-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, CyNT0iX3nVN09BNVuOh73tXaI97HXdFzEzxXimLO99C2xuTXmT38ywzFAFm9eaCc org7cRGcQSzH0h8YlcjGCA== 0000790414-95-000002.txt : 19950428 0000790414-95-000002.hdr.sgml : 19950428 ACCESSION NUMBER: 0000790414-95-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950427 SROS: NYSE SROS: PSE 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: 1934 Act SEC FILE NUMBER: 001-09100 FILM NUMBER: 95531951 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 (Fee Required) For The Fiscal Year Ended January 28, 1995 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: (209) 434-8000 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 nonaffiliates of the Registrant as of March 31, 1995: Common Stock, $.01 par value: $47,471,000 On March 31, 1995 the Registrant had outstanding 10,416,520 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, 1995, which will be filed pursuant to Regulation 14A, are incorporated by reference into Part III of this Form 10-K. PART I Item 1. BUSINESS GENERAL Gottschalks Inc. and its subsidiaries (collectively, the "Company") consists of Gottschalks Inc., its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") and Gottschalks Credit Card Master Trust ("GCC Trust"). Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California, consisting of thirty-two "Gottschalks" department stores and twenty-four "Village East" specialty stores (1). The Company's stores are located primarily in non-major metropolitan cities throughout California, and in Oregon, Washington and Nevada. As described more fully in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources", GCRC and GCC Trust were formed in 1994 in connection with a receivables securitization program. Gottschalks department stores typically offer brand-name fashion apparel, shoes and accessories for men, women and children, cosmetics, jewelry, china, housewares, home appliances and furnishings, electronics and other goods. The Company's Village East specialty stores offer apparel for larger women. The Company's stores carry primarily moderately priced brand-name merchandise, complemented with a mix of higher and budget priced merchandise. 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's business activities have been directed for over 90 years by continuous family management since it was founded by Emil Gottschalk in 1904. ________________________ (1) As of April 1995. Merchandising and Promotion 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. The Company's inventory emphasizes a broad range of brand-names including Estee Lauder, Lancome, Liz Claiborne, Carole Little, Evan Picone, Calvin Klein, Ralph Lauren, Guess, Levi Strauss and Sony. The Company's stores also carry private-label merchandise purchased through Frederick Atkins, Inc., ("Frederick Atkins"), a national association of major retailers which provides its members with group purchasing opportunities. The Company offers a wide selection of fashion apparel and other merchandise in an extensive range of styles, sizes and colors for all members of the family. The following table sets forth for the periods indicated a summary of the Company's sales by division, expressed as a percent of net sales:
1990 1991 1992 1993 1994 Cosmetics & Accessories... 15.4% 15.7% 16.2% 16.5% 16.6% Women's Clothing (1)...... 18.3 17.3 17.1 16.5 16.1 Mens' Clothing............ 12.4 12.8 13.2 13.6 13.9 Housewares, Luggage & Stationary.............. 12.4 12.3 11.0 10.7 10.9 Domestics................. 8.5 9.0 6.7 7.1 8.1 Women's Dresses, Coats & Lingerie.............. 8.5 8.7 8.6 7.8 7.9 Shoes & Other Leased Departments............. 6.9 6.6 7.1 7.4 7.1 Junior's Clothing......... 7.1 7.1 7.2 7.0 6.3 Electronics & Furniture... 3.8 3.6 6.0 5.8 5.6 Children's Clothing....... 4.2 4.3 4.1 4.9 4.9 Village East.............. 2.5 2.6 2.8 2.7 2.6 100.0% 100.0% 100.0% 100.0% 100.0%
_____________________ (1) Net sales includes sales applicable to the Company's Petites West specialty stores which were discontinued in 1991. Such sales totalled 0.6% of net sales in 1991 and 1.4% of net sales in 1990. The Company's merchandising activities are conducted from its corporate offices in Fresno, California by its buying division consisting of an Executive Vice President/General Merchandise Manager, 3 general merchandise managers, 9 divisional merchandise managers, 48 buyers and 35 assistant buyers. Management believes the continuity and experience of its buying division, combined with the Company's long and continuous presence in its primary market areas, enhances its ability to evaluate and respond quickly to emerging fashion trends and changing consumer preferences in its market areas. In addition to providing the Company with group purchasing opportunities, the Company's membership in Frederick Atkins also provides its buying division with current information about marketing and emerging fashion trends. The Company's overall merchandising strategy includes the development of monthly, seasonal and annual merchandising plans for each division, department and store. Management monitors sales and gross margin performance and inventory levels against the plan on a daily basis. The merchandising plan is designed to be flexible in order to allow the Company to respond quickly to changing consumer preferences and opportunities presented by individual item performance in the stores. The Company's buying division and store management meet frequently to ensure the Company's merchandising program is executed efficiently at the store level. Management has devoted considerable resources towards enhancing the Company's merchandise-related information systems. (See Part I, Item I, "Business--Information Systems.") Each of the Company's stores carry substantially the same merchandise, but in different mixes according to individual market demands. Management believes that well-stocked stores and frequent promotional sales contribute significantly to sales volume. In connection with its efforts to increase sales per selling square foot and improve gross margins, the Company has continued to reallocate selling floor space to higher profit margin items and narrow and focus its merchandise assortments. In 1993, the Company closed its clearance center as part of its cost-savings program and now liquidates slow-moving merchandise through its existing stores. The Company commits considerable resources to advertising, using a combination of media types which it believes to be most efficient and effective by market area, including newspapers, television, radio, direct mail and catalogs. The Company is a major purchaser of television advertising time in its primary market areas. In addition to seasonal promotions, the Company uses frequent storewide sales events to highlight brand-name merchandise and promotional prices. The Company also uses direct marketing techniques to access niche markets by sending mailings to its credit card holders and, through its computer data base, generating specific lists of customers who may be most responsive to specific promotional mailings. In addition, the Company conducts a variety of special events including 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 certain of its vendors. Management has continued to focus on enhancing its information systems in order to increase the effectiveness of its promotion strategy. (See Part I, Item I, "Business--Credit Policy" and "Business--Information Systems.") The Company's stores experience seasonal sales and earnings patterns typical of the retail industry. Peak sales occur during the Christmas, back-to-school, and Easter seasons. The Company generally increases its inventory levels and sales staff for these seasons. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Seasonality." Purchase of Merchandise. The Company's membership in Frederick Atkins, a national association of major retailers, provides it with group purchasing opportunities. In 1994, the Company purchased approximately 4.5% of its merchandise from Frederick Atkins. The Company also purchases merchandise from numerous other suppliers. Excluding purchases from Frederick Atkins, the Company's ten largest suppliers in 1994 were Estee Lauder, Inc., Levi Strauss & Co., Liz Claiborne, Inc., Cosmair, Inc., Sony Corporation of America, Lee Company, Saint Tropez West, Zenith Distributing Corporation, Calvin Klein Cosmetics and All- That-Jazz. Purchases from those vendors accounted for approximately 20.2% of the Company's total purchases in 1994. Management believes that alternative sources of supply are available for each category of merchandise it purchases. Store Expansion and Remodeling. The Company's store expansion policy is to achieve consistent, well-controlled long- term growth. The Company has historically avoided expansion into major metropolitan areas, preferring instead to concentrate on secondary cities where management believes there is a strong demand for nationally advertised brand-name merchandise. The Company has also continued to invest in the renovation and refixturing of its existing store locations in order to maintain and improve market share in those market areas. The following table presents selected data regarding the Company's expansion for the fiscal years indicated:
Stores open at year-end (1): 1990 1991 1992 1993 1994 Gottschalks 22 23 25 27 29 Village East 18 21 22 23 24 TOTAL 40 44 47 50 53 Gross store square footage 1,827,500 1,904,200 2,092,900 2,202,300 2,425,000
(1) The number of stores does not include the Company's clearance center (opened - -1988, closed - 1993) or the Company's former Petites West specialty store chain (closed - 1991). ______________________ Since the Company's initial public offering in 1986 and through 1994, the Company has constructed or acquired twenty-one of its twenty-nine Gottschalks department stores, including four junior satellite stores of less than 30,000 square feet each. During this period the Company also opened eighteen of its twenty-four Village East specialty stores. Gross store square footage added during this period was approximately 1.8 million square feet, resulting in over 2.4 million total Company gross square feet. In 1994, the Company opened its twenty-eighth and twenty-ninth Gottschalks stores in Oakhurst and Sacramento, California, and its twenty-fourth Village East specialty store in Sacramento, California. The Company opened three new Gottschalks stores in early 1995 in Auburn and San Bernardino, California and in Carson City, Nevada. The Company also intends to open one additional new Gottschalks store in Tracy, California, and one new Gottschalks store in Visalia, California, as a replacement for an existing store in that location, by the end of 1995. The Company is continuing efforts to expand its operations into other states in the Western United States. In 1992, the Company opened its first Gottschalks stores outside California in Tacoma, Washington and Klamath Falls, Oregon, and in March 1995, opened a new Gottschalks store in Carson City, Nevada. The Company is considering additional department store locations outside California for 1996 store openings. The Company generally seeks prime locations in regional malls as sites for new department stores. The Company also seeks to open a Village East specialty store in each mall where a Gottschalks department store is located. In selecting new store locations, the Company considers the demographic characteristics of the surrounding area, the lease terms and other factors. The Company does not typically own its properties, although management would consider doing so if ownership were financially attractive. The Company has been able to minimize capital requirements associated with new store openings during the past several years through the negotiation of significant contributions from mall owners or developers of certain of the projects for tenant improvements, construction costs and fixtures and equipment. 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. Customer Service. In addition to merchandising and promoting brand-name merchandise, the Company seeks to offer to its customers a conveniently located and attractive shopping environment along with high levels of personal sales assistance not typically associated with major department stores. In Gottschalks stores, merchandise is displayed and arranged by department, with well-known designer and brand-names prominently displayed. Departments open onto main aisles, and numerous visual displays are used to maximize the exposure of merchandise to customer traffic. Village East specialty stores promote the image of style and fashion for larger women. Gottschalks stores also offer a wide assortment of merchandise for petites and are introducing larger mens sizes to certain store locations in 1995. The Company generally seeks to locate its stores in regional shopping malls which are centrally located to access a broad customer base. Twenty-seven of the Company's thirty-two Gottschalks stores, and all but two of its Village East specialty stores, are located in regional shopping malls. The Company's policy is to employ sufficient sales personnel to provide its customers with prompt, personal service. Sales personnel are encouraged to keep notebooks of customers' names, clothing sizes, birthdays, and major purchases, to telephone customers about promotional sales and to send thank-you notes and other greetings to their customers during their normal working hours. Management believes that this type of personal attention builds customer loyalty. The Company stresses the training of its sales personnel and offers various financial incentives based on sales performance. The Company also offers opportunities for promotions and management training and leadership classes. Under its liberal return and exchange policy, the Company will accept, without question, a return or exchange of any merchandise that its stores stock. When appropriate, the Company returns the merchandise to its supplier. Distribution of Merchandise. The Company's distribution facility, designed and equipped to meet the Company's long-term distribution needs, enhances its ability to respond to customers' preferences. Completed in 1989, the Company receives all of its merchandise at its 420,000 square foot distribution center in Madera, California. Currently, merchandise arriving at the distribution center is inspected, recorded by computer into inventory and tagged with a bar- coded price label. The Company generally does not warehouse apparel merchandise, but distributes it to stores promptly. The distribution center is centrally located to serve all of the Company's store locations, including its store locations outside California. Daily distribution enables the Company to respond quickly to fashion and market trends and ensure merchandise displays and store stockrooms are well stocked. As described more fully in Part I, Item I, "Business--Information Systems", management has continued to focus on reducing merchandise purchasing, handling and distribution costs, primarily through the adoption of new technology and new systems and procedures. Management also expects benefits to be realized in payroll, through the reduction of traditionally labor-intensive tasks, and other overhead costs of the Company as a result of the new technology and systems and procedures currently being implemented. Credit Policy. The Company issues its own credit card, which management believes enhances the Company's ability to generate and retain market acceptance and increase sales. As described more fully in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources," the Company sold certain of its customer credit card receivables in March 1994 in connection with an asset-backed securitization program. The Company has continued to service and administer the receivables pursuant to the securitization program. The Company had 438,000 active credit accounts as of March 31, 1995 as compared to 319,000 as of March 31, 1994. Service charge revenues associated with the Company's customer credit cards were $8.9 million, $8.1 million, $8.6 million, $9.0 million, and $8.0 million in 1994, 1993, 1992, 1991 and 1990, respectively. The Company installed a new credit management software system in 1992 which improved all aspects of the Company's credit authorization, collection and billing process, in addition to enhancing the Company's ability to provide customer service. Combined with a new credit scoring system installed in 1993, the Company can process thousands of credit applications daily at a rate of approximately three minutes per application. In 1994, the Company also installed a new automated advanced call management system which has enhanced the Company's ability to manage the process of collecting delinquent customer accounts. The Company expects to complete the installation of an upgrade to its existing credit management system by mid-1995, which among other things, will enhance the Company's ability to access target markets with more sophisticated direct marketing techniques. The credit system upgrades have allowed management to implement new credit-related programs which have resulted in enhanced customer service and increased service charge revenues. In 1993, the Company implemented an "Instant Credit" program, through which credit application rates have more than doubled since its inception. The Company also initiated a "55-Plus" charge account program in 1993, which offers additional merchandise and service discounts to customers 55 years of age and older. In 1994, the Company initiated a "Gold Card" and "55-Plus Gold Card" program for customers who have a net minimum spending history on their charge accounts of $1,000 per year. Gold Card and 55- Plus Gold Card holders receive special services at a discount and receive an annual rebate certificate which can be applied towards future purchases of merchandise. The credit authorization process is centralized at the Company's corporate headquarters in Fresno, California. Credit is extended to applicants based on a scoring model. The Company's credit extension policy is nearly identical for instant and non-instant credit applicants. Applicants who meet pre- determined criteria based on prior credit history, occupation, number of months at current address, income level and geographic location are automatically assigned an account number and awarded a credit limit ranging from $300 to $2,000. Credit limits may be periodically revised. The Company's credit system also provides full on-line positive authorization lookup capabilities at the point-of-sale. Within seconds, each charge, credit and payment transaction is approved or referred to the Company's credit department for further review. Sales associates speed-dial the credit department for an approval when a transaction has been referred by the system. The Company offers credit to customers under several payment plans: the "Option Plan", under which the Company bills customers monthly for charges without a minimum purchase requirement, the "Time-Pay Plan", under which customers may make monthly payments for purchases of home furnishings, major appliances and other qualified items of more than $100, and the "Club Plan", under which customers may make monthly payments for purchases of fine china, silver, crystal and collectibles of more than $100. The Company also periodically offers special promotions to its credit card holders through which customers are given the opportunity to obtain discounts on merchandise purchases or purchase merchandise under special deferred billing and deferred interest plans. Finance charges are assessed on unpaid balances at a rate of 19.8% APR in all states, except Washington, which is assessed at a rate of 18.0% APR. A late charge fee on delinquent charge accounts is assessed at a rate of $5 per late payment occurrence. Information Systems. The Company has continued to invest in technology and systems improvements in its efforts to improve customer service and reduce inventory-related costs and operating costs. The Company's information systems include the latest IBM mainframe technology with capacity sufficient to meet the Company's long-term expansion plans. In addition to the mainframe computer, the Company runs multiple platforms with applications on mid-range, local area network and departmental levels. All of the Company's major information systems are computerized, including its merchandise, inventory, credit, payroll and financial reporting systems. The Company has installed approximately 2,000 computer terminals throughout its stores, corporate offices and distribution center. Every store processes each sales transaction through point-of-sale (POS) terminals that connect on-line with the Company's mainframe computer located at its corporate offices in Fresno, California. This system provides detailed reports on a real-time basis of current sales, gross margin and inventory levels by store, department, vendor, class, style, color, and size. Management has continued to focus on the enhancement of its merchandise- related systems in its efforts to control merchandise cost and shrinkage. In 1993, the Company implemented an automatic markdown system which has assisted in the more timely and accurate processing of markdowns and reduced inventory shortage resulting from paperwork errors. A price management system was installed in 1994 which management believes has improved the Company's POS price verification capabilities, resulting in fewer POS errors and enhanced customer service. Management has also focused on controlling costs related to the purchase, handling and distribution of merchandise, traditionally labor-intensive tasks, through the improvement of its merchandise-related information systems and the adoption of new technology. Management expects to implement a new merchandise management and allocation ("MMS") system in 1995, which is expected to enhance the Company's ability to allocate merchandise to stores more efficiently and make prompt reordering and pricing decisions. The new MMS system is also expected to provide enhanced merchandise-related information used by the Company's buying division in its analysis of market trends and specific item performance in stores. The Company has also continued its efforts to implement a variety of programs with its vendors, including an automatic replenishment inventory system for certain basic merchandise and an electronic data interchange ("EDI") system providing for on-line purchase order and charge-back entry. Such systems will automate certain merchandise purchasing processes. In early 1995, the Company completed the development of systems that will enable it to implement the use of universal product codes ("UPC") with vendors that also have developed the technology. Merchandise purchased from vendors that have UPC capabilities will arrive at the Company's distribution center already tagged with a bar-coded price label that can be translated by the Company's inventory systems, thus ready for immediate distribution to the stores. Management expects to realize benefits in payroll and other selling, general and administrative costs as a result of implementing the previously described systems. Other systems implemented by the Company in its efforts to control its selling, general and administrative costs include the following: (i) a new payroll system in 1994 which is expected to enhance the Company's ability to manage payroll-related costs, (ii) a new advertising management software system in early 1995 which is expected to enhance management's ability to measure individual item sales performance derived from a particular advertisement, and (iii) an upgrade to the Company's existing credit management system, expected to be installed by mid-1995 (see Part I, Item I "Business--Credit Policy"). Leased Departments. The Company currently leases the fine jewelry, shoe and maternity wear departments, custom drapery, certain of its restaurants and the beauty salons in its Gottschalks department stores. The independent operators supply their own merchandise, sales personnel and advertising and pay the Company a percentage of gross sales as rent. Management believes that while the cost of sales attributable to leased department sales is generally higher than other departments, the relative contribution of leased department sales to earnings is comparable to that of the Company's other departments because the lessee assumes substantially all operating expenses of the department. This allows the Company to reduce its level of selling, advertising and other general and administrative expenses associated with leased department sales. Leased department sales as a percent of total sales were 7.1%, 7.4%, 7.1%, 6.6% and 6.9% in 1994, 1993, 1992, 1991 and 1990, respectively. Gross margin applicable to the leased departments was 14.1%, 13.8%, 14.4%, 14.6% and 14.5% in 1994, 1993, 1992, 1991 and 1990, respectively. Competition. The retail department store and specialty apparel businesses are highly competitive. The Company's stores compete with national, regional, and local chain department stores and specialty stores, some of which are considerably larger than the Company and have substantially greater financial and other resources. Competition has intensified in recent years as new competitors, including discount retailers and outlet malls, have entered the Company's primary market areas. The Company competes primarily on the basis of current merchandise availability, customer service, price and store location. The Company's larger national and regional competitors have the ability to purchase larger quantities of merchandise at lower prices. Management believes its buying practices partially counteract this competitive pressure. Such practices include: (i) the ability to accept smaller or odd-sized orders of merchandise from vendors than its larger competitors may be able to accept, (ii) the ability to structure its merchandise mix to more closely reflect the different regional, local and ethnic needs of its customers and (iii) the ability to react quickly and make opportunistic purchases of individual items. Management also believes that its knowledge of its primary market areas, developed over more than 90 years of continuous family management, and its focus on those markets as its primary areas of operations, give it an advantage that its competitors cannot readily duplicate. Many of the Company's competitors are national chains whose operations are not focused specifically on non-major metropolitan cities in the Western United States. One aspect of the Company's strategy is to differentiate itself as a home-town, locally-oriented store versus its more nationally focused competitors. Employees. As of January 28, 1995, the Company had 5,377 employees, of whom 1,168 were employed part-time (working less than 20 hours a 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. To attract and retain qualified employees, the Company offers a 25% discount on most merchandise purchases, participation in a 401(k) Retirement Savings Plan to which the Company may make an annual discretionary contribution, vacation, sick and holiday pay benefits as well as health care, accident, death, disability, dental and vision insurance at a nominal cost to the employee and eligible beneficiaries and dependents. The Company also has a performance-based incentive pay program for certain of its officers and key employees and has stock option plans that provide for the grant of stock options to certain officers and key employees of the Company. 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. 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 of which the Company is the sole limited partner holding a 36% share of the partnership. 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 Company has two consecutive ten year renewal options and receives favorable lease terms under the lease. (See Note 1 to the Consolidated Financial Statements). 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 service economically the Company's existing Western United States store locations 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, and has six consecutive five-year renewal options. Store Leases and Locations. The Company owns seven of its thirty-two Gottschalks stores and leases its remaining Gottschalks and Village East stores from unrelated parties. The store leases generally require the Company to pay either a fixed rent, rent based on a percentage of sales, or rent based on a percentage of sales above a specified minimum rent amount. Certain of the Company's leases also provide for rent abatements and scheduled rent increases over the lease terms. The Company is generally responsible for a pro-rata share of promotion, common area maintenance, property tax and insurance expenses under its store leases. On a comparative store basis, the Company incurred an average of $6.92, $6.80, $6.09, $6.00 and $5.87 per gross square foot in lease expense in 1994, 1993, 1992, 1991 and 1990, respectively, not including common area maintenance and other allocated expenses. Twenty-seven Gottschalks and all but two of the Village East stores, are located in regional shopping malls. 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. The following table contains specific information about each of the Company's stores open as of the end of 1994:
Expiration Gross Selling Date of Square Square Date Current Feet Feet Opened Lease Renewal Options GOTTSCHALKS Antioch............. 80,000 64,100 1989 N/A (1) N/A Aptos............... 11,200 10,200 1988 2004 None Bakersfield: East Hills........ 74,900 63,300 1988 2009 6 five yr. opt. Valley Plaza...... 69,000 51,800 1987 1997(2) None Capitola............105,000 89,700 1990 N/A (1) N/A Chico............... 85,000 77,200 1988 2017 3 ten yr. opt. Clovis..............101,400 94,500 1988 2018 None Eureka.............. 96,900 69,300 1989 N/A (1) N/A Fresno: Fashion Fair...... 76,700 67,900 1970 2001 None Fig Garden........ 36,000 33,400 1983 2005 None Manchester........175,600 143,400 1979 2009 1 ten yr. opt. Hanford............. 98,800 75,400 1993 N/A (1) N/A Klamath Falls....... 65,400 51,100 1992 2007 2 ten yr. opt. Merced.............. 60,000 51,900 1983 2013 None Modesto: Vintage Faire..... 89,600 67,100 1977 2008 4 five yr. opt. Century Center.... 62,300 59,300 1984 2013 1 ten yr. opt. and 1 four yr. opt. Oakhurst............ 25,600 21,600 1994 2005 4 five yr. opt. and 1 six yr. opt. Palmdale............114,900 93,100 1990 N/A (1) N/A Palm Springs........ 68,100 55,100 1991 2011 4 five yr. opt. Sacramento..........194,400 144,900 1994 2014 5 five yr. opt. San Luis Obispo..... 99,300 78,700 1986 N/A (1) N/A Santa Maria.........114,000 97,900 1976 2006 4 five yr. opt. Scotts Valley....... 11,200 9,700 1988 2001 2 five yr. opt. Stockton............ 90,800 79,000 1987 2009 6 five yr. opt. Tacoma..............119,300 92,700 1992 2012 4 five yr. opt. Visalia............. 88,800 72,000 1964 2003 1 twelve yr. opt. and 2 twenty yr. opt. Woodland............ 55,300 47,000 1987 2017 2 ten yr. opt. Yuba City........... 80,000 61,900 1989 N/A(1) N/A Redding............. 7,800 5,000 1993 60 days(3) None Total Gottschalks Square Footage..2,357,300 1,928,200
Expiration Gross Selling Date of Square Square Date Current Feet Feet Opened Lease Renewal Options VILLAGE EAST Antioch............. 2,100 1,475 1989 N/A (1) N/A Bakersfield: East Hills........ 2,500 2,100 1988 1998 None Valley Plaza...... 3,700 3,600 1991 2002 None Capitola............ 2,400 2,360 1991 1999 None Chico............... 2,300 2,285 1988 2000 None Clovis.............. 2,300 2,250 1988 1998 None Eureka.............. 2,800 2,800 1989 2004 None Fresno: Fashion Fair...... 1,600 1,500 1970 1996 None Fig Garden........ 2,800 2,585 1986 1999 None Manchester........ 6,000 5,375 1981 2010 None Hanford............. 2,800 2,480 1993 2008 None Merced.............. 3,100 2,800 1976 2001 None Modesto: Vintage Faire..... 2,900 2,720 1977 1995(2) None Century Center.... 2,500 2,500 1986 2005 None Palmdale............ 2,800 2,300 1990 2000 None Palm Springs........ 2,500 2,025 1991 2001 None Sacramento.......... 2,700 2,470 1994 2004 None San Luis Obispo..... 2,500 2,265 1987 2011 None Santa Maria......... 3,000 2,720 1976 2001 None Stockton............ 1,800 1,300 1989 1998 None Tacoma.............. 4,000 3,220 1992 2012 None Visalia............. 3,400 2,880 1975 1999 None Woodland............ 2,000 2,000 1987 1999 None Yuba City........... 3,200 3,045 1990 2000 None Total Village East Square Footage....67,700 61,055 Total Square Footage........2,425,000 1,989,255
__________________________ (1) Company owned. (2) Management believes it will be able to renegotiate leases expiring in the near-term. Such negotiations may involve revisions to certain provisions currently contained in those leases. Management does not expect any such revisions to materially affect the operating results of the Company. (3) This lease is automatically renewed every 60 days. Either party can terminate the lease upon 60 days' notice. Item 3. LEGAL PROCEEDINGS As described more fully in the Company's Annual Report on Form 10-K for the year ended January 29, 1994 and the Company's various Quarterly Reports on Form 10-Q for the year ended January 28, 1995, the Company has been party to three civil lawsuits related to an income tax deduction (the "Income Tax Deduction") on the Company's 1985 federal tax return and the reports and registration statements filed by the Company with the Securities and Exchange Commission (the "SEC"). On August 26, 1994, the Company announced it had reached an agreement to settle all aspects of those lawsuits and included in the Company's 1994 results of operations is a provision for $3.5 million representing the cost of the settlement and related legal fees and other costs. The derivative action pending in the Superior Court of California, County of Fresno (Ponder v. Ernst & Young; filed May 11, 1993), and the class action pending in the United States District Court for the Northern District of California, (Annoni v. Gottschalks; filed July 15, 1993) were dismissed on October 21, 1994 and November 4, 1994, respectively. On February 1, 1995, the Superior Court of California, County of Fresno, issued a final judgement and order of dismissal for approval of the settlement of the class action set forth before the Court on October 21, 1994, (Ponder v. Gottschalks; filed April 30, 1993). In accordance with the terms of the settlement agreement, the Company funded $3.0 million into an irrevocable trust on February 1, 1995. The net proceeds of the settlement will be paid to the plaintiffs based on the Plan of Allocation, filed by the Company before the Court on January 17, 1995. The Company is a defendant in a lawsuit filed in October 1992 by F&N Acquisition Corporation ("F&N") in the United States Bankruptcy Court for the Western District of Washington (F&N Acquisition Corp. v. Gottschalks, Inc., Case No. A92-08501). F&N is seeking damages arising out of the Company's alleged breach of an oral agreement at a bankruptcy auction to purchase an assignment of a lease of a former Frederick & Nelson store located in Spokane, Washington. In addition, F&N is seeking an unspecified sum for its rejection of the next best offer at the bankruptcy auction. In 1992, F&N obtained a partial summary judgment against the Company under which the Company was ordered to pay F&N damages of approximately $3.0 million plus accrued interest from the date of the judgment. The partial summary judgment was reversed on November 21, 1994 and the matter was remanded to the Bankruptcy Court for further proceedings. Management's estimate of amounts that may be ultimately payable to F&N were included in the provision for unusual items in the 1993 and 1992 consolidated statements of operations. In connection with the above-referenced lawsuit filed against the Company by F&N, an additional complaint was filed in June 1994 in the United States District Court for the Western District of Washington by Sabey Corporation ("Sabey"), the owner of the mall in which the Frederick & Nelson store was located (Sabey Corporation v. Gottschalks, Inc., Case No. C94-842Z). The plaintiff is seeking damages as a third-party beneficiary of the bid the Company made to F&N at the bankruptcy auction, claiming damages suffered by the mall due to the Company's failure to purchase and assume the Frederick & Nelson store lease. In April 1994, an agreement was signed by all parties to the F&N and Sabey lawsuits providing for the consolidation of the two cases. It is anticipated that the Court will enter a ruling confirming the consolidation of these cases in the near-term. Management believes that the ultimate outcome of these cases, as consolidated, will not have a material adverse effect upon the financial condition or results of operations of the Company. In July 1994, UML Financial Corporation and M.J.M. and Associates, Inc. filed a lawsuit against the Company in the California Superior Court for the County of Fresno (UML Financial Corporation and M.J.M. and Associates, Inc. v. Gottschalks, Inc., et al., Case No. 514020 7). The complaint was amended in August 1994 to add three officers of the Company, Joseph W. Levy, Alan A. Weinstein and Warren Williams, as defendants. The plaintiffs claim that the Company failed to fulfill an alleged obligation to consummate certain sale- leaseback financings involving six of the Company's retail stores and unspecified equipment. The most recent version of the complaint alleges breach of contract, fraud and deceit and promissory estoppel. The plaintiffs are seeking specific performance as well as monetary damages. Plaintiffs claim damages in excess of $10 million. The Company is vigorously defending this case and management does not believe that the ultimate outcome of this case will have a material adverse effect upon the financial condition or results of operations of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matter was 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 stock is listed for trading on both the New York Stock Exchange 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 New York Stock Exchange Composite Tape under the symbol "GOT" during the periods indicated:
1994 1993 Fiscal Quarters High Low High Low 1st Quarter......... 12 7/8 8 3/8 9 3/4 7 1/8 2nd Quarter......... 12 8 1/2 9 6 1/8 3rd Quarter......... 9 3/4 7 1/4 9 6 1/2 4th Quarter......... 8 3/8 6 5/8 10 3/8 7 1/2
On March 31, 1995, the Company had 1,169 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. 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 agreements with Shawmut Capital Corporation ("Shawmut" - formerly Barclays Business Credit, Inc.) and Wells Fargo Bank, N.A., ("Wells Fargo") prohibit the Company from paying cash dividends. 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 28, 1995, January 29, 1994, January 30, 1993, February 1, 1992 and February 2, 1991 are referred to herein as 1994, 1993, 1992, 1991 and 1990, respectively. All fiscal years noted include 52 weeks. The selected financial data below should be read in conjunction with 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.
SELECTED BALANCE SHEET DATA: (In thousands of dollars) 1994 1993 1992 1991 1990 Receivables, net...... $ 27,311 $21,460(1) $ 59,508 $ 62,831 $60,661 Merchandise inventories.......... 80,678(2)60,465 58,777 62,821 51,547 Property and equipment, net....... 93,809 96,396 95,933 91,114 83,435 Total assets.......... 233,353 248,330 239,910 242,072 207,556 Working capital....... 37,900 32,147(3) 16,827 64,715 34,975 Long-term obligations, less current portion. 33,672 31,493(3) 14,992 51,290 42,627 Stockholders' equity.. 83,577 82,118 84,529 92,720 55,975 SELECTED FINANCIAL RATIOS: Current ratio......... 1.43:1 1.30:1 1.15:1 1.89:1 1.41:1 Inventory turnover ratio.............. 2.9(4) 2.9 2.9 2.9 3.1 Days credit sales in receivables...... 155.4(5) 169.3(5) 169.8 177.4 178.2
(1) As described more fully in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 2 to the Consolidated Financial Statements, these amounts do not include $40.0 million of the Company's customer credit card receivables sold in March 1994 in connection with an asset- backed securitization program. Such receivables were classified as held for securitization and sale at January 29, 1994. (2) The increase in merchandise inventories from 1993 to 1994 is primarily attributable to additional inventory required for the new stores opened in 1994 and inventory on hand at year-end for new stores opened in early 1995. In addition, to a lesser extent, this increase is attributable to opportunistic purchases of merchandise shortly before year- end in 1994. The Company typically receives extended payment terms for such purchases. (3) Working capital increased $15.3 million and long-term obligations increased $16.5 million from 1992 to 1993 primarily due to the classification of certain debt as long-term in 1993 that had been classified as current in 1992. (4) The inventory turnover ratio in 1994 excludes inventory received at year- end and held for stores opened in early 1995. (5) Days credit sales in receivables include $40.0 million of receivables sold in 1994 and held for securitization and sale as of January 29, 1994. The Company has continued to service and administer the receivables pursuant to the securitization program.
RESULTS OF OPERATIONS: (In thousands, except share data) 1994 1993 1992 1991 1990 Net sales(1)........... $363,603 $342,417 $331,133 $314,633 $287,455 Service charges and other income......... 9,659 8,938 9,458 10,830 10,374 373,262 351,355 340,591 325,463 297,829 Costs and expenses: Cost of sales(2)..... 247,423 233,715 226,319 210,435 189,330 Selling, general and administrative expenses(3)........ 103,571 103,675 105,044 96,144 84,916 Depreciation and amortization....... 5,860 5,877 6,408 5,503 5,266 Interest expense..... 10,238 8,524 6,965 6,793 9,306 Unusual items(4)..... 3,833 3,427 7,852 370,925 355,218 352,588 318,875 288,818 Income (loss) before income tax expense (benefit)............ 2,337 (3,863) (11,997) 6,588 9,011 Income tax expense (benefit)............ 821 (1,190) (4,006) 2,528 3,398 Net income (loss)...... $ 1,516 $ (2,673) $ (7,991) $ 4,060 $ 5,613 Net income (loss) per common share......... $ .15 $ (.26) $ (.77) $ .41 $ .70 Weighted average number of common shares outstanding.......... 10,413 10,377 10,410 9,798 8,040 SELECTED OPERATING DATA: 1994 1993 1992 1991 1990 Total store sales growth (5)..... 6.2% 3.4% 5.2% 9.5% 21.4% Comparable store sales growth......... 3.3% 1.3% (1.0%) 3.5% 11.1% Average net sales per square foot of selling space (6): Gottschalks......... $210 $213 $209 $210 $208 Village East........ 214 216 218 231 217
(1) Includes net sales from leased departments of $26.0 million, $25.3 million, $23.4 million, $20.8 million and $19.7 million in 1994, 1993, 1992, 1991 and 1990, respectively. See Part I, Item 1, "Business--Leased Departments." (2) Includes cost of sales attributable to leased departments of $22.3 million, $21.8 million, $20.1 million, $17.8 million and $16.9 million in 1994, 1993, 1992, 1991 and 1990, respectively. (3) Includes provision for credit losses of $2.1 million, $2.2 million, $2.5 million, $3.0 million and $1.9 million in 1994, 1993, 1992, 1991 and 1990, respectively. (4) See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Consolidated Financial Statements. (5) See Part I, Item I, "Business--Store Expansion and Remodeling", for table of number of stores open at each fiscal year-end. (6) Average net sales per square foot of selling space represents net sales for the period divided by the number of square feet of selling space in use during the period. Average net sales per square foot is computed only for those stores in operation for at least twelve months. "Selling space" has been determined according to standards set by the National Retail Federation. ___________________________ Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net income increased to $1.5 million in 1994 as compared to net losses of $2.7 million in 1993 and $8.0 million in 1992. Prior to unusual items and income taxes, income from operations increased to $6.2 million in 1994 as compared to losses from operations of $436,000 in 1993 and $4.1 million in 1992. The improved operating results of the Company in 1994 as compared to 1993 and 1992 is primarily the result of the implementation of a long-term business strategy in 1993 which has focused on increasing total and comparative store sales through the controlled expansion of the Company, more strongly defined merchandising and customer-service programs and increased promotional activity; enhancing service charges and other revenues through the development of new credit-related programs; improving gross margins and controlling inventory- related costs, and reducing general and administrative costs by reviewing all aspects of the Company's operations. Within the context of this strategy, the Company has strived to achieve these goals without sacrificing its traditionally high-level of customer service. The Company's results of operations in 1994 and 1993 as compared to 1992 were also favorably impacted by improved economic conditions in many of the Company's market areas during those periods. The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Operations, expressed as a percent of net sales:
1994 1993 1992 Net sales........................ 100.0% 100.0% 100.0% Service charges and other income......................... 2.6 2.6 2.9 102.6 102.6 102.9 Costs and expenses: Cost of sales................. 68.0 68.2 68.4 Selling, general and administrative expenses..... 28.5 30.3 31.7 Depreciation and amortization................ 1.6 1.7 1.9 Interest expense.............. 2.8 2.5 2.1 Unusual items................. 1.1 1.0 2.4 102.0 103.7 106.5 Income (loss) before income tax expense (benefit)............. 0.6 (1.1) (3.6) Income tax expense (benefit)..... 0.2 (0.3) (1.2) Net income (loss)................ 0.4% (0.8)% (2.4)%
Net Sales Net sales increased 6.2% in 1994, 3.4% in 1993 and 5.2% in 1992. Comparable store sales increased 3.3% in 1994 and 1.3% in 1993 and decreased 1.0% in 1992. Comparable store sales in 1994 and 1993 were favorably impacted by strong retail activity and improved economic conditions in many of the Company's market areas during those periods. Comparable store sales in 1992 were negatively impacted by recessionary economic conditions during the period. Net sales in 1994, 1993 and 1992 also reflect increased sales volume generated from two new Gottschalks stores and one new Village East store opened in each of those years. The Company opened three new Gottschalks stores in early 1995 and intends to open two additional new stores, including one new store replacing an existing store location, by the end of 1995. Service Charges and Other Income Service charges and other income increased 8.1% in 1994 and decreased 5.5% in 1993 and 12.7% in 1992. Service charges associated with the Company's customer credit cards increased 9.9% in 1994 as compared to decreases of 5.8% in 1993 and 4.4% in 1992. The increase in service charges in 1994 is attributable to an increase in credit sales as a percent of total sales, resulting primarily from the success of new credit-related programs initiated by the Company in 1994 and 1993, including the Instant Credit, 55-Plus, Gold Card and 55-Plus Gold Card programs, in addition to an increase in the number of customer credit card accounts resulting from new stores openings in 1994, 1993 and 1992. Credit sales as a percent of total sales increased to 43.5% in 1994 as compared to 38.8% in 1993 and 38.5% in 1992. The increase in service charges is also attributable to the implementation of a late charge fee on delinquent customer credit card accounts in 1994. Other income, consisting primarily of the amortization of deferred income, was $755,000 in 1994, $838,000 in 1993 and $880,000 in 1992. Other significant items included in other income include the following: (1) a loss of $305,000 recognized by the Company in 1994 in connection with the receivables securitization program, (see "Liquidity and Capital Resources" and Note 2 to the Consolidated Financial Statements), and (2) equity in the income of the Company's investment in a limited partnership of $160,000 in 1994 as compared to losses recognized on the investment of $228,000 in 1993 and $224,000 in 1992 (see Note 1 to the Consolidated Financial Statements.) Cost of Sales Cost of sales increased 5.9% in 1994, 3.3% in 1993 and 7.5% in 1992. The Company's gross margin percent increased to 32.0% in 1994 as compared to 31.8% in 1993 and 31.6% in 1992. The increase in the gross margin percent in 1994 resulted from increased sales volume and a reduction of inventory shrinkage to 1.4% as a percent of net sales in 1994 as compared to 2.1% in 1993 and 2.3% in 1992, primarily from improved inventory-related controls. The improved gross margin in 1994 also reflects a favorable year-end LIFO inventory valuation adjustment ("LIFO adjustment") resulting from moderate price deflation in certain of the Company's LIFO inventory pools in 1994 as compared to moderate price inflation in certain LIFO inventory pools in 1993 and 1992. The Company also experienced fluctuations in inventory levels and the relationship between the cost of its merchandise inventories and its selling prices in 1994, 1993 and 1992 which magnified the LIFO adjustment in each of those years. The LIFO adjustment resulted in a decrease to cost of sales of $3.2 million in 1994 after increasing cost of sales by $969,000 in 1993 and $1.5 million in 1992. Excluding the effect of the LIFO adjustment, the Company's gross margin percent was 31.1% in 1994, 32.0% in 1993 and 32.1% in 1992. (See Note 1 to the Consolidated Financial Statements.) Management believes that the retail industry will continue to experience intense competition and pricing pressures throughout the 1990's, particularly as a result of changing consumer preferences, increased merchandise costs and increased competition from other department and specialty stores, discount retailers and outlet malls. Management has implemented a variety of strategies to counteract the ongoing competitive pressures on its gross margin, and is attempting to increase sales through the controlled expansion of the Company, improve market share in the Company's existing market areas through the development of new sales and customer-service related programs, increase inventory turnover and reduce inventory-related costs. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percent of net sales decreased to 28.5% in 1994 as compared to 30.3% in 1993 and 31.7% in 1992. This decrease as a percent of net sales in 1994 and 1993 as compared to 1992 resulted from increased sales volume and the continued focus on expense control measures throughout the Company. The decrease as a percent of net sales in 1994 was partially offset by higher payroll and related costs and increased advertising and other promotional costs. The decrease as a percent of net sales in 1993 as compared to 1992 also resulted from a reduction in payroll and related costs through the restructuring of the Company's sales, buying and support staff and salary reductions implemented during the year. The benefits of the 1993 restructuring program were fully realized by mid-1994. In 1994 and 1993, the Company also realized the benefit of reductions to required workers' compensation claim reserves resulting from favorable experience adjustments and revisions to applicable workers' compensation laws. In 1992, the Company increased workers' compensation claim reserves as a result of poor actual claim loss experience. Excluding the effect of such experience adjustments, selling, general and administrative expenses as a percent of net sales were 29.1% in 1994, 30.7% in 1993 and 31.2% in 1992. The Company revised its workers' compensation program in early 1995 and does not expect future significant favorable or unfavorable workers' compensation experience adjustments. As a result of programs initiated in 1994 and 1993, and the Company's ongoing efforts to control expenses, management anticipates it will be able to continue to reduce operating expenses as a percent of net sales in the long-term. Management also expects to achieve further reductions in its operating expenses as a percent of net sales by spreading its overhead costs over an increasing selling base resulting from its ongoing store expansion program. Depreciation and Amortization Depreciation and amortization as a percent of net sales decreased to 1.6% in 1994 as compared to 1.7% in 1993 and 1.9% in 1992. The decrease as a percent of net sales in 1994 and 1993 resulted primarily from increased sales volume and a decrease in the amortization of store pre-opening costs related to the Company's new stores. The Company expects to realize an increase in depreciation expense and the amortization of store pre-opening costs in 1995 as a result of completing and opening the two new stores in 1994 and the planned store openings for 1995. Interest Expense Interest expense as a percent of net sales increased to 2.8% in 1994 as compared to 2.5% in 1993 and 2.1% in 1992. These increases as a percent of net sales relate to an increase in the weighted-average interest rate charged on outstanding borrowings under the Company's revolving lines of credit to 7.1% in 1994 as compared to 6.5% in 1993 and 5.8% in 1992 and additional amortization of loan fees applicable to certain of the Company's financing arrangements entered into in 1994 and 1993. The increase in 1994 also relates to additional interest expense associated with the Fixed Base Certificates and additional amortization of the excess servicing asset recorded in connection with the receivables securitization program (see Note 2 to the Consolidated Financial Statements). As described more fully in "Liquidity and Capital Resources", the Company is continuing its efforts to reduce interest expense as a percent of net sales by replacing certain of its current borrowing arrangements with other sources of lower cost borrowings. Provision for Unusual Items As described more fully in Note 3 to the Consolidated Financial Statements and Part I, Item 3, "Legal Proceedings", the provision for unusual items totalling $3.8 million in 1994, $3.4 million in 1993 and $7.9 million in 1992, consists of fines and penalties paid in connection with the Company's settlement of federal criminal charges related to an income tax deduction on the Company's 1985 federal tax return and certain of the Company's financial reporting practices; a tax deficiency, interest and penalties paid to the Internal Revenue Service in connection with the civil aspect of the government's investigation of such deduction and the cost of the settlement of the related stockholder litigation. In addition, the provision for unusual items in 1993 and 1992 includes management's estimate of amounts that may ultimately be payable in connection with unrelated pending litigation against the Company arising out of an agreement to purchase an assignment of a lease of a former Frederick and Nelson store location in Spokane, Washington. The provision for unusual items in 1994, 1993 and 1992 also includes legal and accounting fees and other costs related to these matters. Management does not anticipate that any additional costs that may be incurred in connection with these matters will be material to the operating results of the Company. Income Taxes The Company accounts for income taxes in accordance with Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The Company's effective tax rate was 35.1% in 1994 as compared to credits of (30.8%) in 1993 and (33.4%) in 1992. (See Note 7 to the Consolidated Financial Statements.) Liquidity and Capital Resources The Company's primary needs for liquidity are to provide for working capital and debt service requirements and to fund costs associated with the acquisition, renovation and construction of new and existing stores. The Company's working capital requirements are met through a combination of cash flows generated from operations, funds provided through a receivables securitization agreement and borrowings on the Company's revolving lines of credit. The Company generally seeks to fund costs associated with the acquisition, renovation and construction of new and existing stores with cash generated from operations and lower cost long-term borrowings. Debt service requirements on the Company's various short-term and long-term borrowing arrangements are generally provided for by cash generated from operations. The Company's improved operating results and financial condition in 1994 has enhanced the Company's liquidity. Net cash used in operating activities was $1.5 million in 1994 as compared to $2.6 million in 1993. Net cash provided by operating activities was $2.0 million in 1992. Net cash used in operating activities in 1994 and 1993 related primarily to increases in merchandise inventories and receivables associated with new stores opened during and shortly after year-end in each of those years. To a lesser extent, the increase in merchandise inventory in 1994 is also attributable to the receipt of opportunistic purchases of merchandise shortly before year-end. As described more fully in Note 3 to the Consolidated Financial Statements, net cash used in and provided by operating activities in 1994, 1993 and 1992 also reflects amounts paid in connection with the government's investigation and related stockholder litigation. Net cash used in investing activities was $2.5 million in 1994, $5.4 million in 1993 and $10.7 million in 1992. Net cash used in investing activities in 1994, 1993 and 1992 relates primarily to expenditures for tenant improvements, construction costs and furniture, fixtures and equipment associated with new stores and certain existing store locations. Net cash used in investing activities in 1994, 1993 and 1992 also reflects expenditures for information systems improvements and additional enhancements to the Company's POS and computer processing capabilities. In 1994, the Company entered into a sale and leaseback arrangement for certain computer equipment and software and received proceeds of $1.5 million from the arrangement. The Company also sold certain land not being used in operations in 1994 and received proceeds of $400,000 from the sale. In 1992, the Company entered into a sale and leaseback arrangement for certain furniture and fixtures and received proceeds of $1.4 million from the arrangement. Net cash provided by financing activities was $6.0 million in 1994, $8.2 million in 1993 and $6.5 million in 1992. Net cash provided by financing activities in 1994 consisted primarily of $40.0 million proceeds received through the initial securitization and sale of certain of the Company's receivables. Such proceeds were used to repay all outstanding borrowings on a pre-existing line of credit and long-term borrowing arrangement and to pay certain costs associated with the transaction. The Company also received $6.7 million in 1994 through the mortgage of the property and equipment located at its department store in Hanford, California. Net cash provided by financing activities in 1993 and 1992 consisted primarily of proceeds from the Company's revolving line of credit and other long-term borrowings. The Company's ratio of current assets to current liabilities continued to improve, increasing to 1.43:1 at January 28, 1995 as compared to 1.30:1 at January 29, 1994 and 1.15:1 at January 30, 1993. As described more fully in Note 2 to the Consolidated Financial Statements, the Company entered into an asset-backed securitization program on March 30, 1994. Under the program, all accounts receivable arising under the Company's private label customer credit cards, together with rights to all collections and recoveries on such receivables, are automatically sold, without recourse, to a wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") and certain of those receivables are subsequently conveyed to a trust, Gottschalks Credit Card Master Trust ("GCC Trust"). On March 30, 1994, GCC Trust issued $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates ("Fixed Base Certificates") to third-party investors. On March 30, 1994, GCC Trust also issued a Subordinated Certificate and an Exchangeable Certificate to GCRC, representing GCRC's retained interest in the receivables as of that date. Interest on the Fixed Base Certificates is payable on a monthly basis and the outstanding principal balance is to be repaid in equal monthly installments commencing September 1998 through September 1999, through the application of credit card principal collections during that period. The Company used the $40.0 million proceeds from the initial securitization and sale of the receivables to repay all outstanding borrowings under a pre-existing line of credit and long-term credit facility and to pay certain costs related to the securitization transaction. The Company recognized a loss of $305,000 in connection with the initial transaction. Under the terms of the program, the Company sold additional newly-generated receivables to GCRC subsequent to March 30, 1994 and through January 28, 1995, and certain of those receivables were subsequently conveyed to GCC Trust. Aggregate proceeds from such sales, totalling $146.0 million, were used for working capital purposes by the Company. On September 16, 1994, GCC Trust also issued a Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate") in the principal amount of up to $15.0 million from GCC Trust to Bank Hapoalim. As described more fully below and in Note 2 to the Consolidated Financial Statements, the Variable Base Certificate, representing certain receivables held by GCC Trust, excluding receivables underlying the Fixed Base Certificates and GCRC's retained interest, was issued as collateral for a revolving line of credit financing arrangement with Bank Hapoalim. In addition to the Fixed and Variable Base Certificate, GCRC may, upon the satisfaction of certain conditions, offer additional series of certificates to be issued by GCC Trust. As of January 28, 1995, no such issuance has occurred and management does not contemplate such an issuance in the near- term. The Company has two revolving line of credit arrangements that provide additional working capital financing of up to $65.0 million through March 1997. The Company's primary revolving line of credit arrangement, providing for borrowings of up to $35.0 million as of January 28, 1995, is with Shawmut Capital Corporation ("Shawmut" - formerly Barclays Business Credit, Inc). On March 31, 1995, Shawmut increased the amount available for borrowings under the line of credit to $50.0 million through March 1997, with 40% of the available line of credit provided for by Wells Fargo Bank, N.A., ("Wells Fargo") through a participation agreement. This new line of credit arrangement (collectively the "Shawmut line of credit") also provides for an increase in the amount available for borrowings to $60.0 million during the months of November and December of each year for seasonal inventory purchases. Borrowings under the Shawmut line of credit are limited to a restrictive borrowing base, which was in excess of $35.0 million at January 28, 1995. Interest on outstanding borrowings is to be paid monthly at a rate equal to LIBOR, as determined by Shawmut, plus 3.0% (9.1% at January 28, 1995) through March 31, 1995, and LIBOR plus 2.8% thereafter. At January 28, 1995, $2.8 million was outstanding under the line of credit arrangement with Shawmut. The arrangement with Shawmut originally required the Company to reduce outstanding indebtedness on the line of credit by $5.0 million on June 30, 1994 (extended to April 30, 1995). The Company repaid this amount, prior to its due date, in March 1995. The Shawmut arrangement also required the Company to repay all outstanding borrowings on the line of credit for thirty consecutive days during the period of December 1 to January 31 of each year. This requirement was shortened to seven consecutive days for fiscal 1994 and the Company met this requirement in January 1995. The line of credit arrangement with Shawmut, as amended on March 31, 1995, no longer contains such an annual repayment provision. The Company's revolving line of credit arrangement with Bank Hapoalim provides for additional borrowings of up to $15.0 million through March 1997. Borrowings under the line of credit are limited to a percentage of the outstanding principal balance of receivables underlying the Variable Base Certificate and therefore, are subject to any seasonal variations that may affect the outstanding principal balance of such receivables. Interest on outstanding borrowings on the line of credit is charged at a rate of LIBOR, as determined by the bank, plus 1.0%, not to exceed a maximum of 12.0% (6.8% at January 28, 1995). At January 28, 1995, $15.0 million was outstanding under the line of credit with Bank Hapoalim. The Company also has a short-term and a long-term loan facility with Wells Fargo. The short-term loan, originally due June 30, 1994 (extended to April 30, 1995), bears interest at a rate of 10 3/4% and had an outstanding balance of $1.6 million at January 28, 1995. The Company repaid the outstanding balance of the short-term obligation to Wells Fargo, prior to its maturity, in March 1995. The long-term loan, due June 1996, bears interest at a rate of 10 3/4% and had an outstanding balance of $18.2 million at January 28, 1995. Management expects to either refinance this obligation over a longer maturity period or replace it with another long-term financing arrangement in the near-term. The Company has continued its efforts to secure long-term financing to fund its store expansion program. In December 1994, the Company entered into a seven-year financing arrangement with Heller Financial, Inc. ("Heller") providing for the mortgage of the real property, furniture, fixtures and equipment located at the Company's department store in Hanford, California. Interest on the mortgage loan is charged at a rate of 10.45%. Proceeds from the arrangement, amounting to $6.7 million, were used to repay a portion of the short-term obligation with Wells Fargo, reduce outstanding borrowings on the Shawmut line of credit and pay certain costs associated with the financing arrangement. Certain of the Company's debt agreements contain various restrictive covenants including, but not limited to: restrictions on the payment of cash dividends, limitations of certain annual capital expenditures, maintenance of minimum quick, working capital, tangible net worth, total debt to tangible net worth and coverage ratios. In addition, the agreements require the maintenance of minimum adjusted earnings from operations and interest earned ratios and minimum inventory and payables turnover rates. Certain of the covenants applicable to the Shawmut line of credit were revised during 1994 and in March 1995 in connection with the finalization of the new Shawmut line of credit arrangement. Such revisions were primarily to provide for additional capital expenditures and inventory purchases required for the new stores opened in 1994 and new stores scheduled to be opened in 1995. Wells Fargo agreed to waive its rights with respect to violations of certain of the covenants applicable to its long-term loan facility arising out of the additional capital expenditures and inventory purchases through January 28, 1995, and revised the covenants in connection with the finalization of the new Shawmut line of credit arrangement. Accordingly, the Company classified the note payable to Wells Fargo with an outstanding balance of $18.2 million at January 28, 1995 as long-term in the accompanying financial statements. As of January 28, 1995, the Company was in compliance with, or had received waivers for violations of, all applicable restrictive loan covenants under its various debt agreements. The Company continued to expand in 1994, adding one new 194,400 square foot department store and a specialty store in Sacramento, California and one new 25,600 square foot junior satellite department store in Oakhurst, California. The Company's expansion program for 1995 includes a new 40,000 square foot department store in Auburn, California, a new 204,000 square foot department store in San Bernardino, California and a new 58,000 square foot department store in Carson City, Nevada, which were opened in early 1995. The Company also expects to open a new 113,000 square foot department store in Tracy, California, and a new 150,000 square foot department store in Visalia, California, as a replacement to an existing store at that location by the end of 1995. The estimated cost to open the new stores, net of amounts to be contributed by mall owners or developers of certain of the projects, is $3.4 million. Such costs are expected to be provided for from cash generated from operations or additional long-term financings. The Company continually investigates potential sites for new stores, and capital expenditure plans may change as opportunities for new stores develop. Management believes the previously described financing arrangements, combined with cash flows expected to be generated from operations, provides the Company with adequate funds for its short-term and long-term needs. Management believes its relations with banks and other credit sources are good. As part of the Company's long-term business strategy, management is continuing to evaluate additional alternative financing sources on an ongoing basis. Inflation The Company, as a result of inflation, experiences increases in the cost of certain of its merchandise, salaries, employee benefits and other general and administrative costs. As these costs have increased, the Company has generally been able to offset these increases by adjusting its selling prices or 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 using the department store price indexes 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 in 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 last half of each fiscal year, which includes the back-to-school and Christmas selling seasons. The following table sets forth unaudited quarterly results of operations for the years ended 1994 and 1993 (in thousands, except per share data). The Company's quarterly results of operations for 1993 reflects certain reclassifications to conform with 1994 presentation. (See Note 10 to the Consolidated Financial Statements.)
1994 Quarter ended April 30 July 30 October 29 January 28 Net sales $70,221 $80,515 $78,835 $134,032 Gross profit 22,185 24,929 26,687 42,379 Income (loss) before income tax expense (benefit) (3,778) (5,807) (859) 12,781 Net income (loss) (2,343) (3,983) (568) 8,410 Income (loss) per common share (.22) (.38) (.05) .81 1993 Quarter ended May 1 July 31 October 30 January 29 Net sales $65,833 $76,223 $75,747 $124,614 Gross profit 20,781 23,586 24,785 39,550 Income (loss) before income tax expense (benefit) (5,724) (3,857) (2,807) 8,525 Net income (loss) (3,606) (2,430) (1,768) 5,131 Income (loss) per common share (.35) (.23) (.17) .49
_________________________________ 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 Not applicable. 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 the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 22, 1995, to be filed pursuant to Regulation 14A. The following table lists the executive officers of the Company:
Name Age(1) Position Joseph W. Levy 63 Chairman and Chief Executive Officer Stephen J. Furst 52 President, Chief Operating Officer and Director Gary L. Gladding 55 Executive Vice President/ General Merchandise Manager Alan A. Weinstein 50 Senior Vice President and Chief Financial Officer Michael J. Schmidt 53 Senior Vice President/ Director of Stores
__________________________ (1) As of March 31, 1995 Joseph W. Levy became Chairman and Chief Executive Officer of the Company's predecessor and former subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk") in April 1982 and of the Company in March 1986. Mr. Levy was Executive Vice President from 1972 to April 1982 and first joined E. Gottschalk in 1956. He also serves on the Board of Directors of the National Retail Federation and Community Hospitals of Central California and the Executive Committee of Frederick Atkins, Inc. Mr. Levy was formerly Chairman of the California Transportation Commission and has served on numerous other state and local commissions and public service agencies. Steven J. Furst became Executive Vice President and Chief Operating Officer of the Company in July 1993 and President in November 1993. Mr. Furst was also elected a director of the Company in March 1994. He is the first non- family member to serve as the Company's President in its over 90 year history. From 1963 to 1993, he served in a variety of capacities with Hess's Department Store based in Allentown, Pennsylvania, including Chief Operating Officer and President. He also serves on the Board of Directors of the National Retail Federation and the Fresno Metropolitan Museum. Gary L. Gladding has been Executive Vice President of the Company since May 1987, and joined E. Gottschalk as Vice President/General Merchandise Manager in February 1983. From 1980 to February 1983, he was Vice President and General Merchandise Manager for Lazarus Department Stores, a division of Federated Department Stores, Inc., and he previously held merchandising manager positions with the May Department Stores Co. Alan A. Weinstein became Senior Vice President and Chief Financial Officer of the Company in June 1993. Prior to joining the Company, Mr. Weinstein, a Certified Public Accountant, was the Chief Financial Officer for The Wet Seal, Inc. based in Irvine, California for three years. From 1987 to 1989 he was Vice President and Chief Financial Officer of Wildlife Enterprises, Inc. Aside from his position with The Wet Seal, he has served general and specialty retailers in California, New York and Texas for over twenty-five years. Michael J. Schmidt became Senior Vice President/Director of Stores of E. Gottschalk in February 1985. Mr. Schmidt had been Manager of the Gottschalks Fashion Fair store since October 1983, and was General Manager of the Liberty House store in Fresno from January 1981 to October 1983. Before 1981, he held management positions with Allied Corporation and R.H. Macy & Co., Inc. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 22, 1995, to be filed pursuant to Regulation 14A. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 22, 1995, to be filed pursuant to Regulation 14A. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 22, 1995, to be filed pursuant to Regulation 14A. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Gottschalks Inc. and Subsidiaries are included in Item 8: Consolidated balance sheets -- January 28, 1995 and January 29, 1994 Consolidated statements of operations -- Fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 Consolidated statements of stockholders' equity -- Fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 Consolidated statements of cash flows -- Fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 Notes to consolidated financial statements - Three years ended January 28, 1995 Independent auditors' report (a)(2) The following financial statement schedule of Gottschalks Inc. and Subsidiaries is included in Item 14(d): Schedule VIII -- 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 the Regulation S-K and Item 14(c): Exhibit No. Description 3.1 Certificate of Incorporation of the Registrant, as amended. (1) 3.2 By-Laws of the Registrant, as amended. (2) 10.1 Agreement of Limited Partnership dated March 16, 1990, by and between River Park Properties I and Gottschalks Inc. relating to the Company's corporate headquarters. (2) 10.2 Loan Agreement dated December 1, 1985 by and between E. Gottschalk & Co., Inc. and City of San Luis Obispo relating to $5,500,000 City of San Luis Obispo Commercial Revenue Bonds. (2) 10.3 Employment Agreement dated February 1, 1986 by and between the Registrant and Joseph W. Levy. (3)(4) 10.4 Employment Agreement dated April 1, 1986 by and between E. Gottschalk & Co., Inc. and Gary L. Gladding. (3)(4) 10.5 1986 Employee Incentive Stock Option Plan with form of stock option agreement thereunder. (3)(4) 10.6 1986 Employee Nonqualified Stock Option Plan with form of stock option agreement thereunder. (3)(4) 10.7 Gottschalks Inc. Stock Purchase Plan. (3)(4) 10.8 Wage Continuation Agreement dated November 24, 1980 by and between E. Gottschalk & Co., Inc., and Gerald H. Blum. (3) (4) 10.9 Wage Continuation Agreement dated November 24, 1980 by and between E. Gottschalk & Co., Inc. and Joseph W. Levy. (3)(4) 10.10 Employment Agreement dated June 1, 1987 by and between E. Gottschalk & Co., Inc. and Michael J. Schmidt. (1) (4) 10.11 Participation Agreement dated as of December 1, 1988 among Gottschalks Inc., General Foods Credit Investors No. 2 Corporation and Manufacturers Hanover Trust Company of California relating to the sale-leaseback of the Stockton and Bakersfield Gottschalks department stores and the Madera distribution facility. (1) 10.12 Lease Agreement dated December 1, 1988 by and between Manufacturers Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of department stores in Stockton and Bakersfield, California and the Madera distribution facility. (1) 10.13 Ground Lease dated December 1, 1988 by and between Gottschalks Inc., and Manufacturers Hanover Trust Company of California relating to the sale- leaseback of the Bakersfield department store. (1) 10.14 Memorandum of Lease and Lease Supplement dated July 1, 1989 by and between Manufactures Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of the Stockton department store. (1) 10.15 Ground Lease dated August 17, 1989 by and between Gottschalks Inc. and Manufacturers Hanover Trust Company of California relating to the sale- leaseback of the Madera distribution facility. (1) 10.16 Lease Supplement dated as of August 17, 1989 by and between Manufacturers Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of the Madera distribution facility. (1) 10.17 Tax Indemnification Agreement dated as of August 1, 1989 by and between Gottschalks Inc. and General Foods Credit Investors No. 2 Corporation relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility. (1) 10.18 Lease Agreement dated as of March 16, 1990 by and between Gottschalks Inc. and River Park Properties I relating to the Company's corporate headquarters. (5) 10.19 Receivables Purchase Agreement dated as of March 30, 1994 by and between Gottschalks Credit Receivables Corporation and Gottschalks Inc. (6) 10.20 Pooling and Servicing Agreement dated as of March 30, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (6) 10.21 Amendment No. 1 to Pooling and Servicing Agreement dated as of September 16, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (7) 10.22 Amended and Restated Series 1994-1 Supplement to Pooling and Servicing Agreement dated as of September 16, 1994, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (7) 10.23 Loan and Security Agreement dated March 30, 1994 by and between Barclays Business Credit, Inc. and Gottschalks Inc. (6) 10.24 Intercreditor Agreement dated March 30, 1994 by and among Gottschalks Inc., Barclays Business Credit, Inc. and Wells Fargo Bank, National Association. (6) 10.25 Assignment and Acceptance by and between Wells Fargo Bank, National Association and Barclays Business Credit, Inc. (6) 10.26 First Amendment to Loan and Security Agreement dated May 12, 1994; Second Amendment to Loan and Security Agreement dated October 12, 1994 (7) and Third amendment to Loan and Security Agreement dated December 30, 1994 by and between Gottschalks Inc. and Barclays Business Credit, Inc. and Fourth Amendment to Loan and Security Agreement dated March 22, 1995 and Fifth Amendment to Loan and Security Agreement dated March 31, 1995, by and between Gottschalks Inc. and Shawmut Capital Corporation (formerly Barclays Business Credit, Inc.) 10.27 1994 Amended and Restated Credit Agreement dated as of March 30, 1994 by and between Gottschalks Inc. and Wells Fargo Bank, National Association. (6) 10.28 Second Amended and Restated Security Agreement dated as of August 26, 1993 by and between Gottschalks Inc. and Wells Fargo Bank, National Association. (10) 10.29 First Amendment to Second Amended and Restated Security Agreement dated as of March 30, 1994 by and between Gottschalks Inc. and Wells Fargo Bank, National Association. (6) 10.30 Waiver Agreement dated November 23, 1994, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (7) 10.31 First Amendment to 1994 Amended and Restated Credit Agreement dated August 26, 1994, by and between Gottschalks Inc. and Wells Fargo Bank, N.A. (7) 10.32 New Term Loan Maturity Date Extension dated November 15,1994, by and between Gottschalks Inc. and Wells Fargo Bank, N.A. (7) 10.33 Waiver Agreement dated October 21, 1994, by and between Gottschalks Inc. and Wells Fargo Bank, N.A. (7) 10.34 Consulting Agreement dated June 1, 1994 by and between Gottschalks Inc. and Gerald H. Blum. (4)(8) 10.35 Form of Severance Agreement dated March 31, 1995 by and between Gottschalks Inc. and the following senior executives of the Company: Joseph W. Levy, Stephen J. Furst, Gary L. Gladding, Michael J. Schmidt and Alan A. Weinstein. (4) 10.36 1994 Key Employee Incentive Stock Option Plan. (4)(9) 10.37 1994 Director Nonqualified Stock Option Plan. (4)(9) 10.38 1994 Executive Bonus Plan. (4) 10.39 Promissory Note and Security Agreement dated December 16, 1994 by and between Gottschalks Inc. and Heller Financial, Inc. 21. Subsidiaries of the Registrant. 23. Consent of Deloitte & Touche, LLP. 27. Financial Data Schedule. _______________________ (1) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100), and incorporated herein by reference. (2) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 1-09100), and incorporated herein by reference. (3) Filed as an exhibit to Registration Statement on Form S-1, (File No. 33- 3949), and incorporated herein by reference. (4) Management contract, compensatory plan or arrangement. (5) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 1, 1992 (File No. 1-09100), and incorporated herein by reference. (6) Filed as an exhibit to the Current Report on Form 8-K dated March 30, 1994 (File No. 1-09100), and incorporated herein by reference. (7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended October 29, 1994 (File No. 1-09100), and incorporated herein by reference. (8) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended April 30, 1994 (File No. 1-09100), and incorporated herein by reference. (9) Filed as exhibits to Registration Statements on Form S-8, (Files #33- 54783 and #33-54789), and incorporated herein by reference. (10) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended July 31, 1993 (File No. 1-9100) wherein it bore the same exhibit number, and incorporated herein by reference. _____________________ (b) Reports on Form 8-K--The Company did not file any Reports on Form 8-K during the fourth quarter of 1994. (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 SCHEDULES YEAR ENDED JANUARY 28, 1995 GOTTSCHALKS INC. AND SUBSIDIARIES 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 Subsidiaries as of January 28, 1995 and January 29, 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 28, 1995. 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 the 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 financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiaries as of January 28, 1995 and January 29, 1994, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 1995, 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. DELOITTE & TOUCHE, LLP s/Deloitte & Touche,LLP Fresno, California February 28, 1995 (March 31, 1995 as to Note 4)
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 28, January 29, ASSETS 1995 1994 CURRENT ASSETS: Cash $ 3,156 $ 1,213 Restricted cash 2,365 Receivables held for securitization and sale (Note 2) 40,000 Receivables: Trade accounts, less allowances of $1,297 in 1994 and $1,248 in 1993 (Note 2) 27,311 21,460 Vendor claims, less allowances of $98 in 1994 and $300 in 1993 3,125 3,976 30,436 25,436 Merchandise inventories 80,678 60,465 Refundable income taxes and deferred tax assets (Note 7) 1,565 4,212 Other 8,501 8,361 Total current assets 126,701 139,687 PROPERTY AND EQUIPMENT (Note 5): Land and land improvements 19,178 19,578 Buildings and leasehold improvements 50,223 48,743 Furniture, fixtures and equipment 44,981 44,581 Buildings and equipment under capital leases 14,399 15,513 Construction in progress 845 420 129,626 128,835 Less accumulated depreciation and amortization 35,817 32,439 93,809 96,396 OTHER ASSETS: Notes receivable 2,347 2,847 Goodwill, less accumulated amortization of $913 in 1994 and $796 in 1993 1,485 1,602 Other 9,011 7,798 12,843 12,247 $233,353 $248,330
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 28, January 29, LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 CURRENT LIABILITIES: Revolving lines of credit (Note 4) $ 17,844 $ 49,700 Bank overdraft 9,853 5,625 Trade accounts payable 25,179 13,226 Accrued expenses 16,417 14,713 Taxes, other than income taxes 7,487 6,995 Accrued payroll and related liabilities 5,267 5,013 Short-term obligation (Note 4) 1,600 Current portion of long-term obligations (Notes 4 and 5) 5,154 12,268 Total current liabilities 88,801 107,540 LONG-TERM OBLIGATIONS (less current portion) (Notes 4 and 5): Notes, mortgage and bonds payable 23,721 21,508 Capitalized lease obligations 9,951 9,985 33,672 31,493 DEFERRED INCOME TAXES (Note 7) 5,905 6,022 DEFERRED LEASE PAYMENTS AND OTHER (Note 5) 5,032 4,298 DEFERRED INCOME 16,366 16,859 COMMITMENTS AND CONTINGENCIES (Notes 3,5 and 9) STOCKHOLDERS' EQUITY (Notes 4 and 8): 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; 10,416,520 and 10,411,332 issued 104 104 Additional paid-in capital 56,112 56,021 Retained earnings 27,509 25,993 83,725 82,118 Less common stock in treasury, 22,000 shares at cost in 1994 (148) 83,577 82,118 $233,353 $248,330
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) 1994 1993 1992 Net sales $363,603 $342,417 $331,133 Service charges and other income 9,659 8,938 9,458 373,262 351,355 340,591 Costs and expenses (Notes 5 and 6): Cost of sales 247,423 233,715 226,319 Selling, general and administrative expenses 103,571 103,675 105,044 Depreciation and amortization 5,860 5,877 6,408 Interest expense (Note 4) 10,238 8,524 6,965 Provision for unusual items (Note 3) 3,833 3,427 7,852 370,925 355,218 352,588 Income (loss) before income tax expense (benefit) 2,337 (3,863) (11,997) Income tax expense (benefit)(Note 7) 821 (1,190) (4,006) Net income (loss) $ 1,516 $ (2,673) $ (7,991) Net income (loss) per common share $ .15 $ (.26) $ (.77)
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars, except share data) Additional Common Stock Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total BALANCE, FEBRUARY 1, 1992 10,407,527 $104 $55,959 $36,657 $92,720 Net loss (7,991) (7,991) Shares issued under stock option plan 4,000 29 29 Shares purchased and retired (770) (8) (8) Compensation expense related to stock option plan 118 118 Purchase of 35,000 shares of treasury stock $ (339) (339) BALANCE, JANUARY 30, 1993 10,410,757 104 56,098 28,666 (339) 84,529 Net loss (2,673) (2,673) Shares issued under stock option plan 1,500 10 10 Shares purchased and retired (925) (7) (7) Net compensation benefit related to stock option plan (43) (43) Purchase of 20,000 shares of treasury stock (166) (166) Contribution of 55,000 shares of treasury stock to Retirement Savings Plan (37) 505 468 BALANCE, JANUARY 29, 1994 10,411,332 104 56,021 25,993 0 82,118 Net income 1,516 1,516 Shares issued under stock option plan 13,500 94 94 Shares purchased and retired (8,312) (98) (98) Net compensation expense related to stock option plan 24 24 Purchase of 43,976 shares of treasury stock (303) (303) Contribution of 21,976 shares of treasury stock to Retirement Savings Plan 71 155 226 BALANCE, JANUARY 28, 1995 10,416,520 $104 $56,112 $27,509 $ (148) $83,577
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1994 1993 1992 OPERATING ACTIVITIES: Net income (loss) $ 1,516 $ (2,673) $ (7,991) Adjustments: Depreciation and amortization 5,849 5,876 6,372 Deferred income taxes 876 (236) (2,810) Deferred lease payments and other 734 619 372 Deferred income (493) (556) (494) Net compensation expense (credit) related to stock option plan 24 (43) 118 Provision for credit losses 2,052 2,164 2,557 LIFO (benefit) provision (3,202) 969 1,509 Equity in the (income) losses of limited partnership (160) 228 224 Net loss from sale of assets 7 37 7 Loss on securitization and sale of receivables (Note 2) 305 Changes in operating assets and liabilities: Receivables (excluding receivables sold - Note 2) (6,952) (5,248) (484) Merchandise inventories (16,384) (2,030) 3,165 Other current and long-term assets (35) (3,666) (1,882) Other current and long-term liabilities 14,326 1,944 1,305 Net cash provided by (used in) operating activities (1,537) (2,615) 1,968 INVESTING ACTIVITIES: Purchases of property and equipment (4,539) (5,456) (12,078) Proceeds from sale/leaseback arrangements and other property and equipment sales 1,881 13 1,359 Distribution from limited partnership 153 Net cash used in investing activities (2,505) (5,443) (10,719) FINANCING ACTIVITIES: Change in restricted cash (2,365) Changes in bank overdraft 4,228 1,774 3,851 Proceeds from securitization and sale of receivables (Note 2) 40,000 Proceeds from revolving lines of credit, short-term and long-term obligations 369,888 113,741 124,578 Principal payments on revolving lines of credit, short-term and long-term obligations (405,762) (107,353) (121,930) Issuance of common stock pursuant to stock option plan 94 10 29 Shares purchased and retired (98) (7) (8) Net cash provided by financing activities 5,985 8,165 6,520 INCREASE (DECREASE) IN CASH 1,943 107 (2,231) CASH AT BEGINNING OF YEAR 1,213 1,106 3,337 CASH AT END OF YEAR $ 3,156 $ 1,213 $ 1,106
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - The consolidated financial statements of Gottschalks Inc. and Subsidiaries (the "Company") include the accounts of Gottschalks Inc., its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC" - Note 2), and Gottschalks Credit Card Master Trust ("GCC Trust" - Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year - The Company's fiscal year ends on the Saturday nearest January 31. Fiscal years 1994, 1993 and 1992 ended on January 28, 1995, January 29, 1994 and January 30, 1993, respectively. Each of the three years contained 52 weeks. Restricted Cash - Restricted cash at January 28, 1995 relates to the receivables securitization program (Note 2) and consists of $2,120,000 designated under the prepayment option to reduce outstanding borrowings on the Variable Base Certificate subsequent to January 28, 1995 and $245,000 for the payment of monthly interest to the holders of Fixed Base Certificates. There was no restricted cash at January 29, 1994. Receivables Held for Securitization and Sale - Certain of the Company's customer credit card receivables were securitized and sold on March 30, 1994 (Note 2). Such receivables were classified as held for securitization and sale at January 29, 1994 and reported at the lower of aggregate cost or market value. Receivables - Receivables, excluding receivables sold as of January 28, 1995 and receivables held for securitization and sale as of January 29, 1994, consist primarily of customer credit card receivables and represent the Company's retained interest in receivables sold in connection with the receivables securitization program, receivables underlying the Variable Base Certificate and certain other receivables (Note 2). Such amounts include revolving charge accounts with terms which, in some cases, provide for payments exceeding one year. In accordance with usual industry practice such receivables are included in current assets. Service charge revenues associated with the Company's customer credit cards were $8,904,000, $8,100,000 and $8,578,000 in 1994, 1993 and 1992, respectively. The Company maintains reserves for possible credit losses based on the expected collectibility of all receivables, including receivables sold, and such losses have consistently been within management's expectations. Concentrations of Credit Risk - The Company has thirty-two department stores and twenty-four specialty stores with locations throughout California and in Washington, Oregon and Nevada. 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 was equal to the LIFO value of inventories at January 28, 1995 and exceeded the LIFO value of inventories by $3,202,000 at January 29, 1994. 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 - Store pre-opening costs represent certain expenditures incurred prior to the opening of new stores that are deferred and amortized generally on a straight-line basis not to exceed a twelve month period commencing with the store opening. Store pre- opening costs, net of accumulated amortization, of $724,000 at January 28, 1995 and $31,000 at January 29, 1994 are included in other current assets. 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, land improvements and leasehold improvements and 3 to 15 years for furniture, fixtures and equipment. Amortization of buildings and equipment under capital leases is computed by the straight-line method over the life of the lease and is combined with depreciation in the consolidated statements of operations. Notes Receivable - Notes receivable consist primarily of amounts due from the sale of land and buildings by the Company. The notes are collateralized by a first or second priority interest in the property sold, bear interest at rates ranging from 9.0% to 12.0% and have maturity dates ranging from October 1995 through June 1999. Investment in Limited Partnership - The Company is the limited partner in a partnership that was formed for the purpose of acquiring the land and constructing and maintaining the building in which the Company's corporate headquarters are located. The Company made an initial capital contribution of $5,000,000 to acquire a 36% ownership interest in the partnership and receives favorable rental terms for the space occupied in the building. Of the initial $5,000,000 capital contribution, $1,413,000 was allocated to the investment in limited partnership based on the estimated fair market value of the land and building and the remaining $3,587,000 was allocated to prepaid rent and is being amortized to rent expense over the 20 year lease term. The Company accounts for its investment in the limited partnership on the equity method of accounting. As of January 28, 1995 and January 29, 1994, the investment was $968,000 and $961,000, respectively, and prepaid rent, net of accumulated amortization, was $2,756,000 and $3,005,000, respectively. Such amounts are included in other long-term assets. The Company's equity in the income of the partnership was $160,000 in 1994. The Company's equity in the losses of the partnership was $228,000 in 1993 and $224,000 in 1992. Such amounts are included in service charges and other income. Goodwill - The excess of acquisition costs over the fair value of the net assets acquired is amortized on a straight-line basis over 20 years. Deferred Income - Deferred income consists primarily of donated land and cash received as incentive to construct new stores. Land contributed to the Company is included in land and recorded at appraised fair market values. Contributed land and cash is recorded as deferred income and amortized to income over the average depreciable life of the related fixed assets built on the land with respect to locations that are owned by the Company, and over the terms of the related building leases with respect to locations that are leased by the Company, ranging from 32 to 70 years. No contributions of land or cash were received in 1994. Contributed land with an appraised fair market value of $1,015,000 was received in 1993. Leased Department Sales - Net sales include leased department sales of $25,985,000, $25,324,000 and $23,424,000 in 1994, 1993 and 1992, respectively. Cost of sales include related costs of $22,326,000, $21,825,000 and $20,061,000 in 1994, 1993 and 1992, respectively. Income Taxes - The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 generally requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities and net operating loss and tax credit carryforwards, using enacted tax rates in effect when the differences are expected to reverse. Net Income (Loss) Per Common Share - Net income (loss) per common share is computed based on the weighted average number of common shares and common stock equivalents outstanding (if dilutive) which were 10,413,339, 10,377,201 and 10,410,162 in 1994, 1993 and 1992, respectively. The effect of common stock equivalents under the stock option plans were antidilutive in 1994, 1993 and 1992, and therefore not included. Non-Cash Transactions - The Company entered into a capital lease obligation of $683,000 in 1994 for leased equipment. The Company received a donation of land with an appraised fair market value of $1,015,000 in 1993 as incentive to construct a new store. Fair Value of Financial Instruments - Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of financial instruments. The carrying value of the Company's cash (including restricted cash and bank overdraft), receivables, trade payables and other accrued expenses, revolving lines of credit, short-term borrowings and stand-by letters of credit approximate their estimated fair values because of the short maturities of those instruments. The fair value of the Company's notes receivable are based on discounted cash flows. The fair value of the Company's notes, mortgage loan and bonds payable is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of the Company's notes receivable with an aggregate carrying value of $2,347,000 at January 28, 1995 is $1,789,000. The estimated fair value of the Company's notes, mortgage loan and bonds payable with an aggregate carrying value of $28,183,000 at January 28, 1995 is $28,434,000. Reclassifications - Certain amounts in the accompanying 1993 and 1992 consolidated financial statements have been reclassified to conform with the 1994 presentation. 2. SECURITIZATION AND SALE OF RECEIVABLES The Company entered into an asset-backed securitization program on March 30, 1994. Under the program, all accounts receivable arising under the Company's private label customer credit cards, together with rights to all collections and recoveries on such receivables, are automatically sold, without recourse, to a wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") and certain of those receivables are subsequently conveyed to a trust, Gottschalks Credit Card Master Trust ("GCC Trust"). The Company services and administers the receivables in return for a monthly servicing fee. On March 30, 1994, GCC Trust sold, at par value, undivided ownership interests in certain of the receivables through the issuance of $40,000,000 principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates ("Fixed Base Certificates") to third-party investors. On March 30, 1994, GCC Trust also issued a Subordinated Certificate in the amount of $7,620,000, and an Exchangeable Certificate in the amount of $4,640,000 to GCRC, representing GCRC's retained interest in the receivables as of that date. The outstanding principal balance of the Subordinated Certificate and the Exchangeable Certificate, totalling $7,619,000 and $269,000 at January 28, 1995, respectively, fluctuates depending on the level of the underlying receivables. Interest on the Fixed Base Certificates is payable on a monthly basis and the outstanding principal balance is to be repaid in equal monthly installments commencing September 1998 through September 1999, through the application of credit card receivable principal collections during that period. The Company used the $40,000,000 proceeds from the initial securitization and sale of the receivables to repay all outstanding borrowings under a pre-existing line of credit and long-term credit facility (Note 4) and to pay certain costs related to the securitization transaction. Such proceeds are reported as cash flows from financing activities during the year ended January 28, 1995 in the accompanying statement of cash flows. The Company recognized a loss of $305,000 in connection with the initial securitization and sale of these receivables, representing transaction costs in excess of the excess servicing retained by the Company related to the Fixed Base Certificates. The excess servicing asset related to the Fixed Base Certificates is amortized over the life of the related transaction. Under the terms of the program, the Company sold additional newly- generated receivables to GCRC subsequent to March 30, 1994 and through January 28, 1995, and certain of those receivables were subsequently conveyed to GCC Trust. Aggregate proceeds from such sales, totalling $146,000,000, were used to fund the working capital requirements of the Company and are reported, net of repayments received, as cash flows from operating activities during the year ended January 28, 1995 in the accompanying statement of cash flows. On September 16, 1994, GCC Trust also issued a Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate") in the principal amount of up to $15,000,000 from GCC Trust to Bank Hapoalim. The Variable Base Certificate, representing certain receivables held by GCC Trust, excluding receivables underlying the Fixed Base Certificates and GCRC's retained interest, was issued as collateral for a revolving line of credit financing arrangement with Bank Hapoalim (Note 4). Receivables underlying the Variable Base Certificate totalled $17,857,000 at January 28, 1995. The Company has a prepayment option which enables it, at any time within three days notice, to prepay the Variable Base Certificate. Accordingly, the issuance of the Variable Base Certificate was accounted for as a financing in the accompanying financial statements. In addition to the Fixed and Variable Base Certificates, GCRC may, upon the satisfaction of certain conditions, offer additional series of certificates to be issued by GCC Trust. As of January 28, 1995, no such issuance has occurred. 3. PROVISION FOR UNUSUAL ITEMS The Company was the subject of a government investigation related to an employee benefit plan deduction (the "Income Tax Deduction") of $3,674,000 on its 1985 federal tax return and certain of its financial reporting practices. In July 1992, the Company pled guilty to certain criminal charges and paid fines totalling $1,500,000 to settle all federal criminal charges relating to the Income Tax Deduction and certain reports and registration statements filed by the Company with the Securities and Exchange Commission. In April 1994, the Company reached an agreement with the Commissioner of the Internal Revenue to settle all pending federal civil matters related to the Income Tax Deduction. Pursuant to the terms of the agreement, the Income Tax Deduction on the Company's 1985 federal tax return was disallowed. Such deduction was, however, allowed in subsequent years. In connection with the agreement, the Company paid a tax deficiency, interest and penalties totalling $2,282,000. The previously described amounts are included in the 1993 and 1992 consolidated statements of operations. The Company was party to three civil stockholder lawsuits related to the Income Tax Deduction and the Company's financial reporting practices and guilty pleas. In August 1994, the Company reached an agreement to settle all aspects of those lawsuits. The Company received final judicial approval of the terms of the settlement on February 1, 1995, and pursuant to the terms of the settlement, the Company funded $3,000,000 into an irrevocable trust on that date. The cost of the stockholder lawsuit settlement is included in the provision for unusual items in the 1994 consolidated statement of operations. The Company is also party to an unrelated lawsuit filed in 1992 against the Company by F&N Acquisition Corporation ("F&N") under which F&N seeks damages arising out of the Company's alleged breach of an oral agreement to purchase an assignment of a lease of a former Frederick and Nelson store location in Spokane, Washington. In addition, F&N is seeking an unspecified sum for its rejection of the next best offer to purchase the assignment of the lease. In 1992, F&N obtained a partial summary judgement against the Company under which the Company was ordered to pay F&N damages of $3,000,000 plus accrued interest from the date of the judgement. The partial summary judgement was reversed on November 21, 1994 and the matter was remanded to the Bankruptcy Court for further proceedings. Management's estimate of amounts that may be ultimately payable to F&N are included in the provision for unusual items in the 1993 and 1992 consolidated statements of operations. The Company is continuing to pursue the matter vigorously. Unusual items included in the Company's consolidated statements of operations of $3,833,000 in 1994, $3,427,000 in 1993 and $7,852,000 in 1992, respectively, represents total costs, including legal and accounting fees and other costs, incurred with respect to the previously described matters. Management does not anticipate that any additional costs related to these matters that may be incurred will be material to the operating results of the Company. 4. DEBT The Company has two revolving line of credit arrangements providing for total borrowings of up to $65,000,000 through March 1997. The Company's primary revolving line of credit arrangement, providing for borrowings of up to $35,000,000 as of January 28, 1995, is with Shawmut Capital Corporation ("Shawmut" - formerly Barclays Business Credit, Inc). On March 31, 1995, Shawmut increased the amount available for borrowings under the line of credit to $50,000,000 through March 1997, with 40% of the available line of credit provided for by Wells Fargo Bank, N.A., ("Wells Fargo") through a participation agreement. This new line of credit arrangement (collectively the "Shawmut line of credit") also provides for an increase in the amount available for borrowings to $60,000,000 during the months of November and December of each year for seasonal inventory purchases. Borrowings under the Shawmut line of credit are limited to a restrictive borrowing base, which was in excess of $35,000,000 at January 28, 1995. Interest on outstanding borrowings is to be paid monthly at a rate equal to LIBOR, as determined by Shawmut, plus 3.0% (9.1% at January 28, 1995) through March 31, 1995, and LIBOR plus 2.8% thereafter. At January 28, 1995, $2,844,000 was outstanding under the line of credit arrangement with Shawmut. The arrangement with Shawmut originally required the Company to reduce outstanding indebtedness on the line of credit by $5.0 million on June 30, 1994 (extended to April 30, 1995). The Company repaid this amount, prior to its due date, in March 1995. The Shawmut arrangement also required the Company to repay all outstanding borrowings on the line of credit for thirty consecutive days during the period of December 1 to January 31 of each year. This requirement was shortened to seven consecutive days for fiscal 1994 and the Company met this requirement in January 1995. The line of credit arrangement with Shawmut, as amended on March 31, 1995, no longer contains such an annual repayment provision. The Company's revolving line of credit arrangement with Bank Hapoalim (Note 2) provides for additional borrowings of up to $15,000,000 through March 1997. Borrowings under the line of credit are limited to a percentage of the outstanding principal balance of receivables underlying the Variable Base Certificate and therefore, are subject to any seasonal variations that may affect the outstanding principal balance of such receivables. Interest on outstanding borrowings on the line of credit is charged at a rate of LIBOR, as determined by the bank, plus 1.0%, not to exceed a maximum of 12.0% (6.8% at January 28, 1995). At January 28, 1995, $15,000,000 was outstanding under the line of credit with Bank Hapoalim. The weighted-average interest rate charged on the Company's various revolving line of credit arrangements was 7.1% in 1994, 6.5% in 1993 and 5.8% in 1992. The Company also has a short-term loan facility with Wells Fargo with an outstanding balance of $1,600,000 at January 28, 1995. The short-term loan, originally due June 30, 1994, was extended to April 30, 1995, and bears interest at a rate of 10 3/4%. The Company repaid the outstanding balance of the short-term obligation to Wells Fargo, prior to its maturity, in March 1995. Notes, mortgage and bonds payable consist of the following:
January 28, January 29, (In thousands of dollars) 1995 1994 Note payable to bank, payable in monthly installments of $193 including interest at a rate 10 3/4%, principal due and payable June 30, 1996; collateralized by certain real property, assets and certain property and equipment $18,200 $18,644 Mortgage loan payable to financial institution, payable in monthly principal installments of $79 plus interest at a rate of 10.45%, principal due and payable January 1, 2002; collateralized by certain real property, assets and certain property and equipment 6,650 Notes payable to financial institution, repaid in March 1994 10,633 Commercial Revenue Bonds, payable in monthly installments of $57 including interest at 8.55%, principal due December 1, 1995; collateralized by land and building 3,055 3,443 Other 278 439 28,183 33,159 Less current portion 4,462 11,651 $23,721 $21,508
In December 1994, the Company entered into a mortgage loan financing arrangement with Heller Financial, Inc. ("Heller"), collateralized by the real property, furniture, fixtures and equipment located at the Company's department store in Hanford, California. Proceeds from the arrangement, amounting to $6,650,000, were used to repay a portion of the short-term obligation with Wells Fargo, reduce outstanding borrowings on the Shawmut line of credit and pay certain costs associated with the financing arrangement. The notes payable to financial institution with an outstanding balance of $10,633,000 at January 29, 1994, were paid off by the Company in March 1994 with proceeds from the previously described securitization and sale of certain of the Company's customer credit card receivables (Note 2). The Commercial Revenue Bonds refer to City of San Luis Obispo Commercial Revenue Bonds, (E. Gottschalks & Co., Inc. Project) 1985 Series issued by the City of San Luis Obispo on December 1, 1985. The Company entered into a loan agreement with the City whereby the proceeds of the Bonds were used to finance the construction of the San Luis Obispo store. The scheduled annual principal maturities on all notes, mortgage loan and bonds payable are $4,462,000, $18,971,000, $950,000, $950,000 and $950,000 for 1995 through 1999, respectively. Debt issuance costs related to the Company's various financing arrangements are included in other current and long-term assets and deferred and charged to operations as additional interest expense on a straight-line basis over the life of the related indebtedness. Deferred debt issuance costs, net of accumulated amortization, amounted to $1,757,000 at January 28, 1995 and $1,441,000 at January 29, 1994. Interest paid, net of amounts capitalized, was $8,608,000, $9,197,000 and $6,151,000 in 1994, 1993 and 1992, respectively. Capitalized interest expense was $68,000, $46,000 and $97,000 in 1994, 1993 and 1992, respectively. Certain of the Company's debt agreements contain various restrictive covenants including, but not limited to: restrictions on the payment of cash dividends, limitations of certain annual capital expenditures, maintenance of minimum quick, working capital, tangible net worth, total debt to tangible net worth and coverage ratios. In addition, certain of the agreements require the maintenance of minimum adjusted earnings from operations and interest earned ratios and minimum inventory and payables turnover rates. Certain of the covenants applicable to the Shawmut line of credit were revised during 1994 and in March 1995 in connection with the finalization of the new Shawmut line of credit arrangement. Such revisions were primarily to provide for additional capital expenditures and inventory purchases required for the new stores opened in 1994 and scheduled to be opened in 1995. Wells Fargo agreed to waive its rights with respect to violations of certain of the covenants applicable to its long-term loan facility arising out of the additional capital expenditures and inventory purchases through January 28, 1995, and revised the covenants in connection with the finalization of the new Shawmut line of credit arrangement. Accordingly, the Company classified the note payable to Wells Fargo with an outstanding balance of $18,200,000 at January 28, 1995 as long-term in the accompanying financial statements. As of January 28, 1995, the Company was in compliance with, or had received waivers for violations of, all applicable restrictive loan covenants under its various debt agreements. 5. LEASES The Company leases certain retail department stores under capital leases that expire in various years through 2020. The Company also leases certain retail department stores, specialty stores, land, furniture, fixtures and equipment under noncancellable operating leases that expire in various years through 2027. Certain of the leases provide for the payment of additional contingent rentals based on a percentage of sales in excess of specified minimum levels, 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. Certain of the Company's leases also 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 expense charged to operations and amounts payable under the leases as deferred lease payments. Deferred lease payments were $4,688,000 at January 28, 1995 and $4,157,000 at January 29, 1994. Future minimum lease payments by year and in the aggregate, under capital leases and noncancellable operating leases with initial or remaining terms of one year or more consist of the following at January 28, 1995:
Capital Leases Operating (In thousands of dollars) Buildings Equipment Leases 1995 $ 1,430 $303 $ 10,342 1996 1,430 273 10,293 1997 1,430 204 9,505 1998 1,430 9,294 1999 1,430 10,714 Thereafter 12,292 105,046 Total minimum lease payments 19,442 780 $155,194 Amount representing interest (9,457) (122) Present value of minimum lease payments 9,985 658 Less current portion (459) (233) $ 9,526 $425
Rental expense consists of the following:
(In thousands of dollars) 1994 1993 1992 Operating leases: Buildings: Minimum rentals $ 7,804 $ 7,472 $ 7,182 Contingent rentals 1,142 1,118 1,154 Fixtures and equipment 3,177 2,893 2,613 12,123 11,483 10,949 Contingent rentals on capital leases 605 581 743 $12,728 $12,064 $11,692
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 28, 1995. 6. 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. Under the Plan, employees may elect to have up to 10% of their annual eligible compensation, subject to certain limitations, deferred and deposited with a qualified trustee. The Company, at the discretion of the Board of Directors, may elect to make an annual discretionary contribution to the Plan of up to 2% of each participant's annual eligible compensation, subject to certain limitations. Participants are immediately vested in their voluntary contributions to the Plan and are 100% vested (25% per year) in the Company's matching contribution to the Plan after four years of continuous service. The Company recognized $250,000, $271,000 and $471,000 in expense representing the Company's annual discretionary contribution to the Plan in 1994, 1993 and 1992. A Voluntary Employee Beneficiary Association (VEBA) trust has been established by the Company for the purpose of funding employee vacation benefits. The Company paid such benefits on behalf of the VEBA in 1993 and 1992 and did not fund the VEBA during those years. The Company resumed funding the VEBA in 1994. 7. INCOME TAXES The components of income tax expense (benefit) are as follows:
(In thousands of dollars) 1994 1993 1992 Current: Federal $ (19) $ (955) $(1,198) State (36) 1 2 (55) (954) (1,196) Deferred: Federal 555 (130) (2,105) State 321 (106) (705) 876 (236) (2,810) $ 821 $(1,190) $(4,006)
The principal sources of temporary differences and the related tax effect of each which increase (reduce) deferred taxes in determining the provision (benefit) for income taxes are as follows:
(In thousands of dollars) 1994 1993 1992 Net operating loss carryforwards $ 572 $(2,532) $(1,752) Accrued litigation costs (766) (984) (980) General business credit carryforwards (748) (439) (310) LIFO inventory reserve 792 195 (54) Accounting for leases 378 207 688 Store pre-opening costs 300 (92) 8 Deferred income 200 635 147 Depreciation 179 683 922 Workers' compensation 104 788 (664) State income taxes (88) 474 (90) Accrued employee benefits (87) 347 (158) Alternative minimum tax credit carryforwards (30) 660 122 Other items, net 70 (178) (689) $ 876 $ (236) $(2,810)
The principal components of deferred tax assets and liabilities (in thousands of dollars) are as follows:
January 28, January 29, 1995 1994 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Accrued litigation costs $ 2,730 $ 1,964 Vacation and health claims 880 872 Credit losses 562 532 Accrued employee benefits 260 173 State income taxes 296 208 LIFO inventory reserve $ (2,592) $ (1,800) Workers' compensation (228) (124) Supplies inventory (872) (874) Other items, net 291 (1,317) 1,023 (973) 5,019 (5,009) 4,772 (3,771) Long-Term: Net operating loss carryforwards 3,811 4,383 General business credits 1,989 1,241 Alternative minimum tax 654 624 Depreciation expense (8,155) (7,975) Accounting for leases 558 (3,473) 463 (3,265) Deferred income (1,335) (1,135) Installment sales (521) (607) Other items, net 665 (98) 485 (236) 7,677 (13,582) 7,196 (13,218) $12,696 $(18,591) $11,968 $(16,989)
Income tax expense (benefit) varies from the amount computed by applying the statutory federal income tax rate to the income (loss) before income taxes. The reasons for this difference are as follows:
1994 1993 1992 Statutory rate 35.0% (35.0)% (34.0)% Nondeductible penalties 3.7 6.9 Refunds for amended returns (5.7) Adjustments to previously filed amended returns 7.3 Amortization of goodwill 1.7 1.0 .3 Targeted jobs tax credit (12.5) State income taxes, net of federal income tax benefit 7.3 ( 2.0) ( 3.4) Other items, net ( 3.7) 1.5 2.5 Effective rate 35.1% (30.8)% (33.4)%
The Company received income tax refunds, net of payments, of $1,670,000 and $921,000 in 1994 and 1993. Income tax refunds receivable were $1,555,000 at January 28, 1995 and $3,211,000 at January 29, 1994. At January 28, 1995, the Company has net operating loss carryforwards of $9,207,000 which expire in the years 2008 and 2009, and general business credits of $1,300,000 which expire in the years 2005 through 2010. The Company also has alternative minimum tax credits of $521,000 which may be used for an indefinite period. These carryforwards are available to offset future taxable income and are expected to be fully utilized. 8. STOCK OPTION PLANS In 1986, the Company adopted an Employee Incentive Stock Option Plan (the "1986 ISO Plan") and an Employee Nonqualified Stock Option Plan (the "1986 Nonqualified Plan"). The 1986 ISO Plan provided for the grant of options to three key officers of the Company to purchase up to 160,000 shares of the Company's common stock at a price equal to 100% or 110% of the market value of the common stock on the date of grant. All options under the ISO Plan must be exercised within five years of the date of grant. The 1986 Nonqualified Plan provided for the grant of options to purchase up to 510,000 shares of the Company's common stock to certain officers and key employees of the Company. Options granted under this plan generally become exercisable at a rate of 25% per year beginning on or one year after the grant date. The options are exercisable on a cumulative basis and expire no later than four or five years from the date of grant. The Company recognized compensation expense related to this plan, net of credits resulting from the forfeiture of certain of the options, of $24,000 in 1994 and $118,000 in 1992. The Company recognized a net credit to compensation expense related to this plan of $43,000 in 1993. On March 18, 1994, the Company adopted the 1994 Key Employee Incentive Stock Option Plan (the "1994 ISO Plan") and the 1994 Director Nonqualified Stock Option Plan (the "1994 Director Nonqualified Plan"). The 1994 ISO Plan provides for the grant of options to purchase up to 500,000 shares of the Company's common stock to certain officers and key employees of the Company. Options granted under this plan may not be granted at less than 100% of the fair market value of such shares on the date the option is granted and become exercisable at a rate of 25% per year beginning one year after the date of the grant. The options are exercisable on a cumulative basis and expire no later than ten years after the date of the grant. The 1994 Director Nonqualified Plan provides for the grant of options to purchase up to 50,000 shares of the Company's common stock to the non- employee, non-affiliated directors of the Company. Options granted under this plan shall be granted at the fair market value of such shares on the date the option is granted and become exercisable at a rate of 25% per year beginning one year after the date of the grant. The options are exercisable on a cumulative basis and expire no later than ten years after the date of the grant. A summary of stock option activity related to the Company's stock option plans follows:
1986 1986 1986 Plans: Nonqualified Plan ISO Plan Shares Option Price Shares Option Price Outstanding at February 1, 1992 216,500 $4.00 to $14.00 81,800 $10.73 to $15.54 Granted 25,000 $ 7.00 Exercised (4,000) $4.00 to $14.00 Cancelled (31,000) $7.00 to $14.00 (15,810) $12.65 Outstanding at January 30, 1993 206,500 $7.00 to $14.00 65,990 $10.73 to $15.54 Granted 40,000 $ 9.88 Exercised (1,500) $ 7.00 Cancelled (55,000) $7.00 to $14.00 (25,744) $15.54 Outstanding at January 29, 1994 190,000 $7.00 to $14.00 40,246 $10.73 Granted Exercised (13,500) $ 7.00 Cancelled (17,000) $7.00 to $14.00 Outstanding at January 28, 1995 159,500 $9.88 and $14.00 40,246 $10.73 Balances as of January 28, 1995: Exercisable 139,500 $9.88 and $14.00 40,246 $10.73 Available for Future Grants --- --- 1994 1994 1994 Plans: ISO Plan Director Nonqualified Plan Shares Option Price Shares Option Price Outstanding at January 29, 1994 --- --- Granted 449,000 $9.88 to $10.87 20,000 $ 9.75 Cancelled (5,000) Outstanding at January 28, 1995 444,000 $9.88 to $10.87 20,000 $ 9.75 Balances as of January 28, 1995: Exercisable --- $9.88 to $10.87 --- $ 9.75 Available for Future Grants 56,000 30,000
9. COMMITMENTS AND CONTINGENCIES In connection with the previously described lawsuit filed against the Company by F&N (Note 3), an additional complaint was filed against the Company by Sabey Corporation ("Sabey"), the owner of the mall in which the Frederick & Nelson store was located. The complaint seeks damages suffered by the mall due to the Company's failure to purchase and assume the Frederick & Nelson store lease. In April 1994, an agreement was signed by all parties involved in the F&N (Note 3) and Sabey lawsuits providing for the consolidation of the cases. Management believes the ultimate outcome of these cases, as consolidated, will not have a material adverse effect on the financial condition or results of operation of the Company. The Company arranges for the issue of letters of credit in the ordinary course of business pursuant to the terms of certain vendor contracts. As of January 28, 1995, the Company had outstanding letters of credit amounting to $4,945,000. Management believes the likelihood of non- performance under such contracts is remote. The Company opened three new stores in early 1995, and expects to open two additional stores in fiscal 1995. The estimated cost to open the new stores, net of amounts to be contributed by mall owners or developers of certain of the projects, is approximately $3,400,000. In addition to these matters and the matters discussed in Note 3 to the consolidated financial statements, 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 will not have a material adverse effect on the Company's financial position or results of its operations. 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The Company's unaudited quarterly results of operations for 1993 reflects certain reclassifications to conform with 1994 presentation. The following is a summary of the unaudited quarterly results of operations for 1994 and 1993 (in thousands, except per share data):
1994 Quarter Ended April 30 July 30 October 29 January 28 Net sales $70,221 $80,515 $78,835 $134,032 Gross profit 22,185 24,929 26,687 42,379 Income (loss) before income tax expense (benefit) (3,778) (5,807) (859) 12,781 Net income (loss) (2,343) (3,983) (568) 8,410 Net income (loss) per common share (.22) (.38) (.05) .81 1993 Quarter Ended May 1 July 31 October 30 January 29 Net sales $65,833 $76,223 $75,747 $124,614 Gross profit 20,781 23,586 24,785 39,550 Income (loss) before income tax expense (benefit) (5,724) (3,857) (2,807) 8,525 Net income (loss) (3,606) (2,430) (1,768) 5,131 Net income (loss) per common share (.35) (.23) (.17) .49
The Company's quarterly results of operations for the three month period ended January 28, 1995 includes the following significant adjustments: (1) LIFO inventory reserve adjustment resulting in an increase to the gross margin of $3,202,000, (2) inventory shrinkage reserve adjustment resulting in an increase to the gross margin of $914,000 and (3) a decrease to workers' compensation reserves of $588,000. The Company's quarterly results of operations for the three month period ended January 29, 1994 includes the following significant adjustments: (1) LIFO inventory reserve adjustment resulting in a reduction to the gross margin of $969,000, (2) a charge to unusual items (Note 3) of $671,000 and (3) a decrease to workers' compensation and health insurance reserves of $869,000. **********
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS GOTTSCHALKS INC. AND SUBSIDIARIES _____________________________________________________________________________ COL. A COL. B COL. C COL. D COL. E COL. F _____________________________________________________________________________ Description ADDITIONS Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of of Period Expenses Describe Describe Period Year ended January 28, 1995: Deducted from asset accounts: Allowance for doubtful accounts. $1,248,421 $2,054,562 (1) $2,005,752(2) $1,297,231 Allowance for vendor claims receivable $ 300,000 $ (202,000)(5) $ 98,000 Allowance for notes receivable.$ 50,000 $ 100,000 (4) $ 150,000 Year ended January 29, 1994: Deducted from asset accounts: Allowance for doubtful accounts. $1,233,231 $2,188,626 (1) $2,173,436(2) $1,248,421 Allowance for vendor claims receivable.$ 325,000 $ (25,000)(5) $ 300,000 Allowance for notes receivable.$ 50,000 $ 50,000 Year ended January 30, 1993: Deducted from asset accounts: Allowance for doubtful accounts.. $1,300,000 $2,459,334 (1) $2,526,103(2) $1,233,231 Allowance for vendor claims receivable $ 276,746 $ 48,254 (3) $ 325,000 Allowance for notes receivable.$ 0 $ 50,000 (4) $ 50,000
Notes: (1) Provision for loss on credit sales. (2) Uncollectible accounts written off, net of recoveries. (3) Provision for uncollectible vendor claims receivable. (4) Provision for uncollectible portion of note receivable. (5) Reduction in provision for uncollectible vendor claims receivable. 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 27, 1995 GOTTSCHALKS INC. By: s/Joseph W. Levy Joseph W. Levy Chairman 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 Chairman and Chief Executive Officer (principal executive s/Joseph W. Levy officer) April 27, 1995 Joseph W. Levy Vice Chairman of s/Gerald H. Blum the Board April 27, 1995 Gerald H. Blum President, Chief s/Stephen J. Furst Operating Officer April 27, 1995 Stephen J. Furst and Director Senior Vice President and Chief Financial s/Alan A. Weinstein Officer (principal April 27, 1995 Alan A. Weinstein financial and accounting officer) s/O. James Woodward III Director April 27, 1995 O. James Woodward III s/Bret W. Levy Director April 27, 1995 Bret W. Levy s/Sharon Levy Director April 27, 1995 Sharon Levy s/Joseph J. Penbera Director April 27, 1995 Joseph J. Penbera s/Fred Ruiz Director April 27, 1995 Fred Ruiz s/Max Gutmann Director April 27, 1995 Max Gutmann EX-10.26 2 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment") is entered into as of May 12, 1994 by and between BARCLAYS BUSINESS CREDIT, INC., a Connecticut corporation ("Lender"), and GOTTSCHALKS INC., a Delaware corporation ("Borrower"), with reference to the following facts: RECITALS A. Lender and Borrower are parties to that certain Loan and Security Agreement, dated as of March 30, 1994, pursuant to which Lender agreed to provide certain financial accommodations to Borrower on the terms and conditions set forth therein (said Loan and Security Agreement, together with all exhibits and schedules thereto, is hereinafter referred to as the "Loan Agreement"). B. Lender and Borrower desire to amend certain aspects of their financing arrangements under the Loan Agreement. AGREEMENT NOW THEREFORE, in consideration of the foregoing and the agreements contained herein, Lender and Borrower hereby agree as follows: 1. Use of Terms Defined in the Loan Agreement. All capitalized terms that are defined in the Loan Agreement and that are used without definition herein shall have the respective meanings given to them in the Loan Agreement. 2. Amendment to the Loan Agreement. 2.1 The definitions of "Inventory Turnover Rate" and "Payables Turnover Rate" set forth in Section 1.1 of the Loan Agreement are hereby deleted in their entirety and the following definitions are substituted therefor: "Inventory Turnover Rate" - for the period of 12 consecutive Fiscal Periods ending on any Computation Date: the sum of Inventory as of the last day of each such Fiscal Period; divided by 12; divided by the cost of Inventory sold over such 12 Fiscal Periods; and multiplied by the number of days in such 12 Fiscal Periods. "Payables Turnover Rate" - for the period of 12 consecutive Fiscal Periods ending on any Computation Date: the sum of accounts payable as of the last day of each such Fiscal Period; divided by 12; divided by the cost of goods sold over such 12 Fiscal Periods; and multiplied by the number of days in such 12 Fiscal Periods. 2.2 Section 8.3 (I) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (I) Payables Turnover Rate - Maintain at all times a Payables Turnover Rate not exceeding fifty-five (55) days. 3. Continuing Representations of Borrower. Borrower hereby represents and warrants to Lender that as of the date thereof all representations and warranties contained in the Loan Agreement are true, complete and correct, and no Default or Event of Default has occurred and is continuing. 4. Incorporation into the Loan Agreement. The terms and conditions of this First Amendment shall be incorporated by reference in the Loan Agreement as through set forth in full therein. In the event of any inconsistency between the provisions of this First Amendment and any other provision of the Loan Agreement, the terms and provisions of this First Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this First Amendment, all of the provisions of the Loan Agreement shall remain in full force and effect to the extent in effect on the date hereof. Except to the extent, if any, specifically dealt with herein, this First Amendment does not constitute an amendment or waiver by Lender of any provision of the Loan Agreement, or of any Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this First Amendment, together with the other Loan Documents, constitutes the complete agreement among the parties and supersedes any prior written or oral agreements, writings, communications, or understandings of the parties with respect to the subject matter thereof. 5. Section Headings. The headings of the Sections hereof are for convenience only, are without substantive meaning, and shall not be used in interpreting any provision of this First Amendment or the Loan Agreement. 6. Counterparts. This First Amendment may be executed in counterparts, each of which shall be deemed to be an original but all of which shall be one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Loan and Security Agreement as of the day and year written above. ("Lender") BARCLAYS BUSINESS CREDIT, INC. By: s/ Melvin L. Robbins Melvin L. Robbins Senior Vice President ("Borrower") GOTTSCHALKS INC. By: s/ Alan A. Weinstein Alan A. Weinstein Senior Vice President and Chief Financial Officer SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Second Amendment") is entered into as of October 12, 1994 by and between BARCLAYS BUSINESS CREDIT, INC., a Connecticut corporation ("Lender"), and GOTTSCHALKS INC., a Delaware corporation ("Borrower"), with reference to the following facts: RECITALS A. Lender and Borrower are parties to that certain Loan and Security Agreement, dated as of March 30, 1994, as amended by that certain First Amendment to Loan and Security Agreement, dated as of May 12, 1994, pursuant to which Lender agreed to provide certain financial accommodations to Borrower on the terms and conditions set forth therein (said Loan and Security Agreement, as from time to time in effect, together with all exhibits and schedules thereto, is hereinafter referred to as the "Loan Agreement") B. Lender and Borrower desire to amend certain aspects of their financing arrangements under the Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, Lender and Borrower hereby agree as follows: 1. Use of Terms Defined in the Loan Agreement. All capitalized terms that are defined in the Loan Agreement and that are used without definition herein shall have the respective meanings given to them in the Loan Agreement. 2. Amendment to the Loan Agreement. 2.1 The definition of "Times Interest Earned Ration" set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the following definition is substituted therefor: Times Interest Earned Ration - at any date, means the ratio of (i) Borrower's earnings before interest and taxes for the preceding twelve (12) Fiscal Periods, as determined in accordance with GAAP (provided, that with respect to the "extraordinary item expense" shown on Borrower's financial statement for July 1994, the $3,500,000 portion attributable to Borrower's settlement of its shareholder litigation shall be excluded from such calculation), to (ii) actual interest expense paid by Borrower during such period with respect to all Indebtedness. 2.2 Section 8.3 (D) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: Minimum Earnings. (i) Achieve not less than the following cumulative Consolidated Adjusted Net Earnings from Operations for the corresponding periods set forth below as of the end of each such period: Fiscal Periods Amount February 1994 through <$3,000,000> April 1994 May 1994 Through <$1,500,000> July 1994 August 1994 through <$2,000,000> October 1994 November 1994 through $3,000,000 January 1995 (ii) Maintain at all times not less than the following consolidated Adjusted Net Earnings from Operations for the corresponding periods set forth below: Fiscal Period Amount March 1994 <$850,000> April 1994 <$850,000> May 1994 <$750,000> June 1994 <$750,000> July 1994 <$750,000> February 1995 <$1,500,000> Any Fiscal <$1,500,000> Period thereafter (iii) Maintain at all times from and after August 1994, on a fiscal quarter-to-date basis, Consolidated Adjusted Net Earnings from Operations of not less than <$2,000,000>. (iv) Maintain at all times after January 28, 1995, for the prior twelve (12) Fiscal Periods, Consolidated Adjusted Net Earnings from Operations of not less than $2,600,000. 3. Continuing Representation of Borrower. Borrower hereby represents and warrants to Lender that as of the date hereof all representations and warranties contained in the Loan Agreement are true, complete and correct, and no Default or Event of Default has occurred and if continuing. 4. Incorporation into the Loan Agreement. The terms and conditions of this Second Amendment shall be incorporated by reference in the Loan Agreement as though set forth in full therein. In the event of any inconsistency between the provisions of this Second Amendment and any other provision of the Loan Agreement, the terms and provisions of this Second Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Second Amendment, all of the provisions of the Loan Agreement shall remain in full force and effect to the extent in effect on the date hereof. Except to the extent, if any, specifically dealt with herein, this Second Amendment does not constitute an amendment or waiver by Lender of any provision of the Loan Agreement, or of any Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this Second Amendment, together with the other Loan Documents, constitutes the complete agreement among the parties and supersedes any prior written or oral agreements, writings, communications, or understandings of the parties with respect to the subject matter thereof. 5. Section Headings. The headings of the Sections hereof are for convenience only, are without substantive meaning, and shall not be used in interpreting any provision of this Second Amendment or the Loan Agreement. 6. Counterparts. This Second Amendment may be executed in counterparts, each of which shall be deemed to be an original but all of which shall be one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Loan and Security Agreement as of the day and year first written above. ("Lender") BARCLAYS BUSINESS CREDIT, INC. By s/ Melvin L. Robbins Senior Vice President ("Borrower") GOTTSCHALKS INC. By s/ Alan A. Weinstein Senior Vice President and Chief Financial Officer THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Third Amendment") is entered into as of December 30, 1994 by and between BARCLAYS BUSINESS CREDIT, INC., a Connecticut corporation ("Lender"), and GOTTSCHALKS INC., a Delaware corporation ("Borrower"), with reference to the following facts: RECITALS A. Lender and Borrower are parties to that certain Loan and Security Agreement, dated as of March 30, 1994, as amended by (i) that certain First Amendment to Loan and Security Agreement, dated as of May 12, 1994, and (ii) that certain Second Amendment to Loan and Security Agreement, dated as of October 12, 1994, pursuant to which Lender agreed to provide certain financial accommodations to Borrower on the terms and conditions set forth therein (said Loan and Security Agreement, as from time to time in effect, together with all exhibits and schedules thereto, is hereinafter referred to as the "Loan Agreement"). B. Lender and Borrower desire to amend certain aspects of their financing arrangements under the Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, Lender and Borrower hereby agree as follows: 1. Use of Terms Defined in the Loan Agreement. All capitalized terms that are defined in the Loan Agreement and that are used without definition herein shall have the respective meanings given to them in the Loan Agreement. 2. Amendment to the Loan Agreement. The definition of "Clean-Up Period" set forth in Section 2.7 of the Loan Agreement is hereby amended to reflect that, with respect to the period commencing December 1, 1994 and ending January 31, 1995, the "Clean-Up Period" shall be any seven (7) consecutive calendar days during such period designated by Borrower as the "Clean-Up Period" therefor. 3. Continuing Representations of Borrower. Borrower hereby represents and warrants to Lender that as of the date hereof all representations and warranties contained in the Loan Agreement are true, complete and correct, and no Default or Event of Default has occurred and is continuing. 4. Incorporation into the Loan Agreement. The terms and conditions of this Third Amendment shall be incorporated by reference in the Loan Agreement as though set forth in full therein. In the event of any inconsistency between the provisions of this Third Amendment and any other provision of the Loan Agreement, the terms and provisions of this Third Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Third Amendment, all of the provisions of the Loan Agreement shall remain in full force and effect to the extent in effect on the date hereof. Except to the extent, if any, specifically dealt with herein, this Third Amendment does not constitute an amendment or waiver by Lender of any provision of the Loan Agreement, or of any Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this Third Amendment, together with the other Loan Documents, constitutes the complete agreement among the parties and supersedes any prior written or oral agreements, writings communications, or understandings of the parties with respect to the subject matter. 5. Section Headings. The headings of the Sections hereof are for convenience only, are without substantive meaning, and shall not be used in interpreting any provision of this Third Amendment or the Loan Agreement. 6. Counterparts. This Third Amendment may be executed in counterparts, each of which shall be deemed to be an original but all of which shall be one and the same agreement. **************************************** IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment to Loan and Security Agreement as of the day and year first written above. "Lender" BARCLAYS BUSINESS CREDIT, INC. By _s/Melvin L. Robbins______ Melvin L. Robbins Senior Vice President "Borrower" GOTTSCHALKS INC. By s/Alan A. Weinstein Alan A. Weinstein Senior Vice President and Chief Financial Officer FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Fourth Amendment") is entered into as of March 22, 1995 by and between Shawmut Capital Corporation, a Connecticut corporation ("Lender"), as successor-in- interest to Barclays Business Credit, Inc., a Connecticut corporation ("Barclays"), and Gottschalks Inc., a Delaware corporation ("Borrower"), with reference to the following facts: RECITALS A. Barclays and Borrower entered into that certain Loan and Security Agreement, dated as of March 30, 1994, as amended by (i) that certain First Amendment to Loan and Security Agreement, dated as of May 12, 1994, (ii) that certain Second Amendment to Loan and Security Agreement, dated as of October 12, 1994, and (iii) that certain Third Amendment to Loan and Security Agreement, dated as of December 30, 1994, pursuant to which Barclays agreed to provide certain financial accommodations to Borrower on the terms and conditions set forth therein (said Loan and Security Agreement, as from time to time in effect, together with all exhibits and schedules thereto, is hereinafter referred to as the "Loan Agreement"). B. Barclays has assigned to Lender all of Barclays' right, title and interest in, to and under the Loan Agreement and the other Loan Documents (as defined in the Loan Agreement). C. Lender and Borrower desire to amend certain aspects of their financing arrangements under the Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, Lender and Borrower hereby agree as follows: 1. Use of Terms Defined in the Loan Agreement. All capitalized terms that are defined in the Loan Agreement and that are used without definition herein shall have the respective meanings given to them in the Loan Agreement. 2. Amendments to the Loan Agreement. 2.1 Section 8.3(D) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (D) Minimum Earnings. (i) Maintain at all times not less than the following Consolidated Adjusted Net Earnings from Operations for the corresponding periods set forth below: Fiscal Period Amount March 1995 <$1,500,000> Each Fiscal <$1,500,000> Period thereafter (ii) Maintain all times, on a fiscal quarter-to-date basis, not less than the following Consolidated Adjusted Net Earnings from Operations during the corresponding fiscal quarters set forth below: Fiscal Quarter Amount First fiscal quarter of <$3,000,000> Fiscal Year ending January 1996 Each fiscal quarter <$2,000,000> thereafter (iii) Maintain at all times after January 28, 1995, for the prior twelve (12) Fiscal Periods, Consolidated Adjusted Net Earnings from Operations of not less that $2,600,000. 2.2 Section 8.3(E) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (E) Indebtedness Ratio. Maintain at all times a ratio of Indebtedness to Adjusted Tangible Net Worth of not more than 2.5 to 1.0. 2.3 Section 8.3(H) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (H) Inventory Turnover Rate. Maintain at all times an Inventory Turnover Rate not exceeding one hundred seventy (170) days. 2.4 Section 8.3(I) of the Loan Agreement is hereby deleted in its entirety and following is substituted therefor: (I) Payables Turnover Rate. Maintain at all times a Payables Turnover Rate not exceeding sixty (60) days. 3. Continuing Representations of Borrower. Borrower hereby represents and warrants to Lender that as of the date hereof all representations and warranties contained in the Loan Agreement are true, complete and correct, and not Default or Event of Default has occurred and is continuing. 4. Incorporation into the Loan Agreement. The terms and conditions of this Fourth amendment shall be incorporated by reference int he Loan Agreement as though set forth in full therein. In the event of any inconsistency between the provisions of this Fourth Amendment and any other provision of the Loan Agreement, the terms and provisions of this Fourth Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Fourth Amendment, all of the provisions of the Loan Agreement shall remain in full force and effect to the extent in effect on the date hereof. Except to the extent, if any, specifically dealt with herein, this Fourth Amendment does not constitute an amendment or waiver by Lender of any provision of the Loan Agreement, or of any Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this Fourth Amendment, together with the other Loan Documents, constitutes the complete agreement among the parties and supersedes any prior written or oral agreements, writings, communications, or understandings of the parties with respect to the subject matter thereof. 5. Section Headings. The headings of the Sections hereof are for convenience only, are without substantive meaning, and shall not be used in interpreting any provision of this Fourth Amendment or the Loan Agreement. 6. Counterparts. This Fourth Amendment may be executed in counterparts, each of which shall be deemed to be an original but all of which shall be one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment to Loan and Security Agreement as of the day and year first written above. ("Lender") SHAWMUT CAPITAL CORPORATION, as successor-in-interest to Barclays Business Credit, Inc. By__s/Melvin L. Robbins Melvin L. Robbins Senior Vice President ("Borrower") GOTTSCHALKS INC. By s/Alan A. Weinstein Alan A. Weinstein Senior Vice President and Chief Financial Officer FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Fifth Amendment") is entered into as of March 31, 1995 by an between Shawmut Capital Corporation, a Connecticut corporation, as successor-in-interest to Barclays Business Credit, Inc. ("Lender"), and Gottschalks Inc., a Delaware corporation ("Borrower"), with reference to the following facts: RECITALS A. Lender and Borrower entered into that certain Loan and Security Agreement, dated as of March 30, 1994, as amended by (i) that certain First Amendment to Loan and Security Agreement dated as of May 12, 1994, (ii) that certain Second Amendment to Loan and Security Agreement dated as of October 12, 1994, (iii) that certain Third Amendment to Loan and Secutiy Agreement dated as of December 30, 1994, and (iv) that certain Fourth Amendment to Loan and Security Agreement dated as of March 22, 1995, pursuant to which Lender agreed to provide certain financial accommodations to Borrower on the terms and conditions set forth therein (said Loan and Security Agreement, as from time to time in effect, together with all exhibits and schedules thereto, is hereinafter referred to as the "Loan Agreement"). B. Lender and Borrower desire to amend certain aspects of their financing arrangements under the Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, Lender and Borrower hereby agree as follows: 1. Use of Terms Defined in the Loan Agreement. All capitalized terms that are defined in the Loan Agreement and that are used without definition herein shall have the respective meanings given to them in the Loan Agreement. 2. Amendments to the Loan Agreement. 2.1 The definition of "Borrowing Base" set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and the following is substituted therefor: Borrowing Base - as at any date of determination thereof, an amount equal to: (i) the lesser of: (A) the Maximum Commitment minus the face amount of any LC Guaranty or Letter of Credit issued by Lender or any of its Affiliates outstanding at such date; or (B) fifty percent (50%) of the value of Eligible Inventory at such date, calculated on a first-in, first-out basis (at the lower of cost or market), minus the face amount of any LC Guaranty or Letter of Credit issued by Lender or any of its Affiliates outstanding at such date; MINUS (ii) any amounts which Lender may pay pursuant to any of the Loan Documents for the account of Borrower which remain outstanding. 2.2 A new definition of "Maximum Commitment" is added to Section 1.1 of the Loan Agreement as follows: Maximum Commitment - (a) at any time from January 1 through October 31 of each year, an amount equal to $50,000,000, and (b) at any time from November 1 through December 31 of each year, and amount equal to $60,000,000. 2.3 The Preamble to Article 2 of the Loan Agreement is deleted in its entirety and the following is substituted therefor: 2. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a total credit facility of up to SIXTY MILLION AND 00/100 DOLLARS ($60,000,000) available upon Borrower's request therefor, as follows: 2.4 Section 2.7 of the Loan Agreement ("Clean-Up Period") is deleted in its entirety. 2.5 The first sentence of Section 3.1(A) of the Loan Agreement is deleted in its entirety and the following is substituted therefor: Interest shall accrue on the principal amount of the Revolving Loans outstanding at the end of each day at a fluctuating rate per annum equal to three percent (3%) above the LIBOR Rate; provided, that to the extent a portion of the principal amount of the Revolving Loans outstanding is funded by Wells through a participation with Lender, then interest shall accrue on such outstanding portion at a fluctuating rate per annum equal to two and one-half percent (2.5%) above the LIBOR Rate. 2.6 Section 3.1(F) of the Loan Agreement is deleted in in its entirety and the following is substituted therefor: (F) Unused Line Fee. As additional consideration for Lender's entering into the financing agreements and Lender's cost and risks of making funds available, Borrower shall pay to Lender for each month (or portion thereof) during which the financing agreements are in effect an Unused Line Fee in an amount equal to the product of (i) the amount, if any, by which (x) the Maximum Commitment exceeds (y) the actual amount of the Average Monthly Loan Balance for such month or such portion thereof; times (ii) three-eights of one percent (.375%); times (iii) that fraction, the numerator of which shall be the actual number of days in such month and the denominator of which shall be 360. The Unused Line Fee shall be payable in arrears on the first Business Day of each month and upon the termination of this Agreement. 2.7 Clause (i) set forth in Section 8.2(L) of the Loan Agreement is amended to permit Borrower to open up to four (4) new stores in the Fiscal Year ending February 3, 1996. 3. Conditions of Effectiveness. This Fifth Amendment shall not become effective until Lender receives a Participation Agreement between Lender and Wells Fargo Bank, N.A., in form and substance satisfactory to Lender. 4. Continuing Representations of Borrower. Borrower hereby represents and warrants to lender that as of the date hereof all representations and warranties contained in the Loan Agreement are true, complete and correct, and no Default or Event of Default has occurred and is continuing. 5. Incorporation into the Loan Agreement. The terms and conditions of this Fifth Amendment shall be incorporated by reference in the Loan Agreement as though set forth in full therein. In the event of any inconsistency between the provisions of this Fifth Amendment and any other provision of the Loan Agreement, the terms and provisions of this Fifth Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Fifth Amendment, all of the provisions of the Loan Agreement shall remain in full force and effect to the extent in effect on the date hereof. Except to the extent, if any, specifically dealt with herein, this Fifth Amendment does not constitute an amendment or waiver by Lender of any provision of the Loan Agreement, or of any Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this Fifth Amendment, together with the other Loan Documents, constitutes the complete agreement among the parties and supersedes any prior written or oral agreements, writings, communications, or understandings of the parties with respect to the subject matter thereof. 6. Section Headings. The headings of the Sections hereof are for convenience only, are without substantive meaning, and shall not be used in interpreting any provision of this Fifth amendment or the Loan Agreement. 7. Counterparts. This Fifth amendment may be executed in counterparts, each of which shall be deemed to be an original but all of which shall be one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment to Loan and Security Agreement as of the day and year first written above. ("Lender") SHAWMUT CAPITAL CORPORATION By _s/Melvin L. Robbins Melvin L. Robbins Senior Vice President ("Borrower") GOTTSCHALKS INC. By s/Alan A. Weinstien Alan A. Weinstein Senior Vice President and Chief Financial Officer EX-10.35 3 The following represents a Form of Severance Agreement entered into between the Company and the following executive officers: Joseph W. Levy, Stephen J. Furst, Gary L. Gladding, Alan A. Weinstein and Michael J. Schmidt on March 31, 1995. SEVERANCE AGREEMENT This Severance Agreement (this "Agreement"), is made as of this 31st day of March, 1995, by and between Gottschalks Inc., a Delaware Corporation ("Company") and , an individual ("Employee"). 1. Subject to the provisions of paragraph (4) below, Company hereby agrees that in the event Employee's employment with the Company is terminated by written notice of Company for other than for cause (as defined below), Company will pay Employee a severance benefit equal to twelve (12) months salary, determined at Employee's annual base rate of pay in effect at the time such notice of termination is given (less standard withholdings and authorized deductions), and Employee shall have the right to continue Employee's coverage in Company's group medical plan at Company's expense for a period of one year from the termination date (such benefit being referred to herein as the "Severance Benefit"). 2. For purposes of this agreement, "annual base rate of pay" means Employee's annual base salary only, and excludes all other income heretofore received by Employee, such as, but not limited to, bonuses, incentive compensation, fringe benefits, commissions, overtime, retainers, fees under contracts, income arising from the exercise of stock options, or expense allowances granted by Company. 3. The Severance Benefit, less standard withholding and other authorized deductions, will be paid to Employee after the date of Employee's termination out of the general assets of the Company in the same form and at the same time as Employee's salary otherwise would have been paid to Employee if Employee had continued to be employed by the Company. 4. Subject to the provisions of this paragraph (4) following this sentence, the Severance Benefit shall be paid to Employee only in the event that Employee's employment with Company is terminated by written notice from Company (other than for cause) and only if Employee continues to report to work, and adequately performs each and every duty of Employee's employment until the date set forth in the notice of termination as Employee's date of termination (unless the Company consents to a date of termination that is prior to such date). Notwithstanding anything to the contrary contained in this Agreement, Employee shall not be entitled to the Severance Benefit if: (i) Employee's employment with Company is terminated other than by written notice of termination from Company, including without limitation, the retirement, resignation, disability or death of Employee; (ii) Company sells all or part of its business (or otherwise merges, divides, consolidates or reorganizes) and Employee has the opportunity to continue employment with the buyer (or with one of the resulting entities in the event of a merger, division, consolidation or reorganization), at or above the employee's base rate of pay, regardless of whether the other terms and conditions of Employee's employment after such sale, division, consolidation or reorganization are the same or different from the terms and conditions of Employee's employment with Company; or (iii) Employee is terminated for "cause", which includes, without limitation, a good faith determination by Company that Employee (1) has committed a material breach of his duties and responsibilities, (2) refused to perform required duties and responsibilities or performed them incompetently, (3) breached or violated any fiduciary duty owed to Company or (4) is or has been personally dishonest, or has willfully or negligently violated any law, rule or regulation or has been convicted of a felony or misdemeanor (other than minor traffic violations and similar offenses). 5. Nothing contained herein shall be construed as conferring on Employee the right to continue in the employ of the Company in Employee's present or any other capacity. Employee hereby expressly acknowledges that Employee's employment with Company is "at will" and therefore may be terminated by Company at any time, with or without cause, at Company's sole discretion. Employee also expressly acknowledges that, except for benefits to which Employee may otherwise be entitled by law, Employee shall not be entitled to receive from Company any benefits, compensation or renumeration other than the Severance Benefit upon satisfaction of the conditions which entitle Employee to receive the Severance Benefit. Employee agrees that the Severance Benefit shall constitute the exclusive and sole remedy for any termination of Employee's employment and Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. 6. This Agreement shall be governed by the laws of the State of California. This Agreement may be amended only by a subsequent written agreement signed by Employee and an authorized representative of Company following approval by the Board of Directors of Company. This Agreement is personal to Employee and is not assignable by Employee. This Agreement shall inure to the benefit of and be binding upon Company and its successors and assigns and any such successor or assignee shall be deemed substituted for Company under the terms of this Agreement for all purposes. As used herein, "successor" and "assignee" shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the stock of Company or to which Company assigns this Agreement by operation of law or otherwise. This instrument constitutes and contains the entire agreement and understanding concerning the subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof. This is an integrated document. 7. Any dispute, controversy or claim arising out of or in connection with this Agreement or any other aspect of Employee's employment with Company shall be resolved exclusively through binding arbitration to be held in Fresno County, California in accordance with California Civil Procedure Code 1282-1284.2. In the event either party institutes arbitration under this Agreement, the party prevailing in any such arbitration shall be entitled, in addition to all other relief, to reasonable attorneys' fees relating to such arbitration. The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, et. IN WITNESS WHEREOF, Company has caused to be executed and delivered, and Employee has executed and delivered, this Agreement as of the day and year first above set forth. GOTTSCHALKS INC. By:___________________________________ Title: Employee ______________________________________ EX-10.38 4 EXHIBIT 10.38 SUMMARY OF 1994 EXECUTIVE BONUS PLAN In 1994 the Company adopted an Executive Bonus Plan (the "Plan") which provides for a bonus pool to be divided on a pro-rata basis (based on base salary) among the key executives of the Company. The Board of Directors sets plan goals for the Company each fiscal year. If the plan goals are achieved, the amount allocated to the bonus pool is an amount equal to (a) the percentage of the Company's operating profit, being, income before income tax plus any provision for unusual items (the "Operating Profit") for a fiscal year, determined by the quotient obtained by dividing Operating Profit by total sales; multiplied by (b) the total salaries of the executives participating in the Plan. If the plan goals are exceeded, the amount allocated to the bonus pool is an amount equal to (a) the percentage of the Company's Operating Profit for a fiscal year, determined by the quotient obtained by dividing Operating Profit by total sales; multiplied by (b) the Operating Profit. No bonuses are to be paid pursuant to the Plan if the pre-tax profit of the Company, before unusual items, is less than 2% of total sales. EX-10.39 5 SECURITY AGREEMENT THIS SECURITY AGREEMENT (hereinafter referred to as "Agreement" or "Security Agreement"), made this 16th day of December, 1994, by and between Gottschalks, Inc., a Delaware corporation ("Debtor"), whose business address is 7 River Park Place East, Fresno, California 93729, and Heller Financial, Inc., a Delaware corporation ("Secured Party"), whose address is Commercial Equipment Finance Division, 500 West Monroe Street, Chicago, Illinois 60661. WITNESSETH: 1. Secure Payment. To secure payment of indebtedness in the principal sum of up to Six Million Six Hundred Fifty Thousand and 00/100 Dollars ($6,650,000.00) as evidenced by a note or notes (the "Notes"), which Debtor has executed and delivered or will execute and deliver to Secured Party and also to secure any other indebtedness or liability of Debtor to Secured Party, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising and no matter how acquired by Secured Party, including all future advances or loans which may be made at the option of Secured Party (all the foregoing hereinafter called the "Indebtedness"), Debtor hereby grants and conveys to Secured Party a first superior continuing lien and security interest in the property described below and/or on the Schedule(s) attached hereto (the "Schedules"), all products and proceeds (including insurance proceeds) thereof, if any, and all increases, substitutions, replacements, attachments, additions, and accessions thereto, all or any of the foregoing hereinafter called the "Collateral". (Description of Collateral On Attached Schedules. The Schedules may be supplemented from time to time to evidence the Collateral, subject to this Agreement.) 2. Warranties, Representations and Covenants. Debtor warrants, represents, covenants and agrees as follows: (a) Perform Obligations. Debtor shall pay all of the Indebtedness secured by this Agreement and perform all of the obligations contained in this Agreement according to its terms. Debtor shall use the loan proceeds primarily for business uses and not for personal, family, household, or agricultural uses. (b) Defend the Collateral. Debtor shall defend the title to the Collateral against all persons and against all claims and demands whatsoever, which Collateral, except for the security interest granted hereby, is lawfully owned by Debtor and is now free and clear of any and all liens, security interests, claims, charges, encumbrances, taxes, and assessments of any kind, except as may be set forth on the Schedules. At the request of Secured Party, Debtor shall furnish further assurance of title, execute any written agreement or do any other acts necessary to effectuate the purposes and provisions of this Agreement, execute any instrument or statement required by law or otherwise in order to perfect, continue, or terminate the security interest of Secured Party in the Collateral and pay all costs of filing in connection therewith. (c) Keep Possession of the Collateral. Debtor shall retain possession of the Collateral until the Indebtedness is fully paid and performed (subject to Secured Party's rights and remedies upon the occurrence of an Event of Default (defined below))and shall not sell, exchange, assign, loan, deliver, lease, mortgage, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party. Debtor shall keep the Collateral at the location[s] specified on the Schedules and shall not remove same (except in the usual course of business for temporary periods) without the prior written consent of Secured Party. (d) Collateral Free and Clear. Debtor shall keep the Collateral free and clear of all liens, charges, encumbrances, assessments, and other security interests of any kind (other than the security interest granted hereby) and shall pay, when due, all taxes, assessments, and license fees relating to the Collateral. (e) Collateral in Good Operating Order. All of the Collateral is in good operating order, condition and repair and is used or useful in the business of Debtor. Debtor shall keep the Collateral, at Debtor's sole cost and expense, in good repair and condition and not misuse, abuse, waste, or allow it to deteriorate except for normal wear and tear. Debtor shall make the Collateral available for inspection by Secured Party at all reasonable times, and Debtor will use and maintain the Collateral in a lawful manner in accordance with all applicable laws, regulations, ordinances, and codes. (f) Insurance. Debtor shall insure the Collateral against loss by fire (including extended coverage), theft and other hazards, for its full insurable value including replacement costs, with a deductible not to exceed $50,000.00 per occurrence and without co-insurance. The insurance policy shall name Secured Party as loss payee and shall contain such other terms as Secured Party may require. In addition, Debtor shall obtain liability insurance, including automobile if the Collateral includes motor vehicles, respecting the Collateral covering liability for bodily injury, including death and property damage, in an amount of at least $5,000,000 per occurrence or such greater amount as may comply with general industry standards, or in such other amounts as Secured Party may otherwise require. Policies shall be in such form, amounts, and with such companies as Secured Party may approve; shall provide for at least thirty (30) days prior written notice to Secured Party prior to any modification or cancellation thereof; shall be payable to Debtor and Secured Party as their interests may appear; shall waive any claim for premium against Secured Party; and shall provide that no breach of warranty or representation or act or omission of Debtor shall terminate, limit or affect the insurers' liability to Secured Party. Certificates of insurance or policies evidencing the insurance required hereby along with satisfactory proof of the payment of the premiums therefor shall be delivered to Secured Party who is authorized, but under no duty, to obtain such insurance upon failure of Debtor to do so. Debtor shall give immediate written notice to Secured Party and to insurers of loss or damage to the Collateral and shall promptly file proofs of loss with insurers. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact, coupled with an interest, for the purpose of obtaining, adjusting and canceling any such insurance and endorsing settlement drafts. Debtor hereby assigns to Secured Party, as additional security for the Indebtedness, all sums which may become payable under such insurance, including return premiums and dividends. (g) Complete Information. No representation or warranty made by Debtor in this Agreement and no other document or statement furnished to Secured Party by or on behalf of Debtor contains any material misstatement of a material fact or omits to state any material fact necessary in order to make the statements contained herein or therein not misleading. Except as expressly set forth in the Schedules, there is no fact known to Debtor that will or could have a materially adverse affect on the business, operation, condition (financial or otherwise), performance, properties or prospects of Debtor or Debtor's ability to timely pay all of the Indebtedness and perform all of its other obligations contained in or secured by this Agreement. (h) If Collateral Attaches to Real Estate. If the Collateral or any part thereof has been attached to or is to be attached to real estate, a description of the real estate and the name and address of the record owner is set forth on the Schedules. If said Collateral is attached to real estate prior to the perfection of the security interest granted hereby, Debtor will, on demand of Secured Party, furnish Secured Party with a disclaimer or waiver of any interest in the Collateral satisfactory to Secured Party and signed by all persons having an interest in the real estate. Notwithstanding the foregoing, the Collateral shall remain personal property and shall not be affixed to realty without the prior written consent of Secured Party. (i) Financial Statements. Debtor shall deliver to Secured Party, Debtor's independent outside audited annual financial statements within ninety (90) days after the end of each fiscal year of Debtor, and shall furnish, within sixty (60) days after the end of each fiscal year quarter of Debtor, quarterly financial statements of Debtor certified as to completeness, accuracy and fair presentation by an appropriate officer of Debtor. Debtor shall also deliver to Secured Party, Debtor's internally prepared annual Income Statements for Debtor's store located at 1673 West Lacey Boulevard, Hanford, California, prepared in accordance with Debtor's past internal accounting principles, consistently applied (individually, a "Store Income Statement"), within sixty (60) days after the end of each fiscal year of Debtor. Debtor shall certify that all financial information and statements provided to Secured Party fairly present the financial condition of Debtor at the date thereof. (j) Perfection. This Agreement creates a valid and first priority security interest in the Collateral, securing the payment and performance of the Indebtedness and all actions necessary to perfect and protect such security interest have been duly taken. (k) Authorization. Debtor is now, and will at all times remain, duly licensed, qualified to do business and in good standing in every jurisdiction where failure to be so licensed or qualified and in good standing would have a material adverse effect on its business, properties or assets. Debtor has the power to authorize, execute and deliver this Security Agreement, the Notes and the other documents relating thereto (the Security Agreement, Notes and other documents, all as amended from time to time, are hereafter collectively referred to as the "Loan Documents"), to incur and perform obligations hereunder and thereunder, and to grant the security interests created hereby. The Loan Documents have been duly authorized, executed, and delivered by or on behalf of Debtor, and constitute the legal, valid, and binding obligations of Debtor and are enforceable against Debtor in accordance with their respective terms. Debtor will preserve and maintain its existence and will not wind up its affairs or otherwise dissolve. Debtor will not, without thirty (30) days prior written notice to Secured Party, (1) change its name or so change its structure such that any financing statement or other record notice becomes misleading or (2) change its principal place of business or chief executive or accounting offices from the address stated herein. (l) Litigation. There are no actions, suits, proceedings, or investigations ("Litigation") pending or, to the knowledge of Debtor, threatened against Debtor. Debtor is not in violation of any material term or provision of its by-laws, or of any material agreement or instrument, or of any judgment, decree, order, or any statute, rule, or governmental regulation applicable to it. The execution, delivery, and performance of the Loan Documents do not and will not violate, constitute a default under, or otherwise conflict with any such term or provision or result in the creation of any security interest, lien, charge, or encumbrance upon any of the properties or assets of Debtor, except for the security interest herein created. Debtor will promptly notify Secured Party in writing of Litigation against it if: (1) the outcome of such Litigation may materially or adversely affect the finances or operations of Debtor (for purposes of this provision, One Hundred Dollars ($100,000) shall be deemed material) or (2) such Litigation questions the validity of any Loan Document or any action taken or to be taken pursuant thereto. Debtor shall furnish to Secured Party such information regarding any such Litigation as Secured Party shall reasonably request. (m) Compliance with Laws. Debtor shall comply in all material respects with all applicable laws, rules, and regulations and duly observe all valid requirements of all governmental authorities, and all statutes, rules and regulations relating to its business, including, without limitation, those concerning public and employee health, safety, and social security and withholding taxes and those concerning employee benefit plans and as such may be required by the Internal Revenue Code, as amended from time to time ("the Code") and the Employees Retirement Income Security Act of 1974 as amended from time to time ("ERISA"). With respect to any "multiple employer plan" or "single employer plan" as defined in ERISA (collectively, "Plans"), Debtor will not: (i) incur any liability to the Pension Benefit Guaranty Corporation ("PBGC"); (ii) participate in any prohibited transaction involving any of such Plans or any trust created thereunder which would subject Debtor to a tax or penalty on prohibited transactions imposed under the Code or ERISA; (iii) fail to make any contribution which it is obligated to pay under the terms of such Plan; (iv) allow or suffer to exist any occurrence of a "reportable event", or any other event or condition which presents a risk of termination by the PBGC of any such Plan; or (v) incur any withdrawal liability with respect to any Plan which is not fully bonded. (n) Taxes. Debtor has timely filed all tax returns (federal, state, local, and foreign) required to be filed by it and has paid or established reserves for all taxes, assessments, fees, and other governmental charges upon its properties, assets, income and franchises. Debtor does not know of any actual or proposed additional tax assessments for any fiscal period against it which would have a material adverse effect on it. Debtor will promptly pay and discharge all taxes, assessments, and other governmental charges prior to the date on which penalties are attached thereto, establish adequate reserves for the payments of such taxes, assessments, and other governmental charges (including cash reserves, if any, required by generally accepted accounting principles ("GAAP") for any taxes, assessments, or other charges being contested), make all required withholding and other tax deposits, and, upon request, provide Secured Party with receipts or other proof that any or all of such taxes, assessments, or governmental charges have been paid in a timely fashion; provided, however, that nothing contained herein shall require the payment of any tax, assessment, or other governmental charge so long as its validity is being contested in good faith and by appropriate proceedings diligently conducted. Should any stamp, excise, or other tax, including mortgage, conveyance, deed, intangible, or recording taxes become payable in respect of this Security Agreement, the Notes, or any other Loan Documents, Debtor shall pay the same (including interest and penalties, if any) and shall hold Secured Party harmless with respect thereto. (o) Labor Laws. Debtor is in compliance with the Fair Labor Standards Act. Debtor is not engaged in any unfair labor practice which would have a material adverse effect on it. There are: (1) no unfair labor practice complaints pending or, to the best knowledge of Debtor, threatened against Debtor before the National Labor Relations Board and no grievance or arbitration proceedings arising out of or under collective bargaining agreements are pending or, to the best knowledge of Debtor, threatened; (2) no strikes, work stoppages, or controversies pending or threatened between Debtor and any of its employees; and (3) no union representation questions that exist with respect to Debtor's business and no union organizing activities that are taking place. (p) Environmental Laws. Debtor has complied and will comply in all material respects with all Environmental Laws applicable to the transfer, construction on, and operations of its property and business. Debtor has (1) not received any summons, complaint, order, or similar notice that it is not in compliance with, or that any public authority is investigating its compliance with, any Environmental Laws and (2) no knowledge of any material violation of any Environmental Laws on or about its assets or property. Debtor will comply, in all material respects with all Environmental Laws and provide Secured Party, promptly following receipt, copies of any correspondence, notice, complaint, order, or other document that it receives asserting or alleging a circumstance or condition which requires or may require a cleanup, removal, remedial action or other response by or on the part of Debtor under Environmental Laws, or which seeks damages or civil, criminal or punitive penalties from Debtor for an alleged violation of any Environmental Laws. Debtor will advise Secured Party in writing as soon as Debtor becomes aware of any condition or circumstance that makes the environmental representations or warranties contained in this Agreement inaccurate in any material respect. For purposes of this Security Agreement, "Environmental Laws" means all federal, state, and local laws, rules, regulations, orders, and decrees relating to health, safety, hazardous substances, and environmental matters, including, without limitation, the Resource Recovery and Reclamation Act of 1976, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Toxic Substances Control Act, the Clean Water Act of 1977, and the Clean Air Act, all as amended from time to time. (q) No Liability. Debtor acknowledges and agrees that Secured Party shall not be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than as a result of Secured Party's gross negligence or willful misconduct. (r) Setoff. Without limiting any other right of Secured Party, whenever Secured Party has the right to declare any Indebtedness to be immediately due and payable (whether or not it has so declared), Secured Party is hereby authorized at any time and from time to time to the fullest extent permitted by law, to set off and apply against any and all of the Indebtedness, any and all monies then or thereafter owed to Debtor by Secured Party in any capacity, whether or not the obligation to pay such monies owed by Secured Party is then due. Secured Party shall be deemed to have exercised such right of setoff immediately at the time of such election even though any charge therefor is made or entered on Secured Party's records subsequent thereto. (s) Regulations. No proceeds of the loans or any other financial accommodation hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, as that term is defined in Regulations G, T, U, X of the Board of Governors of the Federal Reserve System. (t) Books and Records. Debtor shall maintain, at all times, true and complete books, records and accounts in which true and correct entries are made of its transactions in accordance with GAAP and consistent with those applied in the preparation of Debtor's financial statements. At all reasonable times, upon reasonable notice, and during normal business hours, Debtor will permit Secured Party or its agents to audit, examine and make extracts from or copies of any of its books, ledgers, reports, correspondence, and other records. Secured Party may verify any Collateral in any reasonable manner which Secured Party may consider appropriate, and Debtor shall furnish all reasonable assistance and information and perform any acts which Secured Party may reasonably request in connection therewith. (u) Written Notice. Debtor agrees to give Secured Party written notice of any action or inaction by Secured Party or any agent or attorney of Secured Party or that may give rise to a claim against Secured Party or any agent or attorney of Secured Party or that may be a defense to payment of the obligations for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law. Debtor agrees that unless such notice is fully given as promptly as possible (and in any event within thirty (30) days) after Debtor has knowledge, or with the exercise of reasonable diligence should have had knowledge, of any such action or inaction, Debtor shall not assert, and Debtor shall be deemed to have waived, any claim or defense arising therefrom. (v) Indemnity. Debtor shall indemnify, defend and hold Secured Party, its parent, officers, directors, agents, employees, and attorneys harmless from and against any loss, expense (including reasonable attorneys' fees and costs), damage or liability arising directly or indirectly out of (i) any breach of any representation, warranty or covenant contained herein and in the other Loan Documents, (ii) any claim or cause of action that would deny Secured Party the full benefit or protection of any provision herein and in the Loan Documents, and (iii) the ownership, possession, lease, operation, use, condition, sale, return, or other disposition of the Collateral. If after receipt of any payment of all or any part of the Indebtedness, Secured Party is for any reason compelled to surrender such payment to any person or entity, because such payment is determined to be void or voidable as a preference, impermissible set-off, or a diversion of trust funds, or for any other reason, this Security Agreement and the Loan Documents shall continue in full force and effect and Debtor shall be liable to Secured Party for the amount of such payment surrendered. The provisions of the preceding sentence shall be and remain effective notwithstanding any contrary action which may have been taken by Secured Party in reliance upon such payment, and any such contrary action so taken shall be without prejudice to Secured Party's rights under this Security Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. Additionally, Debtor will pay or reimburse Secured Party for any and all reasonable costs and expenses incurred in connection herewith, including, but not limited to, attorneys' fees, filing fees, search fees, and lien recordation. The provisions of this paragraph shall survive the termination of this Security Agreement and the Loan Documents. (w) Collateral Documentation. Debtor shall deliver to Secured Party prior to any advance or loan, satisfactory documentation regarding the Collateral to be financed, including, but not limited to, such invoices, canceled checks evidencing payments, or other documentation as may be reasonably requested by Secured Party. Additionally, Debtor must satisfy Secured Party that Debtor's business and financial information is as has been represented and there has been no material change in Debtor's business, financial condition, operations or prospects. 3. Prepayment. Debtor may prepay the Indebtedness in whole, but not in part, in accordance with the terms of the Notes. 4. Events of Default. If any one of the following events (each of which is herein called an "Event of Default") shall occur: (a) Debtor defaults in the payment, when due, of any Indebtedness, or (b) any warranty or representation of Debtor is untrue or inaccurate or Debtor breaches any warranty or representation hereunder, or (c) Debtor breaches or defaults in the performance of any other agreement or covenant hereunder or under any of the Loan Documents, or (d) Debtor shall default in the payment or performance of any debt or other obligation in connection with any indebtedness of any kind owed by it to any person or entity in excess of Five Million and 00/100 Dollars ($5,000,000), including, but not limited to, Secured Party, or (e) Debtor becomes insolvent, makes an assignment for the benefit of creditors or ceases to continue as a going business, or (f) a receiver, trustee, conservator, or liquidator is appointed for Debtor or for all or any portion of Debtor's property, with or without the approval or consent of Debtor, or (g) a petition is filed by or against Debtor under the Bankruptcy Code or any amendment thereto or under any other insolvency law or laws providing for the relief of debtors, or (h) in the reasonable opinion of Secured Party the value of the Collateral is substantially reduced or Secured Party considers that the prospect of full performance and satisfaction by Debtor of the Indebtedness is imperiled; or (i) if there is a material adverse change in the business or financial condition or prospects of Debtor then, and in any such event, Secured Party shall have the right to exercise any one or more of the remedies hereinafter provided. Each of the following events shall also constitute an Event of Default hereunder and upon the occurrence of any one or more of them, Secured Party shall have the right to exercise any one or more of the remedies hereinafter provided: (aa) If at the end of any fiscal year quarter of Debtor, Debtor's net income before interest, taxes, depreciation and amortization ("EBITDA") for the preceding four (4) fiscal year quarters (including the quarter just ended) is less than one and one-half (1.5) times as much as all of Debtor's interest expense incurred during the same four (4) fiscal year quarters ("Interest Expense"), all as determined in accordance with GAAP (i.e., the ratio of EBITDA to Interest Expense in any four (4) fiscal year quarters may not be less than 1.5:1); or (bb) If Debtor at any time has a net worth as determined in accordance with GAAP of less than Sixty-Five Million and 00/100 Dollars ($65,000,000); or (cc) If at the end of any fiscal year of Debtor, Debtor's "operating income" for its store located at 1673 West Lacey Boulevard, Hanford, California, is less than One Million Dollars ($1,000,000), as shown on any Store Income Statement. 5. Remedies. If an Event of Default shall occur, in addition to all rights and remedies of a secured party under the Uniform Commercial Code, Secured Party may, at its option, at any time (a) declare the entire unpaid Indebtedness to be immediately due and payable; (b) without demand or legal process, enter into the premises where the Collateral may be found and take possession of and remove the Collateral, all without charge to or liability on the part of Secured Party; and (c) require Debtor to assemble the Collateral, render it unusable, and crate, pack, ship, and deliver the Collateral to Secured Party in such manner and at such place as Secured Party may require, all at Debtor's sole cost and expense. DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS IF ANY TO (1) PRIOR NOTICE OF REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SUCH REPOSSESSION. Secured Party may, at its option, ship, store, and repair the Collateral so removed and sell any or all of it at a public or private sale or sales. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made, it being understood and agreed that Secured Party may be a buyer at any such sale and Debtor may not, either directly or indirectly, be a buyer at any such sale. The requirements, if any, for reasonable notice will be met if such notice is mailed postage prepaid to Debtor at its address shown above, at least five (5) days before the time of sale or disposition. Debtor shall also be liable for and shall upon demand pay to Secured Party all expenses incurred by Secured Party in connection with the undertaking or enforcement by Secured Party of any of its rights or remedies hereunder or at law, including, but not limited to, all expenses of repossessing, storing, shipping, repairing, selling or otherwise disposing of the Collateral and legal expenses, including reasonable attorneys' fees and court costs (through any and all appeals and judgment enforcement actions, it being acknowledged and agreed by Debtor that this provision shall survive and not merged with any such judgment), all of which costs and expenses shall be additional Indebtedness hereby secured. After any such sale or disposition, Debtor shall be liable for any deficiency of the Indebtedness remaining unpaid, with interest thereon at the rate set forth in the related Note. 6. Cumulative Remedies. All remedies of Secured Party hereunder are cumulative, are in addition to any other remedies provided for by law or in equity and may, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of Secured Party to exercise, and no delay in exercising any right or remedy, shall operate as a waiver thereof or in any way modify or be deemed to modify the terms of this Security Agreement and the other Loan Documents or the Indebtedness, nor shall any single or partial exercise by Secured Party of any right or remedy preclude any other or further exercise of the same or any other right or remedy. 7. Assignment. Secured Party may transfer or assign this Security Agreement, the Note, or the Indebtedness and the other Loan Documents either together or separately without releasing Debtor or the Collateral, and upon such transfer or assignment the assignee or holder shall be entitled to all the rights, powers, privileges and remedies of Secured Party to the extent assigned or transferred. The obligations of Debtor shall not be subject, as against any such assignee or transferee, to any defense, set-off, or counter-claim available to Debtor against Secured Party and any such defense, set-off, or counter-claim may be asserted only against Secured Party. 8. Time is of the Essence. Time and manner of performance by Debtor of its duties and obligations under this Security Agreement, the Notes, and the other Loan Documents is of the essence. If Debtor shall fail to comply with any provision of this Security Agreement and the other Loan Documents, Secured Party shall have the right, but shall not be obligated, to take action to address such non-compliance, in whole or in part, and all moneys spent and expenses and obligations incurred or assumed by Secured Party shall be paid by Debtor upon demand and shall be added to the Indebtedness. Any such action by Secured Party shall not constitute a waiver of Debtor's default. 9. Enforcement. This Agreement shall be governed by and construed in accordance with the laws and decisions of the State of Illinois. At Secured Party's election and without limiting Secured Party's right to commence an action in any other jurisdiction, Debtor hereby submits to the exclusive jurisdiction and venue of any court (federal, state or local) having situs within the State of Illinois, expressly waives personal service of process and consents to service by certified mail, postage prepaid, directed to the last known address of Debtor, which service shall be deemed completed within ten (10) days after the date of mailing thereof. 10. Further Assurance; Notice. Debtor shall, at its expense, do, execute and deliver such further acts and documents as Secured Party may from time to time reasonably require to assure and confirm the rights created or intended to be created hereunder to carry out the intention or facilitate the performance of the terms of this Security Agreement and the Loan Documents or to assure the validity, perfection, priority or enforceability of any security interest created hereunder. Debtor agrees to execute any instrument or instruments necessary or expedient for filing, recording, perfecting, notifying, foreclosing, and/or liquidating of Secured Party's interest in the Collateral upon request of, and as determined by, Secured Party, and Debtor hereby specifically authorizes Secured Party to prepare and file Uniform Commercial Code financing statements and other documents and to execute same for and on behalf of Debtor as Debtor's attorney-in-fact, irrevocably and coupled with an interest, for such purposes. All notices required or otherwise given by either party shall be deemed adequately and properly given if sent by registered or certified mail or by overnight courier with a copy by facsimile to the other party at the addresses stated herein or at such other address as the other party may from time to time designate in writing. 11. Waiver of Jury Trial. Debtor and Secured Party hereby waive their respective rights to a jury trial of any claim or cause of action based upon or arising out of this Security Agreement, the Notes, or the other Loan Documents. This waiver is informed and freely made. Debtor and Secured Party acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Agreement and the other Loan Documents, and that each will continue to rely on the waiver in their related future dealings. Debtor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. 12. Complete Agreement. This Security Agreement and the other related Loan Documents are intended by Debtor and Secured Party to be the final, complete, and exclusive expression of the agreement between them. This Security Agreement and the other related Loan Documents may not be altered, modified or terminated in any manner except by a writing duly signed by the parties hereto. Debtor and Secured Party intend this Security Agreement and the other related Loan Documents to be valid and binding and no provisions hereof and thereof which may be deemed unenforceable shall in any way invalidate any other provisions of this Security Agreement and the other related Loan Documents, all of which shall remain in full force and effect. This Security Agreement and the other related Loan Documents shall be binding upon the respective successors, legal representatives, and assigns of the parties. The singular shall include the plural, the plural shall include the singular, and the use of any gender shall be applicable to all genders. If there be more than one Debtor, the warranties, representations and agreements herein are joint and several. The Schedules on the following page[s] are a part hereof. Sections and subsections headings are included for convenience of reference only and shall not be given any substantive effect. IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Security Agreement as of the day and year first above written. HELLER FINANCIAL, INC., GOTTSCHALKS, INC., a Delaware corporation a Delaware corporation By: s\Clifford Lehman By: s\Alan A. Weinstein Name: Clifford Lehman Name: Alan A. Weinstein Title: Vice President Title: Senior Vice President/CFO Fax: (415) 986-4106 Fax: (209) 434-4804 SCHEDULE Description of Collateral Description of Collateral (Full description including make, model and serial number): See Schedule A attached hereto and made a part hereof by reference. Place where Collateral is to be kept: 1673 West Lacey Blvd., Hanford, CA Other liens, encumbrances or security interests to which Collateral is subject, if any. None Other Collateral Real Property If Collateral is attached or to be attached to real estate, set forth: Address of Real Estate (Including County, block number, lot number, etc.): See Schedule B attached hereto and made a part hereof by reference. Record Owner of Real Estate (Name and Address): Gottschalks, Inc. 7 River Park Place Fresno, CA 93729 If the real estate at which the Collateral is to be kept is leased: Name and Address of Lessor of Real Estate: None ____________ Initials SCHEDULE A Description of Collateral: All fixtures, machinery, apparatus, goods (other than inventory), equipment, materials, building materials, fittings, chattels and other tangible personal property, and all appurtenances and additions thereto and betterments, renewals, substitutions and replacements thereof now or hereafter owned by Debtor or in which Debtor has or hereafter shall acquire an interest, whether now or hereafter located on, attached to, contained in or used or usable in connection with the real property described below (the "Premises"), or placed on any part thereof, though not attached thereto, including without limitation all screens, awnings, shades, blinds, curtains, draperies, carpets, rugs, furniture and furnishings, heating, lighting, air conditioning, refrigeration, incineration and/or compacting plants, systems and equipment, hoists, stoves, ranges, vacuum and other cleaning systems, call systems, sprinkler systems and other fire prevention and extinguishing apparatus and materials, motors, machinery, pipes, ducts, conduits, dynamos, engines, compressors, generators, boilers, stokers, furnaces, pumps, tanks, appliances, equipment and fittings; all rights of Debtor in construction contracts, plans, specifications and architects agreements arising in connection with the improvement of the Premises, and all permits, licenses, franchises, certifications and other rights and privileges obtained in connection therewith; all proceeds, substitutions and replacements of the foregoing; together with all the leases, subleases, lettings and licenses of, and all other contracts, bonds and agreements relating to the use, occupancy or operation of the Premises or any part thereof, now or hereafter entered into, and all amendments, modifications, supplements, additions, extensions and renewals thereof (for purposes of this Schedule A, collectively, "Leases"), and all right, title and interest of Debtor in, to and under the Leases, including the right to all cash and securities deposited thereunder (as down payments, security deposits, or otherwise), all rights of first refusal with respect thereto, and the right to receive and collect the rents, security deposits, income, proceeds, earnings, royalties, revenues, issues, profits and other similar items and things payable in connection with the Leases, or any of them,, and the right to enforce, whether at law or in equity or by any other means, all provisions and options thereof or thereunder; together with all unearned premiums, accrued, accruing or to accrue under insurance policies now or hereafter obtained by Debtor in accordance with the Security Agreement between Debtor and Heller Financial, Inc., a Delaware corporation, dated at or around December 16, 1994, all proceeds (including funds, accounts, deposits, instruments, general intangibles, notes or chattel paper) of the conversion, voluntary or involuntary, of the Premises into cash or other liquidated claims, including proceeds of hazard, title and other insurance and proceeds received pursuant to any sales or rental agreements of Debtor in respect of the Premises, and all judgments, damages, awards, settlements and compensation (including interest thereon) heretofore or hereafter made to the present and all subsequent owners of the Premises and/or any other property or rights conveyed or encumbered hereby for any injury to or decrease in the value thereof for any reason, or by any governmental or other lawful authority for the taking by eminent domain, condemnation or otherwise of all or any part thereof; provided, that Secured Party's security interest in the accounts receivable arising out of Debtor's private label credit card program, and the collections and proceeds thereof in whatever form (including any related "instruments," "documents" and "chattel paper," each as defined under the California Uniform Commercial Code), all deposit accounts associated therewith, and all books and records related thereto, shall automatically terminate (but not Secured Party's security interest in the proceeds thereof consisting of any amounts paid by Gottschalks Credit Receivables Corporation) upon the sale of such accounts by Debtor to Gottschalks Credit Receivables Corporation. Description of Premises. The Premises referred to herein is all of that certain real property situated in the County of Kings, State of California, commonly known as 1673 West Lacey Boulevard, Hanford, California, and more particularly described on Schedule B attached hereto and incorporated herein by this reference. INITIALS: PROMISSORY NOTE $6,650,000.00 December 16, 1994 FOR VALUE RECEIVED, Gottschalks, Inc., a Delaware corporation ("Maker"),promises to pay to the order of Heller Financial, Inc., a Delaware corporation (together with any holder of this Note, "Payee"), at its office located at 500 West Monroe Street, Chicago, Illinois 60661, or at such other place as Payee may from time to time designate, the principal sum of Six Million Six Hundred Fifty Thousand and 00/100 Dollars ($6,650,000.00), together with interest thereon at a fixed rate equal to ten and 45/100 percent (10.45%) per annum. Principal and interest shall be payable in eighty-four (84) consecutive monthly installments commencing February 1, 1995, and continuing on the first day of each month thereafter until this Note is fully paid. The first eighty-three (83) monthly installments shall be in the principal amount of Seventy-Nine Thousand One Hundred Sixty-Six and 67/100 Dollars ($79,166.67), plus all accrued and unpaid interest, and the eighty-fourth (84th) monthly installment (the due date of which is defined herein as the "Maturity Date") shall be in the principal amount of Seventy-Nine Thousand One Hundred Sixty-Six and 39/100 Dollars ($79,166.39), plus all accrued and unpaid interest. In addition, Maker shall also make an interest only initial payment on January 1, 1995, of all accrued interest from the date of this Note through December 31, 1994. All payments shall be applied first to interest and then to principal. Interest shall be computed on the basis of a 360 day year comprised of 30-day months and charged for the actual number of days elapsed. Notwithstanding the foregoing, if at any time implementation of any provision hereof shall cause the interest contracted for or charged herein or collectable hereunder to exceed the applicable lawful maximum rate, then the interest shall be limited to such lawful maximum. Upon forty-five (45) days prior written notice to Payee, on any regular installment payment date, Maker may prepay in full, but not in part, the then entire unpaid principal balance hereof together with all accrued and unpaid interest thereon to the date of such prepayment, provided that along with and in addition to such prepayment Maker shall pay (i) any and all other sums due hereunder and then due under the Security Agreement, Deed of Trust, and other documents of even date herewith executed by Maker in favor of Payee encumbering and granting a security interest in certain property and securing the indebtedness described therein and evidenced by this Note (together, the "Security Documents") and (ii) a prepayment fee as liquidated damages and not as a penalty, in a sum equal to the following percentages of the amount prepaid: 5% of the amount prepaid for any prepayment during Loan Year 1; 4% of the amount prepaid for any prepayment during Loan Year 2; 3% of the amount prepaid for any prepayment during Loan Year 3; 2% of the amount prepaid for any prepayment during Loan Year 4; 1% of the amount prepaid for any prepayment during Loan Year 5; 1% of the amount prepaid for any prepayment during Loan Year 6: and, 1% of the amount prepaid for any prepayment during Loan Year 7. Any payment of the amounts due under this Note following acceleration of the maturity date upon the occurrence of any Event of Default (as defined in the Security Documents), shall constitute a voluntary prepayment hereunder as to which the prepayment fee described in clause (ii) above shall apply. The phrase "Loan Year" as used herein shall mean each twelve (12) consecutive months commencing on the date of this Note. This Note is secured by the Security Documents, under which Payee has been granted a security interest in certain real and personal property to secure the payment and performance by Maker of this Note, to which reference is made for a further statement of the nature and extent of protection and security afforded, the rights of Payee and the rights and obligations of the undersigned. Time is of the essence hereof. If payment of any installment or any other sum due under this Note or the Security Documents is not paid within ten (10) days after its due date, Maker agrees to pay a late charge of five cents (.05) per dollar on, and in addition to, the amount of each such payment, but not exceeding the lawful maximum. In the event Maker shall fail to make any payment under this Note within ten (10) days after its due date or if Maker shall be in breach or default of the Security Documents, then the entire unpaid principal balance hereof with accrued unpaid interest thereon together with all other sums payable under this Note or the Security Documents, shall, at the option of Payee and without notice or demand, become immediately due and payable, such accelerated balance bearing interest until paid at the rate of three percent (3%) per annum above the fixed rate set forth in the first paragraph of this Note (the "Default Rate"). Maker and all endorsers, guarantors or any others who may at any time become liable for the payment hereof hereby consent to any and all extensions of time, renewals, waivers and modifications of, and substitutions or release of security or of any party primarily or secondarily liable on, or with respect to, this Note or the Security Documents or any of the terms and provisions of either that may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee, without joinder of the others as parties thereto, and that Payee shall not be required to first foreclose, proceed against, or exhaust any security herefor, in order to enforce payment of this Note by any one or more of them. Maker and all endorsers, guarantors or any others who may at any time become liable for the payment hereof hereby severally waive presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection with this Note, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, and agree to pay, if permitted by law, all expenses incurred in collection, including reasonable attorneys' fees, and hereby waive all benefits of valuation, appraisement and exemption laws. If there be more than one Maker, all the obligations, promises, agreements and covenants of Maker under this Note are joint and several. If any Maker is a corporation, it and the persons signing on its behalf represent and warrant that the execution and delivery of this Note has been duly authorized by all necessary and appropriate corporate and shareholder action. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS AND DECISIONS OF THE STATE OF ILLINOIS. AT HOLDER'S ELECTION AND WITHOUT LIMITING HOLDER'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF. MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND FREELY MADE. MAKER ACKNOWLEDGES THAT HIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT IT HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS NOTE, AND THAT IT WILL CONTINUE TO RELY ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. Witness/Attest: Gottschalks, Inc., a Delaware corporation By: s\Alan A. Weinstein Name: Alan A. Weinstein Title: Sr. V.P./C.F.O. 1 PROM-NOTE.DOC\08/94 EX-21 6 EXHIBIT 21 Subsidiaries of the Registrant State or Other Jurisdiction Name(s) Under Which Incorporation or Subsidiary Does Name of Subsidiary Organization Business Gottschalks Credit Delaware Gottschalks Credit Receivables Receivables Corporation Corporation EX-23 7 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-54783 and No. 33-54789 of Gottschalks Inc. on Form S-8 of our report dated February 28, 1995 (March 31, 1995 as to Note 4), appearing in the Annual Report on Form 10-K of Gottschalks Inc. for the year ended January 28, 1995. DELOITTE & TOUCHE, LLP s/Deloitte & Touche,LLP Fresno, California April 24, 1995 EX-27 8 ART. 5 FDS FOR 1994 FORM 10-K
5 1,000 YEAR JAN-28-1995 JAN-28-1995 3,156 0 31,831 1,395 80,678 126,701 129,626 35,817 233,353 88,801 33,672 104 0 0 83,473 233,353 363,603 373,262 247,423 0 5,860 2,052 10,238 2,337 821 1,516 0 0 0 1,516 .15 .15
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