new stores opened in Danville and Davis, California, in late fiscal 1999. New Store Pre-Opening Costs ---------------------------- New store pre-opening costs totaled $977,000 in the first half of fiscal 2000. Such costs relate primarily to the 34 stores acquired from Lamonts and consist of payroll and fringe benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising and credit solicitation costs incurred after the July 24, 2000 acquisition date and through the end of the first half of fiscal 2000. The Company expects to incur additional new store pre-opening costs throughout the second half of fiscal 2000 with respect to the newly acquired stores, and in connection with other planned new store openings. No new store pre-opening costs were incurred in the first half of fiscal 1999. Interest Expense ------------------- Interest expense, which includes the amortization of deferred financing costs, increased by approximately $400,000 to $5.5 million in the first half of fiscal 2000 as compared to $5.1 million in the first half of fiscal 1999, an increase of 7.6%. As a percent of net sales however, interest expense remained unchanged at 2.2% in the first half of both fiscal 2000 and 1999. The dollar increase is primarily due to higher average outstanding borrowings on the Company's working capital facility and an increase in the weighted-average interest rate applicable to the facility (8.2% in the first half of fiscal 2000 as compared to 7.1% in the first half of fiscal 1999) resulting from higher LIBOR and prime interest rates in effect as compared to the same period of the prior year. Miscellaneous Income --------------------- Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, decreased by $80,000 to $683,000 in the first half of fiscal 2000 as compared to $763,000 in the first half of fiscal 1999. As a percent of net sales however, miscellaneous income remained unchanged at 0.3% of net sales in the first half of both 2000 and 1999. Income Taxes ---------------- The Company's interim effective tax credits of (39.5%) and (41.7%) in the first half of fiscal 2000 and 1999, respectively, relate to net losses incurred in those periods and represent the Company's best estimates of the annual effective tax rates for those fiscal years. Net Loss ---------- As a result of the foregoing, the Company's net loss was reduced by $353,000 to ($831,000) in the first half of fiscal 2000 as compared to a net loss of approximately ($1,184,000) in the first half of fiscal 1999. On a per share basis (basic and diluted), the net loss was ($0.07) per share in the first half of fiscal 2000 as compared to ($0.09) per share in the first half of fiscal 1999. This improvement was achieved despite significant new store pre- opening costs incurred in connection with the Lamonts acquisition. Excluding those amounts, the net loss was ($240,000), or ($0.02) per share, in the first half of fiscal 2000. Liquidity and Capital Resources --------------------------------- Sources of Liquidity. As described more fully in the Company's 1999 Annual Report on Form 10-K and Notes 3 and 6 to the accompanying financial statements, the Company's working capital requirements are currently met through a combination of cash provided by operations, short-term trade credit, and by borrowings under its revolving line of credit and its receivables securitization program. The Company's liquidity position, like that of most retailers, is affected by seasonal influences, with the greatest portion of cash from operations generated in the fourth quarter of each fiscal year. Revolving Line of Credit. The Company has a $180.0 million revolving line of credit facility with Congress through March 30, 2002. Borrowings under the arrangement are limited to a restrictive borrowing base equal to 75% of eligible merchandise inventories which, at the Company's option, may be increased to 80% of such inventories during the period of November 1 through December 31 of each year to fund increased seasonal inventory requirements. Interest under the facility is currently charged at a rate of approximately LIBOR plus 1.875% (8.66% at July 29, 2000), with no interest charged on the unused portion of the line of credit. As of July 29, 2000, the Company had excess availability of $31.5 million on the facility and was in compliance with the single financial loan covenant applicable to the facility. Receivables Securitization Program. The Company's receivables securitization program provides the Company with an additional source of working capital and long- term financing that is generally more cost- effective than traditional debt financing. Under the program, a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") has been issued to a single investor through a private placement. Interest on the 1999-1 Series is earned by the certificate holder on a monthly basis at a fixed interest rate of 7.66%, and the outstanding principal balance of the certificate is to be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. Monthly cash flows generated by the Company's credit card portfolio, consisting of principal and interest collections, are first used to pay certain costs of the program, which include interest payable to the investor, and are then available to fund the working capital requirements of the Company. The Company is currently evaluating the issuance of an additional $25.0 million Variable Base Certificate under the program. The issuance of the certificate would enable the Company to finance receivables currently in excess of amounts required to support the 1999-1 Series, as well as receivables expected to be generated in the 35 new stores opened early in the third quarter of fiscal 2000 and the additional store expected to be opened in the fourth quarter of fiscal 2000. It is expected that the Variable Base Certificate will be issued during the second half of fiscal 2000. However, there can be no assurance that such an issuance will occur, or that its issuance will not be delayed, subject to a variety of conditions precedent or other factors. Uses of Liquidity. -------------------- Lamonts Acquisition. As described more fully in Note 2 to the accompanying financial statements, on July 24, 2000, the Company acquired 34 former Lamonts store leases and related store fixtures and equipment for a net purchase price of $17.6 million in cash. The purchase price for the assets was financed through the issuance of a $10.0 million three-year note payable to a third party lender, with the remainder provided from existing financial resources. The Company also experienced a significant increase in merchandise inventory levels as of the end of the second quarter of fiscal 2000 as compared to the prior year, primarily in connection with the initial stocking of the newly acquired stores. Such purchases were largely financed with short-term trade credit. Capital Expenditures. Capital expenditures in the first half of fiscal 2000, totaling $7.5 million, were primarily related to the renovation and refixturing of certain existing locations, tenant improvements and fixtures for the new department store in Grants Pass, Oregon, and information systems enhancements. In addition to the stores acquired from Lamonts, the Company opened one new department store in the third quarter of 2000 and has entered into an agreement to open one additional department store in the fourth quarter of fiscal 2000. The Company is also in the process of completing the remodeling and refurbishing of certain of its existing locations and certain of the locations recently acquired from Lamonts. The estimated remaining cost of such projects, totaling $10.0 million as of July 29, 2000, is expected to be financed from existing financial resources. Such projects are expected to be fully complete in fiscal 2000. However, there can be no assurance that the completion of such projects will not be delayed subject to a variety of conditions precedent or other factors. Management believes the previously described sources of liquidity will be sufficient to provide for the Company's working capital, capital expenditure and debt service requirements throughout fiscal 2000. Management also believes it has sufficient sources of liquidity for its long-term growth plans at moderate levels. The Company may engage in other financing activities if it is deemed to be advantageous. Safe Harbor Statement. ------------------------ Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward- looking statements be subject to the safe harbors created thereby. These forward- looking statements include the plans and objectives of management for future operations and the future economic performance of the Company that involve risks and uncertainties. Such forward-looking statements may be identified by words including, but not limited to: "will", "believes", "anticipates", "intends", "seeks", "may", "expects", and "estimates", or similar terms, variations of such terms or the negative of such terms. The forward-looking statements are qualified by important factors that could cause results to differ materially from those identified in such forward-looking statements, including, without limitation, the following: (i) the ability of the Company to gauge fashion trends and preferences of its customers; (ii) the level of demand for the merchandise offered by the Company; (iii) the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, and hire and train employees; (iv) the ability of management to manage the planned expansion and to successfully integrate the stores acquired from Lamonts; (v) the continued ability to obtain adequate credit from factors and vendors and the timely availability of branded and other merchandise; (vi) the effect of economic conditions, both nationally and in the Company's specific market areas; (vii) the effect of severe weather or natural disasters; and (viii) the effect of competitive pressures from other retailers. Results actually achieved thus may differ materially from expected results in these statements as a result of the foregoing factors or other factors affecting the Company. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As described more fully in Part II, Item 7A of the Company's 1999 Annual Report on Form 10-K, the Company is exposed to market risks in the normal course of business due to changes in interest rates on short-term borrowings under its revolving line of credit. Based on current market conditions, management does not believe there has been a material change in the Company's exposure to interest rate risks as described in that report. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS There were no sales of unregistered securities by the Company during the thirteen week period ended July 29, 2000. The Company's credit agreement with Congress prohibits the Company from paying dividends without prior written consent from that lender. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 22, 2000, the Company held its 2000 Annual Meeting of Stockholders at which the following matter was submitted to a vote of the Company's stockholders: 1. The stockholders voted for eleven nominees for director, each for one year terms. Each of the eleven nominees were elected. The results of the vote are as follows: NOMINEE FOR DIRECTOR VOTES FOR VOTES WITHHELD -------------------- --------- --------------- Joe Levy 10,400,363 1,205,243 James R. Famalette 11,391,204 214,402 Max Gutmann 10,391,642 1,213,964 Bret W. Levy 11,373,249 232,357 Sharon Levy 10,396,569 1,209,037 Joseph J. Penbera 10,394,033 1,211,573 Frederick R. Ruiz 11,389,599 216,007 O. James Woodward III 11,379,304 226,302 William Smith 11,382,704 222,902 Isidoro A?lvarez A?lvarez 11,387,683 217,923 Jorge Pont Sa?nchez 11,387,883 202,241 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed pursuant to the requirements of Item 601 of Regulation S-K: Exhibit No. Description ----------- ------------- 10.43 Ninth Amendment to Loan and Security Agreement dated June 28, 2000, by and between Gottschalks Inc. and Congress Financial Corporation (Western). 10.44 Amendment No. 1 to the Asset Purchase Agreement dated May 16, 2000 by and between Gottschalks Inc. and Lamonts Apparel, Inc. (*) 10.45 Promissory Note dated July 24, 2000 by and between Gottschalks Inc. and Heller Financial Leasing, Inc. 27 Financial Data Schedule * Filed with the Company's Current Report on Form 8-K dated July 24, 2000 (File No. 1-09100) (b) The Company filed the following Current Report on Form 8-K during the thirteen week period ended July 29, 2000: - Current Report on Form 8- K dated July 24, 2000, describing pursuant to Item 2, Acquisition or Disposition of Assets, (i) the completion of the acquisition of 37 store leases and related store fixtures and equipment from Lamonts Apparel, Inc. for a cash purchase price of $20.1 million, (ii) the sale of one of the leases acquired for $2.5 million, and (iii) the termination of two of the leases acquired for $20,000 in cash. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Gottschalks Inc. ---------------- (Registrant) September 12, 2000 \s\ James R. Famalette ------------------- ---------------------- (James R. Famalette, President and Chief Executive Officer) September 12, 2000 \s\ Michael S.Geele ------------------ --------------------- (Michael S.Geele, Senior Vice President and Chief Financial Officer)