-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HgOx0iIFJdGrurWkwBETDpHuNHDMKcFJXDEwUO6WfmdDTNdvJai2OZqpn7tO08e2 hRwS5PEkt8izAV3ZcxiUSA== 0000790414-96-000003.txt : 19960506 0000790414-96-000003.hdr.sgml : 19960506 ACCESSION NUMBER: 0000790414-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960503 SROS: NYSE 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: 96555982 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 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 February 3, 1996 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 non-affiliates of the Registrant as of March 31, 1996: Common Stock, $.01 par value: $45,147,869 On March 31, 1996 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 27, 1996, 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. is a regional department and specialty store chain based in Fresno, California, currently consisting of thirty-five "Gottschalks" department stores and twenty-five "Village East" specialty stores located primarily in non-major metropolitan cities throughout California, and in Oregon, Washington and Nevada (1). Gottschalks and Village East sales totaled $401.0 million in fiscal 1995, of which Gottschalks sales represented 97.4% and Village East sales represented 2.6% of total sales. Gottschalks department stores typically offer a wide range of brand-name and private-label merchandise, including women's, men's, junior's and children's apparel; cosmetics and accessories; shoes and jewelry; home furnishings including, china, housewares, electronics and appliances; and other consumer goods. Village East specialty stores offer apparel for larger women. Gottschalks stores are generally anchor tenants of regional shopping malls, with Village East specialty stores generally located in the regional malls in which a Gottschalks department store is located. The Company's stores carry primarily moderately priced brand-name merchandise, including Estee Lauder, Lancome, Liz Claiborne, Carole Little, Evan Picone, Calvin Klein, Ralph Lauren, Guess, Levi Strauss and Sony. The Company seeks to complement the brand-name merchandise with private-label merchandise and 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. Gottschalks Inc. also includes the accounts of its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") and Gottschalks Credit Card Master Trust ("GCC Trust"), (collectively, the "Company"), which were formed in 1994 in connection with a receivables securitization program. (See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources".) Gottschalks and its predecessor, E. Gottschalk & Co., have operated continuously for over 91 years since it was founded by Emil Gottschalk in 1904. Since the Company first offered its stock to the public in 1986, it has added twenty-six of its thirty-five Gottschalks stores, opened twenty of its twenty-five Village East specialty stores and constructed its distribution center. (1) Gottschalks is currently the largest independent department store chain based in California. _______________________ (1) As of April 1996. 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, cosmetics and accessories, home furnishings and other merchandise in an extensive range of styles, sizes and colors for all members of the family and home. The following table sets forth for the periods indicated a summary of the Company's total sales by division, expressed as a percent of net sales:
1995 1994 1993 1992 1991 Softlines: Cosmetics & Accessories 17.2% 16.6% 16.5% 16.2% 15.7% Women's Clothing (1)... 15.5 16.1 16.5 17.1 17.3 Mens' Clothing........ 14.3 13.9 13.6 13.2 12.8 Women's Dresses, Coats & Lingerie......... 7.8 7.9 7.8 8.6 8.7 Junior's Clothing.... 6.0 6.3 7.0 7.2 7.1 Shoes & Other Leased Departments........ 7.4 7.1 7.4 7.1 6.6 Children's Clothing.. 4.9 4.9 4.9 4.1 4.3 Village East......... 2.6 2.6 2.7 2.8 2.6 Total Softlines 75.7 75.4 76.4 76.3 75.1 Hardlines: Housewares, Luggage & Stationary......... 11.0 10.9 10.7 11.0 12.3 Domestics............ 8.1 8.1 7.1 6.7 9.0 Electronics & Furniture 5.2 5.6 5.8 6.0 3.6 Total Hardlines 24.3 24.6 23.6 23.7 24.9 Total Sales 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. 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, 2 Vice President/General Merchandise Managers, 9 Divisional Merchandise Managers, 48 buyers and 31 assistant buyers. Management believes the 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 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. Management seeks to continuously refine its merchandise mix with the goal of increasing sales of higher gross margin items and increasing inventory turnover. 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 as a means to more efficiently monitor and execute its merchandising plan. (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. The mix of merchandise in a particular store may also vary depending on the size of the facility. 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. The Company's promotional strategy includes seasonal promotions, promotions directed at selected items and frequent storewide sales events to highlight brand-name merchandise and promotional prices. The Company also 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. The Company has increased its use of direct marketing techniques to access niche markets by sending mailings to its credit card-holders and, through its computer database, generating specific lists of customers who may be most responsive to specific promotional mailings. In fiscal 1995, the Company also implemented a telemarketing program which through the use of an advanced call management system and the Company's existing credit department personnel, the Company is able to auto-dial potential customers within a selected market area and deliver a personalized message regarding current promotions and events. 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 fiscal 1995, the Company purchased approximately 4.7% 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 fiscal 1995 were Estee Lauder, Inc., Levi Strauss & Co., Liz Claiborne, Inc., Cosmair, Inc. (Lancome), Calvin Klein Cosmetics, Sony Corporation of America, Koret of California, All-That-Jazz, Lee Company and Graff Californiawear. Purchases from those vendors accounted for approximately 19.0% of the Company's total purchases in fiscal 1995. Management believes that alternative sources of supply are available for each category of merchandise it purchases. Geographic Strategy. The Company's geographic strategy is to locate its stores in diverse, growing, non-major metropolitan areas. Gottschalks stores are often located in agricultural areas and cater to mature customers with above average levels of disposable income. Gottschalks strives to be the "hometown store" in each of the communities it serves. Management believes the Company has a competitive advantage in offering brand-name merchandise and a high level of service to customers in secondary markets in the western United States. Store Expansion and Remodeling. 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 and fewer competitors offering such merchandise. The Company has also continued to prudently invest in the renovation and refixturing of its existing store locations in order to maintain and improve market share in those market areas. The Company sometimes receives reimbursement for certain of its new store construction costs and costs associated with the renovation and refixturing of existing store locations from mall owners and vendors. The following table presents selected data regarding the Company's expansion for the fiscal years indicated:
Stores open at year-end: 1995 1994 1993 1992 1991(3) Gottschalks 34(1) 29 27 25 23 Village East 26(2) 24 23 22 21 TOTAL 60 53 50 47 44 Gross store square footage (in thousands) 2,984 2,425 2,202 2,093 1,904
(1) The Company opened one additional Gottschalks store in March 1996, increasing the number of Gottschalks stores open to 35 as of the date of this report. (2) The Company incorporated one Village East store into a larger department store in April 1996 in connection with entering into a new lease (See Note 12 to the Consolidated Financial Statements) (3) 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 fiscal 1995, the Company has constructed or acquired twenty-six of its thirty-four Gottschalks department stores, including four junior satellite stores of less than 30,000 square feet each. During this period the Company also opened twenty of its twenty-six Village East specialty stores. Gross store square footage added during this period was approximately 2.2 million square feet, resulting in approximately 3.0 million total Company gross square feet. The Company opened five new Gottschalks stores in California in fiscal 1995, including new stores in Auburn, San Bernardino, Visalia (a larger replacement store for a pre-existing store at that location), Watsonville and Tracy. The Company also opened its first store in Nevada in fiscal 1995, located in Carson City. In early fiscal 1996, the Company opened its second Gottschalks store in Nevada, in Reno, and relocated its existing stores in the Modesto Vintage Faire Mall (Modesto, California) and Fashion Fair Mall (Fresno, California), to larger anchor space in those malls which were previously occupied by a major competitor of the Company. (See Note 12 to the Consolidated Financial Statements). The Company's operations outside California now include two stores in Nevada and one store in each of Oregon and Washington. The Company generally seeks prime locations in regional malls as sites for new department stores. Although the majority of the Company's department stores are larger than 50,000 gross square feet, during the past several years, the Company has, where the opportunities have been attractive, established four junior satellite stores each with less than 30,000 gross square feet. The Company also seeks to open a Village East specialty store in each mall where a Gottschalks department store is located, except when the Company finds it more profitable to establish a Village East department within the Gottschalks store, rather than as a separate specialty shop. 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. The Company attempts to build customer loyalty by providing a high level of service and by having well-stocked stores. Product seminars and other training programs are frequently conducted in the Company's stores so that sales personnel will be able to provide useful product information to customers. In addition to providing high levels of personal sales assistance, the Company seeks to offer to its customers a conveniently located and attractive shopping environment. 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 introduced larger mens sizes to certain store locations in fiscal 1995. The Company generally seeks to locate its stores in regional shopping malls which are centrally located to access a broad customer base. Thirty of the Company's thirty-five 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, and to telephone customers about promotional sales and 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 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 quickly respond to changing 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 implementation of such technology, systems and procedures. 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 461,000 active credit accounts as of March 31, 1996 as compared to 438,000 as of March 31, 1995, an increase of 5.3%. Service charge revenues associated with the Company's customer credit cards were $10.9 million, $8.9 million, $8.1 million, $8.6 million and $9.0 million in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. The Company installed a new credit management software system in fiscal 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. The Company completed an upgrade to this system in fiscal 1995, which among other things, has enhanced the Company's ability to access target markets with more sophisticated direct marketing techniques. This system, combined with a new credit scoring system installed in fiscal 1993, enables the Company to process thousands of credit applications daily at a rate of approximately three minutes per application. In fiscal 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. As described more fully in "Business-- Merchandising and Promotion Strategy", the Company is also able to utilize the advanced call management system for telemarketing activities. 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 fiscal 1993, the Company implemented an "Instant Credit" program, through which successful credit applicants receive a 10% discount on the first days' purchases made with the Company's credit card; a "55-Plus" charge account program, initiated in fiscal 1993, which offers additional merchandise and service discounts to customers 55 years of age and older; and "Gold Card" and "55-Plus Gold Card" programs, initiated in fiscal 1994, 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. In fiscal 1995, the Company launched a credit card reactivation program in an attempt to recapture credit card-holders who have not utilized their credit card for a specified period of time. In addition to increasing service charge income, management believes holders of the Company's credit card typically buy more merchandise from the Company than other customers. 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 currently 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 currently assessed at a rate of $5 per late payment occurrence. The Company is presently evaluating an increase to the APR and late charge fee in fiscal 1996. Information Systems. The Company has continued to invest prudently 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 fiscal 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 fiscal 1994 which management believes has improved the Company's POS price verification capabilities, resulting in fewer POS errors and enhanced customer service. Coupled with enhanced physical inventory procedures and improved security systems in the Company's stores, these systems have resulted in the reduction of the Company's inventory shrinkage to 1.3% of net sales in fiscal 1995, from 1.4%, 2.1%, 2.3% and 2.5% in fiscal 1994, 1993 1992 and 1991, respectively. 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. In fiscal 1995, management implemented a new merchandise management and allocation ("MMS") system, which enhances the Company's ability to allocate merchandise to stores more efficiently and make prompt reordering and pricing decisions. The new MMS system also provides 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 have automated certain merchandise purchasing processes. In fiscal 1995, the Company also 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 arrives 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. The Company, along with numerous other major department store retailers and vendors, is also actively involved in developing a program to standardize hangers for apparel merchandise (the "VIC's" program). Merchandise purchased from vendors participating in the VICS program arrives at the distribution center already on hangers and ready for immediate distribution to 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 fiscal 1994 which has enhanced the Company's ability to manage payroll-related costs; (ii) a new advertising management software system in fiscal 1995 which has enhanced 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 installed in fiscal 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 7.4%, 7.1%, 7.4%, 7.1% and 6.6% in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. Gross margin applicable to the leased departments was 14.4%, 14.1%, 13.8%, 14.4% and 14.6% in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. Competition. The retail department store and specialty apparel and home furnishings businesses are highly competitive. The Company's stores compete with national, regional, and local chain department 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 trend towards consolidation of competitors within the retail industry has also intensified competition. The Company competes primarily on the basis of current merchandise availability, customer service, price and store location and the availability of services including credit and product delivery. 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. The Company's membership in Frederick Atkins also provides it with increased buying power in the marketplace. Management also believes that its knowledge of its primary market areas, developed over more than 91 years of continuous operations, and its focus on those markets as its primary areas of operations, give the Company 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 February 3, 1996, the Company had 5,181 employees, of whom 1,349 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 store locations in the western United States and its projected future market areas. The Company leases the distribution facility from an unrelated party under a 20-year lease expiring in the year 2009, and has six consecutive five-year renewal options. Store Leases and Locations. The Company owns six of its thirty-five 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 $6.29, $6.38, $6.54, $6.09 and $6.00 per gross square foot in lease expense in fiscal 1995, 1994, 1993, 1992 and 1991, respectively, not including common area maintenance and other allocated expenses. In certain cases, the Company has been able to add gross square feet to certain existing store locations under favorable rental conditions. Thirty of the Company's thirty-five Gottschalks stores and all but two of its twenty-five Village East stores are located in regional shopping malls. (1) 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. _______________ (1) As of April 1996.
The following table contains specific information about each of the Company's stores open as of the end of fiscal 1995: Expiration Gross(1) Selling Date of Square Square Date Current Feet Feet Opened Lease Renewal Options GOTTSCHALKS Antioch............. 80,000 64,036 1989 N/A (2) N/A Aptos............... 11,200 9,362 1988 2004 None Auburn.............. 40,000 37,245 1995 2005 1 five yr. opt. Bakersfield: East Hills........ 74,900 73,069 1988 2009 6 five yr. opt. Valley Plaza...... 69,000 57,195 1987 1997(3) None Capitola............105,000 89,352 1990 2015(5) 4 five yr. opt. Carson City, Nevada. 58,000 51,848 1995 2005 2 five year opt. Chico............... 85,000 75,934 1988 2017 3 ten yr. opt. Clovis..............101,400 93,521 1988 2018 None Eureka.............. 96,900 70,090 1989 N/A (2) N/A Fresno: Fashion Fair...... 76,700 67,860 1970 2001(7) None Fig Garden........ 36,000 32,774 1983 2005 None Manchester........175,600 127,243 1979 2009 1 ten yr. opt. Hanford............. 98,800 75,382 1993 N/A (2) N/A Klamath Falls, Oregon............ 65,400 53,446 1992 2007 2 ten yr. opt. Merced.............. 60,000 51,628 1983 2013 None Modesto: Vintage Faire..... 89,600 67,086 1977 2008(7) 4 five yr. opt. Century Center.... 62,300 58,285 1984 2013 1 ten yr. opt. and 1 four yr. opt. Oakhurst............ 25,600 21,894 1994 2005 4 five yr. opt. and 1 six yr. opt. Palmdale............114,900 93,029 1990 N/A (2) N/A Palm Springs........ 68,100 57,194 1991 2011 4 five yr. opt. Sacramento..........194,400 138,797 1994 2014 5 five yr. opt. San Bernardino......204,000 147,061 1995 2017 4 five yr. opt. San Luis Obispo..... 99,300 91,155 1986 N/A (2) N/A Santa Maria.........114,000 99,262 1976 2006 4 five yr. opt. Scotts Valley....... 11,200 9,740 1988 2001 2 five yr. opt. Stockton............ 90,800 74,952 1987 2009 6 five yr. opt. Tacoma, Washington..119,300 94,054 1992 2012 4 five yr. opt. Tracy...............113,000 88,168 1995 2015 4 five yr. opt. Visalia.............150,000 133,930 1995 2014 3 five yr. opt. Watsonville......... 75,000 63,449 1995 2006 4 five yr. opt. Woodland............ 55,300 52,913 1987 2017 2 ten yr. opt. Yuba City........... 80,000 61,944 1989 N/A(2) N/A Redding............. 7,800 5,000 1993 60 days(4) None Total Gottschalks Square Footage..2,908,500 2,387,898 VILLAGE EAST Antioch............. 2,100 1,472 1989 1999 None Bakersfield: East Hills........ 3,350 2,847 1988 1998 None Valley Plaza...... 3,700 3,550 1991 2002 None Capitola............ 2,360 2,006 1991 1999 None Carson City, Nevada. 3,400 2,800 1995 2005 None Chico............... 2,300 1,920 1988 2000 None Clovis.............. 2,300 1,955 1988 1998 None Eureka.............. 2,820 2,397 1989 2004 None Fresno: Fashion Fair...... 1,750 1,487 1970 1996(6) None Fig Garden........ 2,800 2,521 1986 1999 None Manchester........ 5,950 5,375 1981 2010 None Hanford............. 2,800 2,480 1993 2008 None Merced.............. 3,350 2,847 1976 2001 None Modesto: Vintage Faire..... 2,900 2,720 1977 1995(6) None Century Center.... 2,730 2,320 1986 2005 None Palmdale............ 2,716 2,309 1990 2000 None Palm Springs........ 2,480 2,108 1991 2001 None Sacramento.......... 2,700 2,470 1994 2004 None San Luis Obispo..... 2,500 1,472 1987 2011 None Santa Maria......... 3,000 2,720 1976 2001 None Stockton............ 1,799 1,530 1989 1998 None Tacoma.............. 4,000 3,220 1992 2012 None Tracy............... 3,428 2,914 1995 2006 None Visalia............. 3,400 2,880 1975 1999 None Woodland............ 2,022 1,719 1987 1999 None Yuba City........... 3,200 3,045 1990 2000 None Total Village East Square Footage....75,855 65,084 Total Square Footage........2,984,355 2,452,982
__________________________ (1) Reflects total store square footage, including office space, storage, service and other support space that is non dedicated to direct merchandise sales. (2) These stores are Company owned and have been pledged as security for various debt obligations of the Company. (See Note 3 of the Consolidated Financial Statements.) (3) 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. (4) This lease is automatically renewed every 60 days. Either party can terminate the lease upon 60 days' notice. (5) See Note 6 to the Consolidated Financial Statements regarding the sale and leaseback of the Company's department store in Capitola, California. (6) The Company has notified the respective landlords that it will not exercise its option to renew these leases. In connection with entering into new leases for larger department stores in the malls in which these stores are located, the Company has incorporated Village East into the larger store format as a separate department. (See Note 12 to the Consolidated Financial Statements.) (7) See Note 12 to the Consolidated Financial Statements for additional information related to these leases. Item 3. LEGAL PROCEEDINGS The Company is party to a lawsuit filed in 1992 by F&N Acquisition Corporation ("F&N") under which F&N originally claimed 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 (F&N Acquisition Corp. v. Gottschalks Inc., Case No. A92-08501). In addition, F&N claimed unspecified damages for its rejection of the next best offer to purchase the assignment of the lease. In 1992, F&N received 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 judgement was reversed in 1994, however, and remanded to the United States District Court for the Western District of Washington for further proceedings. Management's estimate of amounts that may ultimately be payable to F&N were previously accrued in fiscal 1992. In connection with the F&N lawsuit, an additional complaint was filed against the Company by Sabey Corporation ("Sabey"), the owner of the mall in which the Frederick and Nelson store was located. (Sabey Corporation v. Gottschalks Inc., Case No. C94-842Z). The F&N and Sabey lawsuits were combined in May 1995 and the lawsuits are currently scheduled for trial in July 1996. (F&N Acquisition Corp. and Sabey Corporation v. Gottschalks Inc., Case No. C95-186Z). An amendment to the original breach of contract claim contained in the F&N lawsuit was filed on January 29, 1996 alleging, among other things, that the Company breached the contract by deliberately delaying its performance. In addition to breach by intentional delay and impossibility, the plaintiffs have also claimed fraud and negligent misrepresentations by executives of the Company. Management is continuing to vigorously defend the lawsuits and does not believe that any additional costs that may ultimately be incurred in connection with the lawsuits, as combined, will be material to the operating results 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 ("NYSE") Composite Tape under the symbol "GOT" during the periods indicated:
1995 1994 Fiscal Quarters High Low High Low 1st Quarter......... 7 7/8 6 3/4 12 7/8 8 3/8 2nd Quarter......... 7 3/8 6 1/2 12 8 1/2 3rd Quarter......... 8 3/8 6 1/2 9 3/4 7 1/4 4th Quarter......... 7 4 3/4 8 3/8 6 5/8
On March 31, 1996, the Company had 1,089 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. The sales price of the Company's common stock as reported by the NYSE on March 31, 1996 was $6.50 per share. The Company has not paid a cash dividend since its initial public offering in 1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future depending on the Company's earnings, financial condition and capital requirements. In addition, the Company's credit agreement with Fleet Capital Corporation ("Fleet" - formerly Shawmut Capital Corporation) prohibits 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 February 3, 1996, January 28, 1995, January 29, 1994, January 30, 1993 and February 1, 1992 are referred to herein as 1995, 1994, 1993, 1992 and 1991, respectively. All fiscal years noted include 52 weeks, except for fiscal 1995 which includes 53 weeks. Although the Company's results of operations for fiscal 1995 were not materially impacted by results applicable to the 53rd week, fiscal 1995 cash flows were impacted. (See Item 7, "Liquidity and Capital Resources".) The selected financial data below should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and related notes included elsewhere herein.
RESULTS OF OPERATIONS: 1995 1994 1993 1992 1991 (In thousands, except per share data) Net sales(1)........... $401,041 $363,603 $342,417 $331,133 $314,633 Service charges and other income......... 11,663 9,659 8,938 9,458 10,830 412,704 373,262 351,355 340,591 325,463 Costs and expenses: Cost of sales(2)..... 278,827 247,423 233,715 226,319 210,435 Selling, general and administrative expenses(3)........ 123,100 103,571 103,675 105,044 96,144 Depreciation and amortization(4).... 8,092 5,860 5,877 6,408 5,503 Interest expense..... 11,296 10,238 8,524 6,965 6,793 Unusual items(5)..... 3,833 3,427 7,852 421,315 370,925 355,218 352,588 318,875 Income (loss) before income tax expense (benefit)............ (8,611) 2,337 (3,863) (11,997) 6,588 Income tax expense (benefit)............ (2,972) 821 (1,190) (4,006) 2,528 Net income (loss)...... $ (5,639) $ 1,516 $ (2,673) $(7,991) $ 4,060 Net income (loss) per common share..... $ (.54) $ .15 $ (.26) $ (.77) $ .41 Weighted average number of common shares outstanding.......... 10,416 10,413 10,377 10,410 9,798 SELECTED OPERATING DATA: 1995 1994 1993 1992 1991 Sales growth: Total store sales(6)..... 10.3% 6.2% 3.4% 5.2% 9.5% Comparable store sales .. (3.1%) 3.3% 1.3% (1.0%) 3.5% Average net sales per square foot of selling space (7): Gottschalks......... $181 $196 $198 $209 $210 Village East........ 161 164 176 218 231 Gross margin percent: Owned sales......... 31.8% 33.3% 33.2% 32.7% 34.4% Leased sales........ 14.4% 14.1% 13.8% 14.4% 14.6% Credit sales as a % of total sales........ 45.3% 43.5% 38.8% 38.5% 41.0% __________________
(1) Includes net sales from leased departments of $29.8 million, $26.0 million, $25.3 million, $23.4 million and $20.8 million in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. See Part I, Item 1, "Business--Leased Departments." (2) Includes cost of sales attributable to leased departments of $25.5 million, $22.3 million, $21.8 million, $20.1 million and $17.8 million in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. (3) Includes provision for credit losses of $2.5 million, $2.1 million, $2.2 million, $2.5 million and $3.0 million in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. (4) Includes the amortization of new store pre-opening costs of $2.5 million, $438,000, $429,000, $1.0 million and $823,000 in fiscal 1995, 1994, 1993, 1992 and 1991, respectively. (5) See Note 10 to the Consolidated Financial Statements. (6) See Part I, Item I, "Business--Store Expansion and Remodeling", for table of number of stores open at each fiscal year-end. (7) Average net sales per square foot of selling space represents net sales for the period divided by the number of square feet of selling space in use during the period. Average net sales per square foot is computed only for those stores in operation for at least twelve months. "Selling space" has been determined according to standards set by the National Retail Federation. ___________________________
SELECTED BALANCE SHEET DATA: 1995 1994 1993 1992 1991 (In thousands of dollars) Receivables, net........$ 27,467(1) $ 27,311(1) $ 21,460(1) $ 59,508 $ 62,831 Merchandise inventories............ 87,507 80,678(2) 60,465 58,777 62,821 Property and equipment, net......... 89,250(3) 93,809 96,396 95,933 91,114 Total assets............ 239,041 233,353 248,330 239,910 242,072 Working capital......... 42,904 37,900 32,147(4) 16,827(4) 64,715 Long-term obligations, less current portion... 34,872 33,672 31,493(4) 14,992 51,290 Stockholders' equity.... 77,917 83,577 82,118 84,529 92,720 SELECTED FINANCIAL DATA: Capital expenditures, net of reimbursements..$ 12,773 $ 4,539 $ 5,456 $ 12,078 $ 13,023 Current ratio........... 1.45:1 1.43:1 1.30:1 1.15:1 1.89:1 Inventory turnover ratio(5) .............. 2.7 2.9 2.9 2.9 2.9 Days credit sales in receivables......... 135.1(6) 155.4(6) 169.3(6) 169.8 177.4
(1) These amounts do not include $40.0 million of the Company's customer credit card receivables sold in March 1994 in connection with a receivables securitization program. Such receivables were classified as held for securitization and sale at the end of fiscal 1994.(See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.") (2) The increase in merchandise inventories from fiscal 1993 to fiscal 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 fiscal 1995. In addition, to a lesser extent, this increase is attributable to opportunistic purchases of merchandise shortly before year- end in fiscal 1994. The Company typically receives extended payment terms for such purchases. (3) The decrease in property and equipment from fiscal 1994 to fiscal 1995 is primarily due to the sale and leaseback of the Company's department store in Capitola, California in fiscal 1995. (See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources".) This decrease was partially offset by capital expenditures, net of reimbursements received, related to new stores opened during the year. (4) Working capital increased $15.3 million and long-term obligations increased $16.5 million from fiscal 1992 to 1993 primarily due to the classification of certain debt as long-term in fiscal 1993 that had been classified as current in fiscal 1992. (5) The inventory turnover ratio excludes inventory received at year-end and held for stores opened early in the subsequent fiscal year. (6) Days credit sales in receivables include $40.0 million of receivables sold in fiscal 1994 and held for securitization and sale as of the end of fiscal 1993. The Company has continued to service and administer the receivables pursuant to the securitization program. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The fiscal 1995 retail environment presented the Company with many challenges. As described more fully below, the Company's fiscal 1995 comparable store sales and gross margin were negatively impacted primarily by external factors influencing the Company's operating environment. Such external factors included unusual variances in weather conditions during the spring and fall selling seasons and intense pricing competition initiated by two financially troubled retailers in certain of the Company's market areas. In order to compete in such an environment, the Company increased its promotional activity, resulting in higher markdowns and a lower gross margin. The Company's fiscal 1995 results of operations were also negatively impacted by the amortization of new store pre-opening costs associated with the opening of two new stores in fiscal 1994 and six new stores (including one larger replacement for a pre-existing store) in fiscal 1995. The Company also incurred higher selling, general and administrative and interest costs as a percent of net sales in connection with those new stores. These factors were partially offset by increased service charge income as a percent of net sales. While management believes the impact of such external factors is temporary and will not continue throughout fiscal 1996, the Company is implementing revised operational strategies which include cost reduction and revenue enhancement plans. Management believes the implementation of such plans will assist the Company in achieving its goal of profitable operations. Management also expects the Company's fiscal 1996 results of operations to benefit by the acquisition of Broadway Stores, Inc. ("Broadway"), one of the Company's primary competitors, by Federated Department Stores, Inc. ("Federated") and the temporary and permanent closure of certain Broadway locations in connection with that acquisition. (See "Liquidity and Capital Resources".) The Company recorded a net loss of $5.6 million in fiscal 1995 as compared to a net income of $1.5 million in fiscal 1994. The Company's fiscal 1994 results of operations were favorably impacted by the year-end LIFO inventory valuation adjustment and other non-recurring adjustments to certain other reserves, partially offset by a provision for unusual items. The Company recorded a net loss of $2.7 million in fiscal 1993. 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:
1995 1994 1993 Net sales........................ 100.0% 100.0% 100.0% Service charges and other income. 2.9 2.6 2.6 102.9 102.6 102.6 Costs and expenses: Cost of sales................. 69.5 68.0 68.2 Selling, general and administrative expenses..... 30.7 28.5 30.3 Depreciation and amortization. 2.0 1.6 1.7 Interest expense.............. 2.8 2.8 2.5 Unusual items................. 1.1 1.0 105.0 102.0 103.7 Income (loss) before income tax expense (benefit)............. (2.1) 0.6 (1.1) Income tax expense (benefit)..... (0.7) 0.2 (0.3) Net income (loss)................ (1.4)% 0.4% (0.8)%
Fiscal 1995 Compared to Fiscal 1994 Net Sales Net sales increased $37.4 million to $401.0 million in fiscal 1995 as compared to $363.6 million in fiscal 1994, an increase of 10.3%. This increase reflects additional sales volume generated by the opening of six new Gottschalks stores during fiscal 1995 and two new Gottschalks stores not open for the entire year in fiscal 1994. New stores opened in California during fiscal 1995 include: Auburn (February 1995), San Bernardino (April 1995), a larger replacement for a pre-existing store in Visalia (August 1995), Watsonville (August 1995) and Tracy (October 1995). The Company also opened its first store in Nevada during the year in Carson City (March 1995). New stores opened in fiscal 1994 include Oakhurst (October 1994) and Sacramento, California (November 1994). Comparable store sales decreased 3.1% in fiscal 1995 as compared to fiscal 1994. This decrease is due, in part, to unusual variances in weather conditions in many of the Company's market areas during the year. Spring and summer apparel sales were weak due to unusually cold and rainy weather conditions early in the spring season, and unseasonably warm weather in the fall and winter seasons resulted in sluggish fall and winter apparel and seasonal home merchandise sales. Temporary pricing competition initiated by two financially troubled retailers operating in certain of the Company's market areas also negatively impacted sales at the Company's stores in those areas. Management is continuing efforts to increase sales volume through the controlled expansion of the Company and is attempting to improve market share in its existing markets through the development of new sales and customer-service related programs. New stores opening in fiscal 1996 included a new Gottschalks store in Reno, Nevada in March 1996 and two larger replacement stores for pre-existing stores in Modesto and Fresno, California, in March and April, 1996, respectively. Management also expects sales volume to increase in fiscal 1996 as the result of the acquisition of Broadway Stores, Inc., one of the Company's major competitors, by Federated Department Stores, Inc. (See "Liquidity and Capital Resources".) Service Charges and Other Income Service charges and other income increased $2.0 million to $11.7 million in fiscal 1995 as compared to $9.7 million in fiscal 1994, an increase of 20.6%. As a percent of net sales, service charges and other income increased to 2.9% in fiscal 1995 as compared to 2.6% in fiscal 1994. Service charges associated with the Company's customer credit cards increased $2.0 million to $10.9 million in fiscal 1995 as compared to $8.9 million in fiscal 1994. This increase is primarily due to an increase in the late charge fee assessed on delinquent customer accounts, effective January 1995, which resulted in increasing late charge fees by $1.2 million in fiscal 1995 as compared to fiscal 1994. Credit sales as a percent of total sales have also continued to improve, increasing to 45.3% in fiscal 1995 as compared to 43.5% in fiscal 1994, primarily due to the ongoing success of credit-related programs first implemented by the Company in fiscal 1994 and 1993, in addition to increased marketing efforts aimed at the Company's customer credit cardholders and credit solicitation activities resulting in a higher percentage of new credit card accounts opened in connection with new store openings. (See Part I, Item I, "Business -- Credit Policy"). Other income, which includes the amortization of deferred income and other miscellaneous income and expense items, was $726,000 in fiscal 1995 as compared to $755,000 in fiscal 1994. Cost of Sales Cost of sales increased $31.4 million to $278.8 million in fiscal 1995 as compared to $247.4 million in fiscal 1994, an increase of 12.7%. The Company's gross margin percent decreased to 30.5% in fiscal 1995 as compared to 32.0% in fiscal 1994. This decrease in gross margin percent relates primarily to an increase in markdowns as a percent of net sales due to (i) heavy discounting of men's, women's and junior apparel necessitated by unusually cold and rainy weather conditions in the spring and summer selling seasons and unseasonably warm weather conditions during the fall and winter selling seasons; (ii) temporary competitive pressures caused by pricing policies of two financially troubled retailers in certain of the Company's market areas during the period; (iii) the clearance of certain merchandise in connection with a modification of the Company's women's apparel merchandising strategy; and (iv) promotional activity related to new store openings during the period. The Company's inventory shrinkage was 1.3% of net sales in fiscal 1995 as compared to 1.4% in fiscal 1994. The Company's 1994 gross margin percent was favorably impacted by the year-end LIFO inventory valuation adjustment, which resulted in an increase in gross margin of $3.2 million. The Company's LIFO inventory reserve for financial reporting purposes was eliminated as a result of the fiscal 1994 adjustment and no similar benefit was recognized as a result of the Company's fiscal 1995 LIFO adjustment. (See Note 1 to the Consolidated Financial Statements). Excluding the effect of the LIFO adjustment, the Company's gross margin percent was 31.1% in fiscal 1994. To a lesser extent, the Company's fiscal 1994 gross margin percent was also favorably impacted by a reduction of inventory shrinkage to 1.4% of net sales in fiscal 1994 as compared to 2.1% in fiscal 1993, primarily due to improved inventory-related controls. Management believes the Company's gross margin will continue to be pressured in fiscal 1996 by both intense competition and pricing pressures from other department and specialty stores, discount retailers and outlet malls, and as a result of changing consumer spending patterns. Management is continuing efforts to implement a variety of strategies designed to counteract these pressures, including tight controls over inventory levels, shifting inventories into more profitable lines of business based on current trends, the negotiation of additional guaranteed gross margin arrangements with vendors, and the implementation of enhanced information systems and new technology as a means to reduce inventory related costs. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $19.5 million to $123.1 million in fiscal 1995 as compared to $103.6 million in fiscal 1994, an increase of 18.8%. As a percent of net sales, selling, general and administrative expenses increased to 30.7% in fiscal 1995 as compared to 28.5% in fiscal 1994. This increase as a percent of net sales is primarily due to lower than expected sales volume, in addition to higher payroll, advertising and other selling, general and administrative costs associated with certain of the Company's new stores opened during the year. Certain store operating costs as a percent of net sales are generally higher for new stores and decline as the stores mature over a two to three year period. The Company has also experienced an increase in building and equipment rental expense as a result of the sale and leaseback financing of the Capitola store in fiscal 1995 and enhanced POS terminal and information systems equipment leased during the year. The impact of such increases has been partially offset by reductions in depreciation and amortization as a result of such sales. (See "Liquidity and Capital Resources"). In fiscal 1994, the Company realized the benefit of reductions to required workers' compensation claim reserves resulting from favorable experience adjustments and revisions to applicable workers' compensation laws. Excluding the effect of such experience adjustments, selling, general and administrative expenses were 29.1% of net sales in fiscal 1994. The Company revised its workers' compensation program in early fiscal 1995 and no significant favorable or unfavorable experienced adjustments were recognized in fiscal 1995 or are expected in the future. Depreciation and Amortization Depreciation and amortization, which includes the amortization of new store pre-opening costs, increased $2.2 million to $8.1 million in fiscal 1995 as compared to $5.9 million in fiscal 1994, an increase of 37.3%. This increase is primarily due to the amortization of new store pre-opening costs which increased by $2.1 million to $2.5 million in fiscal 1995 as compared to $438,000 in fiscal 1994, as a result of completing and opening two new stores in fiscal 1994 and six new stores (including one replacement store) in fiscal 1995. Excluding the amortization of new store pre-opening costs, depreciation and amortization as a percent of net sales decreased to 1.4% in fiscal 1995 as compared to 1.5% in fiscal 1994. This decrease is primarily due to lower depreciation expense resulting from the sale and leaseback of the Company's department store in Capitola, California in fiscal 1995 and its mainframe computer in fiscal 1994, partially offset by additional depreciation expense resulting from capital expenditures, net of reimbursements received for certain of those expenditures, for new stores opened during the year. (See "Liquidity and Capital Resources"). Management expects the amortization of new store pre-opening costs to be lower in fiscal 1996 as compared to fiscal 1995 due to fewer planned new store openings. Interest Expense Interest expense increased $1.1 million to $11.3 million in fiscal 1995 as compared to $10.2 million in fiscal 1994, an increase of 10.8%. Due to the increased sales volume, interest expense as a percent of net sales remained unchanged at 2.8% in fiscal 1995 and 1994. The dollar increase in interest expense resulted from an increase in the weighted-average interest rate charged on outstanding borrowings under the Company's various lines of credit (8.75% in fiscal 1995 as compared to 7.13% in fiscal 1994); higher average outstanding borrowings under those lines of credit to fund increased inventory purchases associated with new stores and operating losses during the year; and additional interest expense associated with the Midland mortgage loans (October 1995), Heller note payable (December 1994) and Fixed Base Certificates (March 1994). These increases were partially offset by lower interest on long-term borrowings as a result of the application of proceeds from the Midland mortgage financing and the Capitola sale and leaseback arrangement. (See "Liquidity and Capital Resources.") Provision for Unusual Items The provision for unusual items in fiscal 1994, totaling $3.8 million, includes a provision of $3.5 million representing costs incurred in connection with an agreement reached to settle the stockholder litigation previously pending against the Company and related legal fees and other costs. The Company paid all amounts due in connection with the settlement agreement in February 1995. No additional costs in excess of such amounts previously accrued have been incurred by the Company. (See Note 10 to the Consolidated Financial Statements.) 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 benefit was (34.5%) in fiscal 1995 as compared to an effective tax rate of 35.1% in fiscal 1994. (See Note 7 to the Consolidated Financial Statements.) Fiscal 1994 Compared to Fiscal 1993 Net Sales Net sales increased $21.2 million to $363.6 million in fiscal 1994 as compared to $342.4 million in fiscal 1993, an increase of 6.2%. This increase reflects additional sales volume generated by the opening of two new Gottschalks stores during the year in Oakhurst (a junior satellite store -- October 1994) and Sacramento, California (November 1994), and two new Gottschalks stores in Hanford (March 1993) and Redding, California (a junior satellite store -- November 1993), not open for the entire year in fiscal 1993. Comparable store sales increased by 3.3% in fiscal 1994 as compared to fiscal 1993, primarily due to strong promotional activity and improved economic conditions in many of the Company's market areas during the period. Service Charges and Other Income Service charges and other income increased approximately $800,000 to $9.7 million in fiscal 1994 as compared to $8.9 million in fiscal 1993, an increase of 9.0%. As a percent of net sales, service charges and other income remained unchanged at 2.6% in fiscal 1994 and 1993. Service charges associated with the Company's customer credit cards increased $800,000 to $8.9 million in fiscal 1994 as compared to $8.1 million in 1993, an increase of 9.9%. This increase is primarily due to an increase in credit sales as a percent of total sales (43.5% in fiscal 1994 as compared to 38.8% in fiscal 1993), resulting from the success of new credit-related programs first initiated by the Company in fiscal 1994 and 1993, in addition to credit solicitation activities resulting in a higher percentage of customer credit card accounts opened in connection with new store openings in fiscal 1994 and 1993. (See Part I, Item I, "Business -- Credit Policy"). Other income was $755,000 in fiscal 1994 as compared to $838,000 in fiscal 1993, a decrease of $83,000. Significant items included in other income included a one-time 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 equity in the income of the Company's investment in a limited partnership of $160,000 in 1994 as compared to a $228,000 loss recognized on the investment in 1993 (see Note 1 to the Consolidated Financial Statements.) Cost of Sales Cost of sales increased $13.7 million to $247.4 million in fiscal 1994 as compared to $233.7 million in fiscal 1993, an increase of 5.9%. The Company's gross margin percent increased to 32.0% in fiscal 1994 as compared to 31.8% in fiscal 1993. The Company's fiscal 1994 gross margin percent includes a favorable year-end LIFO inventory valuation adjustment, resulting in an increase in gross margin of $3.2 million, as compared to a reduction to gross margin resulting from the fiscal 1993 LIFO adjustment of $969,000. To a lesser extent, the improved gross margin also resulted from a reduction of inventory shrinkage to 1.4% as a percent of net sales in fiscal 1994 as compared to 2.1% in fiscal 1993, primarily from improved inventory-related controls. Excluding the effect of the LIFO adjustment, the Company's gross margin percent was 31.1% in fiscal 1994 as compared to 32.0% in fiscal 1993. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased approximately $100,000 to $103.6 million in fiscal 1994 as compared to $103.7 million in fiscal 1993, a decrease of .10%. As a percent of net sales, selling, general and administrative expenses decreased to 28.5% in fiscal 1994 as compared to 30.3% in fiscal 1993. This decrease as a percent of net sales resulted from the increase in sales volume and a reduction of certain operating expenses as a result of expense control measures implemented throughout the Company. 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 1994, however recognized increases to such reserves in fiscal 1993. Excluding the effect of such experience adjustments, selling, general and administrative expenses as a percent of net sales were 29.1% in 1994 as compared to 30.7% in 1993. Depreciation and Amortization Depreciation and amortization was unchanged at $5.9 million in fiscal 1994 and 1993. As a percent of net sales, depreciation and amortization decreased to 1.6% in fiscal 1994 as compared to 1.7% in fiscal 1993. This decrease as a percent of net sales resulted primarily from the increase in sales volume. The amortization of new store pre-opening costs was $438,000 in fiscal 1994 as compared to $429,000 in fiscal 1993. Interest Expense Interest expense increased $1.7 million to $10.2 million in fiscal 1995 as compared to $8.5 million in fiscal 1994, an increase of 20.0%. As a percent of net sales, interest expense increased to 2.8% in fiscal 1994 as compared to 2.5% in fiscal 1993. These increases resulted from an increase in the weighted-average interest rate charged on outstanding borrowings under the Company's various lines of credit (7.13% in 1994 as compared to 6.5% in 1993); higher average outstanding borrowings under those lines of credit to fund increased inventory purchases associated with new stores; and additional interest expense associated with the Heller note payable (December 1994) and Fixed Base Certificates (March 1994). (See "Liquidity and Capital Resources.") Provision for Unusual Items As described more fully in the Company's 1994 Annual Report on Form 10-K and Note 10 to the Consolidated Financial Statements, the provision for unusual items in fiscal 1994, totaling $3.8 million, includes a provision of $3.5 million representing costs incurred in connection with an agreement reached to settle the stockholder litigation previously pending against the Company and related legal fees and other costs. The provision for unusual items in fiscal 1993, totaling $3.4 million, includes interest expense, legal and accounting fees and other costs incurred primarily in connection with the settlement of all pending federal civil matters related to an income tax deduction taken on the Company's 1985 federal tax return and the previously described stockholder litigation. 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 fiscal 1994 as compared to a benefit of (30.8%) in fiscal 1993. (See Note 7 to the Consolidated Financial Statements.) Liquidity and Capital Resources Overview of Current Liquidity Position. The fiscal 1995 retail environment presented the Company with many challenges. The Company's operating losses and capital requirements associated with the opening of new stores strained the Company's working capital facilities and reduced the Company's liquidity. As described more fully below, the Company has limited internal sources of liquidity due to the fact that operating uses of cash have exceeded cash generated by operations, requiring the Company to turn to external sources for a portion of its liquidity requirements. Sources of external liquidity are also limited due to the fact that : (i) all but one of the Company-owned stores have either been mortgaged or sold and leased back to the Company, leaving the Company with limited capacity for future secured borrowing; and (ii) borrowing capacity under the Company's primary revolving line of credit arrangement with Fleet Capital Corporation ("Fleet") depends on the Company's ability to comply with restrictive covenants in the applicable agreement. The Company had difficulties meeting certain of such covenants in fiscal 1995. Fleet has cooperated with the Company in revising such covenants and, when necessary, has granted waivers or agreed to forebear such violations. In addition, for fiscal 1996, Fleet has tied the covenants to the Company's 1996 financial plan (the "1996 Plan"). As of the date of this report, the Company's actual results of operations for the first two months of fiscal 1996 exceeded the 1996 Plan and the Company was in compliance with all applicable restrictive covenants. The following more completely summarizes the Company's present liquidity position and provides factors for evaluating the Company's liquidity prospects. Liquidity Needs. The Company's primary needs for liquidity are to provide working capital, to meet its debt service requirements and to fund costs associated with the acquisition and construction of new stores and the renovation of existing stores. In fiscal 1995 the Company also required additional funds for the payment of $3.0 million in connection with previously settled stockholder litigation. (See Note 10 to the Consolidated Financial Statements.) The Company's working capital increased by 13.2% in fiscal 1995, primarily as a result of increases in inventory and prepayments to vendors in connection with new store openings. The Company, unable to fully fund this increase from operating cash flow, funded the increase with debt. The increased inventory is pledged as collateral under the line of credit with Fleet. Note: See "Proposed Course of Action" and the factors listed therein which may affect the forward-looking statements contained in this paragraph. The Company anticipates its cash flow requirements for fiscal 1996 to be lower than in fiscal 1995, primarily due to fewer new store openings. The Company currently anticipates additional capital expenditures in fiscal 1996 of $4.0 million and increased inventory requirements and other costs of $5.2 million in connection with its fiscal 1996 new store openings, or $14.6 million less than such amounts incurred in connection with fiscal 1995 new store openings. The Company will also continue to require funds to meet its debt service payments, including a $2.7 million short-term note payable to Wells Fargo Bank, N. A., due in September 1996. While management currently expects to repay such loan with proceeds from a proposed sale and leaseback arrangement of the Company's department store in San Luis Obispo, California, in the event the proposed transaction is not finalized or its finalization is delayed, management believes the Company will have adequate cash flow available under alternative sources to repay the loan upon its scheduled maturity. (See "Mortgage and Sale-Leaseback Financings" below). In addition, as described more fully in Part I, Item III, "Legal Proceedings", the F&N litigation presently pending against the Company is scheduled for trial in July 1996. While the Company previously recorded a reserve for a loss that may result from an unfavorable judgement or settlement of that litigation, a cash payment in connection with such a judgement or settlement could take place in fiscal 1996. Management believes such amounts have been adequately provided for in the Company's fiscal 1996 plan. Liquidity Sources. In recent years, the Company's working capital requirements have been met through a combination of long-term and short-term debt financing, cash flows provided pursuant to its receivables securitization program, mortgage financings and sale-leasebacks of its owned department stores. The Company's current sources of liquidity, however, are more limited. It is anticipated that the Company's current liquidity will come primarily from cash, its revolving lines of credit and its securitization program. As described below, other sources of liquidity which were used by the Company in recent years are not likely to provide the Company with significant working capital funds. As a result, the Company's ability to take advantage of growth opportunities will be limited. Mortgage and Sale-Leaseback Financings. The Company finalized certain mortgage loans and a sale-leaseback financing of its properties in fiscal 1995. (See Notes 3 and 6 to the Consolidated Financial Statements.) Proceeds from such transactions were used primarily to repay pre-existing loans and to reduce outstanding borrowings under the Company's line of credit with Fleet. Management is currently negotiating for the sale and leaseback of its department store located in San Luis Obispo, California. Management expects the arrangement to be finalized in the second quarter of fiscal 1996 and intends to use the $6.9 million expected proceeds from the arrangement to repay the $2.7 million short-term obligation to Wells Fargo, due September 5, 1996, with the remaining $4.2 million available for working capital purposes. However, there can be no assurance that the arrangement will be finalized, or that its finalization will not be delayed, subject to a variety of conditions precedent or other factors. Assuming such sale-leaseback is completed, all of the Company's land and buildings will either have been sold or pledged as collateral for mortgage loans and the Company will have no additional land or buildings that could be used to raise additional working capital. Cash Flows From Securitization Program. The Company's receivables securitization program provides the Company with an additional source of working capital financing that is generally more cost effective than traditional debt financing. (See "Other Recent Sources of Liquidity" and Note 2 to the Consolidated Financial Statements"). Management is presently negotiating with the Bank Hapoalim for the expansion and extension of the previously issued Variable Base Certificate and related line of credit, and expects to finalize such negotiations in fiscal 1996. Based on the present level of receivables and historical trends, management believes there will be adequate collateral to expand the Variable Base Certificate by $10.0 million in late fiscal 1996, which would result in total availability under the line of credit with Bank Hapoalim of $25.0 million. However, there can be no assurance that a sufficient level of receivables will be generated or that Bank Hapoalim will enter into such an expansion or extension. Revolving Lines of Credit. The Company's primary revolving line of credit arrangement is with Fleet and provides for borrowings of up to $66.0 million through March 1997. Such borrowings are limited to a restrictive borrowing base equal to 60% of eligible merchandise inventories during the months of March 1996 through December 1996 (50% during all other months). Interest under the Fleet line of credit is charged at a rate equal to LIBOR plus 2.8% through August 9, 1995 and LIBOR plus 3.4% thereafter (9.0% at February 3, 1996). In addition, as described more fully in Note 3 to the Consolidated Financial Statements, the arrangement with Fleet contains various restrictive covenants. Thus, while the maximum amount available for borrowings under the line of credit was $66.0 million at February 3, 1996, and only $30.2 million was outstanding as of that date, the Company's ability to continue to borrow under the Fleet facility depends upon its ability to meet the financial covenants and the restrictive borrowing base. The arrangement with Fleet was amended several times during fiscal 1995 and one additional time in early fiscal 1996, primarily to increase the Company's borrowing capacity under the arrangement and to revise certain restrictive covenants that the Company would have otherwise breached. Increases to the borrowing capacity under the arrangement were requested by the Company in order to fund additional inventory purchases and capital requirements that were incurred in connection with opportunities to open new stores that were presented to the Company after the fiscal 1995 borrowing capacity had been established. The Company also required increases to its borrowing capacity to provide funds to cover operating losses during the period. Certain of the restrictive covenants under the arrangement were originally established by Fleet based on the Company's fiscal 1995 financial plan. The Company revised its fiscal 1995 plan several times during the year to reflect its current level of operations and the impact of the new stores added after its original fiscal 1995 plan had been finalized. Accordingly, Fleet amended the agreement several times during the year, and in connection with such amendments, increased the interest rate charged under the arrangement and charged the Company additional loan and administrative fees. Notwithstanding the amendments, the Company was in violation of four of the covenants applicable to the Fleet arrangement as of February 3, 1996. (See Note 3 to the Consolidated Financial Statements). Fleet agreed to forebear such violations as of that date and to further amend certain of the restrictive covenants for fiscal 1996. Certain of the restrictive covenants applicable to the arrangement for fiscal 1996 have been established by Fleet based on the Company's fiscal 1996 financial plan. (See "Proposed Course of Action"). Accordingly, the Company's ability to maintain compliance with such covenants is contingent upon its ability to meet its 1996 Plan. The Company believes that it will be able to maintain compliance with the restrictive covenants in the Fleet arrangement. However, if the Company is unable to comply or to obtain waivers or amendments to the agreement in the future, Fleet will have the ability to deem all outstanding borrowings under the arrangement as immediately due and payable prior to its maturity on March 30, 1997. Management believes alternative financing sources may be available to the Company, however, any delay in obtaining such alternative financing would have a material adverse effect on the Company. Proposed Course of Action. The statements in this section "Proposed Course of Action" and in the section "Liquidity Needs" above contain forward-looking statements. Numerous factors could cause actual results to differ materially from the forward looking statements described. Many of such factors are beyond the Company's control. Such factors include, but are not limited to, (i) the Company's ability to improve performance of existing stores, reduce operating costs, enhance service charges and other revenues and improve cash flows, each as described below; (ii) potential negative customer response to the proposed changes summarized below; (iii) the actual costs incurred in opening new stores; (iv) the variability of the Company's results in any period due to the seasonal nature of the business, the timing and level of the Company's sales and promotions, the timing of new store openings, the weather and fashion trends; (v) the overall health of the economy in the Company's markets, such as levels of employment, consumer confidence and income and the effect of any downturn in the California economy or in the specific regions in which the Company operates; (vi) promotional and pricing programs of competitors; (vii) the ability of the Company to complete the sale-leaseback of its San Luis Obispo store; and (viii) the outcome of any Company litigation. The Company's 1996 Plan is aimed, among other things, at improving the Company's liquidity position. The 1996 Plan projects that the Company will have adequate cash and availability under its various revolving lines of credit to meet its liquidity needs through the end of fiscal 1996. The 1996 Plan incorporates a variety of strategies developed in connection with a recent operational and strategic review. Such strategies are aimed at increasing the Company's sales and gross margins, reducing its operating expenses and enhancing its service charges and other revenues. Management believes the Company's outlook for fiscal 1996 will largely be dependant upon the Company's ability to achieve the operating results and level of cash flows projected in that plan. As of the date of this report, certain of the operational and stretegic assumptions incorporated in the 1996 Plan, described more fully below, have already been implemented. Improved performance of existing stores - Management believes the Company's performance can be improved by changing its approach with respect to under-performing stores. Management has identified two of its department stores that are currently performing below desired levels and is pursuing a strategy to modify the operations of those locations in an attempt to minimize their adverse affect on the Company's overall operating results. Unfortunately, the opportunities to close these locations are limited due to certain provisions contained in the related lease agreements. Reduce operating costs - In connection with its efforts to reduce operating costs, the Company benchmarked its operating costs against certain of its peer group and competitors' operations and has identified areas in which the Company could potentially reduce its operating costs without adversely affecting customer service and sales levels. The primary source of operating cost reductions are expected to occur in the following areas: (i) personell reductions through the reduction of selling, buying, and administrative staff, the restructuring of job assignments and the elimination of duplicative functions and functions no longer essential to the core operations of the Company; (ii) the outsourcing of certain functions where cost benefits and efficiencies can be attained; (iii) the renegotiation of certain contracts and agreements; and (iv) the elimination or reduction of certain discretionary expenses. Enhance service charges and other revenues - The Company intends to implement an increase to the finance charge rate assessed on outstanding customer credit card account balances and to increase the late charges assessed on delinquent customer accounts, consistent with rates charged by certain competitors', by mid-fiscal 1996. (See Part I, Item I," Business -- Credit Policy"). Improve cash flow - The Company's fiscal 1995 expansion program included the opening of six new department stores. (See Part I, Item I, "Business -- Store Expansion and Remodeling"). As of the date of this report, the Company has opened the one new store in Reno, Nevada, and the two replacement stores in Fresno and Modesto, California, contemplated in the Company's 1996 Plan. With the exception of expenditures related to those new stores, the Company currently does not anticipate any further new store openings in fiscal 1996. Additionally, the Company intends to limit major capital expenditures, maintain tight controls over inventory levels and substantially reduce other discretionary expenditures in order to provide increased cash flows for operations. The Company's cash flow was enhanced during the first quarter of fiscal 1996 by the receipt of $2.8 million in connection with the filing of certain amended income tax returns. Management believes the Company's ability to meet its 1996 plan is further enhanced by the acquisition of one of its primary competitors. Federated Department Stores, Inc. ("Federated") acquired Broadway Stores, Inc. ("Broadway"), in late fiscal 1995. Broadway operated eleven stores under Broadway and Weinstocks nameplates in approximately one-third of the Company's market areas. Federated has announced that it will permanently close four of those locations during the first quarter of fiscal 1996 and will temporarily close three of those locations for remodeling, with those stores expected to reopen in the third or fourth quarters of fiscal 1996 under a Macys or Bullocks nameplate. The remaining four locations were reopened by Federated immediately under a Macys or Bullocks nameplate. Management believes that while Broadway stores carried substantially the same merchandise and competed for the same customer as the Company, Macys/Bullocks department stores generally carry higher priced merchandise and compete with the Company to a lesser degree. The Company's stores in the locations in which Broadway stores are to be permanently or temporarily closed comprised 34.9% of the Company's fiscal 1995 sales. Management expects this percentage to increase in fiscal 1996 as a result of the temporary and permanent store closures. Other Recent Sources of Liquidity. Mortgage and Sale-Leaseback Financings. The Company obtained additional working capital funds in fiscal 1995 through mortgage loans and a sale-leaseback. On October 4, 1995, the Company finalized three fifteen-year mortgage loans with Midland Commercial Funding ("Midland"), and on October 10, 1995 finalized a fourth such mortgage loan. The mortgage loans, collectively the "Midland loans", are collateralized by the land, buildings and leasehold improvements of four of the Company's department stores located in Eureka, Antioch, Yuba City and Palmdale, California. The $20.0 million total proceeds from the arrangements were used to repay the $9.8 million remaining outstanding balance of a pre-existing long-term loan with Wells Fargo, with the remaining $10.2 million used to reduce outstanding borrowings under the Fleet line of credit and pay certain costs associated with the transaction. Monthly principal payments on the mortgage loans are based on twenty-five year amortization schedules and interest is payable at fixed rates ranging from 9.23% to 9.39%. The outstanding balance of the Midland loans was $20.0 million at February 3, 1996. On June 27, 1995, the Company finalized the sale and leaseback of the land, building and leasehold improvements comprising its department store located in Capitola, California. Proceeds from the arrangement, totaling $11.6 million, were used to reduce the outstanding balance of the previously described Wells Fargo long-term note payable by $8.0 million, with the remaining $3.6 million used to reduce outstanding borrowings under the Fleet line of credit. Bank and Other Financings. In addition to the Fleet facility, the Company also has a revolving line of credit with Bank Hapoalim that provides for additional borrowings of up to $15.0 million through March 1997, limited to a restrictive borrowing base. Interest on outstanding borrowings under the line of credit is charged at a rate equal to LIBOR plus 1.0% (6.625% at February 3, 1996). At February 3, 1996, the maximum amount available for borrowings of $15.0 million was outstanding under the line of credit with Bank Hapoalim. The Company also has a long-term financing arrangement with Heller Financial, Inc. ("Heller"), due January 1, 2002, which bears interest at a rate of 10.45% and had an outstanding loan balance of $5.7 million at February 3, 1996. The note with Heller also contains various restrictive loan covenants. The Company was in violation of one of those covenants at February 3, 1996. The Company has obtained a waiver from the lender for the violation as of that date and the agreement has been amended to avoid expected future violations. Management believes the Company will be able to maintain compliance with the applicable covenants, as amended, throughout fiscal 1996. Accordingly, the related debt is classified as long-term pursuant to its original terms in the accompanying financial statements. The Company's 8.55% Commercial Revenue Bonds were paid upon their maturity on December 1, 1995 with proceeds from a short-term note payable to Wells Fargo in the amount of $2.7 million. The note payable, originally due March 5, 1995, (extended to September 5, 1996), is collateralized by the Company's department store in San Luis Obispo, California, and bears interest at a rate of 1/4% above the prime rate of interest through March 5, 1996, increasing to 1 and 1/2% above the prime rate through June 5, 1996 and 2% above the prime rate of interest, thereafter. During 1995, the Company also received a total of $1.3 million in connection with two of its fiscal 1995 store openings for the purpose of financing fixture and equipment expenditures at those locations. The $1.3 million is to be repaid over ten-year maturity periods at interest rates ranging from 5.0% to 10.0%. The outstanding balance of such loans at February 3, 1996 was $1.2 million. Securitization Program. As described more fully in Note 3 to the Consolidated Financial Statements, the Company issued $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates ("Fixed Base Certificates") to third-party investors in March 1994 under a receivables securitization program. Interest, earned by the certificateholders on a monthly basis, is paid through finance charges collected under the program. The outstanding principal balance of the certificates 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 issuance of the Fixed Base Certificates was accounted for as a sale for financial reporting purposes. Accordingly, the $40.0 million of receivables underlying those certificates and the corresponding obligations are excluded from the accompanying financial statements. 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. In September 1994, a Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate") in the principal amount of up to $15.0 million was also issued to Bank Hapoalim as collateral for the previously described revolving line of credit financing arrangement with that bank. In addition to the Fixed and Variable Base Certificate, additional series of certificates may be issued as a source of additional working capital financing to the Company. Management is presently contemplating the issuance of an additional variable base certificate in late fiscal 1996, however, there can be no assurance that such an issuance will occur. Subsequent Events. On March 29, 1996, the Company finalized an agreement with Broadway Stores, Inc. ("Broadway"), a wholly-owned subsidiary of Federated Department Stores, Inc. ("Federated"), and Way Modesto Properties, Corp., the landlord, whereby the Company vacated its present location in the Modesto, California Vintage Faire Mall and sub-leased Broadway's former store in that mall for the remaining twelve years, including renewal periods, of the lease. Pursuant to a letter of intent dated April 16, 1996, the Company also vacated its present location in the Fresno Fashion Fair Mall and reopened a new store in that mall in the former Broadway store location. Management expects to finalize a twenty-year lease for Fashion Fair location in the near-term. Lease terms under both of the arrangements are comparable to other leases of the Company. In connection with the arrangements, the Company purchased certain of the existing fixtures and equipment at the Modesto location from Federated for $1.3 million, and Federated financed the purchase price with a five-year note payable bearing interest at a rate of 10.0%. The Company expects Federated to finance the purchase of additional fixtures and equipment under similar terms in connection with the finalization of the Fashion Fair arrangement. Additional Cash Flow and Working Capital Analysis. Working capital increased to $42.9 million in fiscal 1995 as compared to $37.9 million in fiscal 1994 and $32.1 million in fiscal 1993. The Company's ratio of current assets to current liabilities continued to improve, increasing to 1.45:1 at February 3, 1996, as compared to 1.43:1 at January 28, 1995 and 1.30:1 at January 29, 1994. Cash flows from operating activities consist primarily of net income (loss) adjusted for certain non-cash income and expense items, including, but not limited to, depreciation and amortization, the provision for uncollectible accounts and changes in deferred taxes. Net cash used in operating activities was $18.9 million in fiscal 1995. Excluding the payment of certain recurring expenses related to fiscal 1996 that occured in fiscal 1995 due to the 53rd week, net cash used in operating activities was $11.3 million in fiscal 1995 as compared to $1.5 million in fiscal 1994, an increase of $9.8 million. This increase is primarily attributable to increased inventory requirements associated with six new stores (including one larger replacement store) opened since the prior year, less $4.0 million received as incentive to open one of those new stores (see Note 5 to the Consolidated Financial Statements) and an increase in amounts due from vendors and prepayments for certain merchandise. As described more fully in Note 10 to the Consolidated Financial Statements, net cash used in operating activities in fiscal 1995 also includes the payment of $3.0 million into an irrevocable trust in accordance with the settlement of the previously described stockholder litigation and amounts paid in connection the settlement of previously outstanding state income tax matters. Net cash used in operating activities in fiscal 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 fiscal 1994 is also attributable to the receipt of opportunistic purchases of merchandise shortly before year-end. As described more fully in Note 10 to the Consolidated Financial Statements, net cash used in and provided by operating activities in fiscal 1994 and 1993 also reflects amounts paid in connection with the government's investigation and related stockholder litigation. Net cash used in investing activities was $1.1 million in fiscal 1995 as compared to $2.5 million in fiscal 1994, a decrease of $1.4 million. Net cash used in investing activities in fiscal 1995 includes expenditures for tenant improvements, construction costs and furniture, fixtures and equipment associated with new and certain existing store locations, less reimbursements received for certain of those expenditures and proceeds from the previously described Capitola store sale and leaseback arrangement. Net cash used in investing activities in 1994 and 1993 consisted primarily of expenditures for two new stores opened during each of those years. Net cash provided by financing activities was $21.9 million in fiscal 1995 as compared to $6.0 million in fiscal 1994, an increase of $15.9 million. Net cash provided by financing activities in fiscal 1995 consisted primarily of proceeds from the Company's revolving lines of credit, net of repayments made on its various credit facilities during the year. The $20.0 million provided by the Midland financing was fully applied against previously outstanding obligations. The sale and leaseback arrangement finalized in fiscal 1995 resulted in an increase to working capital of $3.6 million. Net cash provided by financing activities in fiscal 1994 included borrowings under the Company's lines of credit and was partially offset by the application of the $40.0 million proceeds received through the issuance of the Fixed Base Certificates, which was used to repay all outstanding borrowings under 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 consisted primarily of proceeds from the Company's revolving line of credit and other long-term borrowings. Inflation Although inflation has not been a material factor to the Company's operations during the past several years, the Company does experience some increases in the cost of certain of its merchandise, salaries, employee benefits and other general and administrative costs. The Company is generally able to offset these increase 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 Company's results may also vary from quarter to quarter as a result of, among other things, the timing and level of the Company's sales promotions, weather, fashion trends and the overall health of the economy in the Company's market areas. Working capital requirements also fluctuate during the year, increasing substantially prior to the Christmas selling season when the Company must carry significantly higher inventory levels. The following table sets forth unaudited quarterly results of operations for fiscal 1995 and 1994 (in thousands, except per share data). (See Note 13 to the Consolidated Financial Statements.)
1995 Quarter ended April 29 July 29 October 28 February 3 Net sales $77,934 $91,884 $86,066 $145,157 Gross profit 22,553 27,490 27,432 44,739 Income (loss) before income tax expense (benefit) (5,100) (3,155) (5,101) 4,745 Net income (loss) (3,162) (1,955) (3,164) 2,642 Income (loss) per common share (.30) (.19) (.30) .25 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 _________________________________
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 27, 1996, to be filed pursuant to Regulation 14A. The following table lists the executive officers of the Company: Name Age(1) Position Joseph W. Levy 64 Chairman and Chief Executive Officer Stephen J. Furst 53 President, Chief Operating Officer and Director Gary L. Gladding 56 Executive Vice President/ General Merchandise Manager Alan A. Weinstein 51 Senior Vice President and Chief Financial Officer Michael J. Schmidt 54 Senior Vice President/ Director of Stores __________________________ (1) As of March 31, 1996 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 91 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. From October 1983 through February 1985, he was Manager of the Gottschalks Fashion Fair store. Prior to joining the Company, he was General Manager of the Liberty House store in Fresno from January 1981 to October 1983, and before 1981, 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 27, 1996, 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 27, 1996, 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 27, 1996, to be filed pursuant to Regulation 14A. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Gottschalks Inc. and Subsidiaries are included in Item 8: Consolidated balance sheets -- February 3, 1996 and January 28, 1995 Consolidated statements of operations -- Fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 Consolidated statements of stockholders' equity -- Fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 Consolidated statements of cash flows -- Fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 Notes to consolidated financial statements - Three years ended February 3, 1996 Independent auditors' report (a)(2) The following financial statement schedule of Gottschalks Inc. and Subsidiaries is included in Item 14(d): Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the consolidated financial statements, are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The following exhibits are required by Item 601 of 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. 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 1986 Employee Incentive Stock Option Plan with form of stock option agreement thereunder.(3)(4) 10.3 1986 Employee Nonqualified Stock Option Plan with form of stock option agreement thereunder.(3)(4) 10.4 Gottschalks Inc. Stock Purchase Plan.(3)(4) 10.5 Wage Continuation Agreement dated November 24, 1980 by and between E. Gottschalk & Co., Inc. and Joseph W. Levy. (3)(4) 10.6 Employment Agreement dated June 1, 1987 by and between E. Gottschalk & Co., Inc. and Michael J. Schmidt.(1)(4) 10.7 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) 10.8 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) 10.9 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) 10.10 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) 10.11 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) 10.12 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) 10.13 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) 10.14 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) 10.15 Receivables Purchase Agreement dated as of March 30, 1994 by and between Gottschalks Credit Receivables Corporation and Gottschalks Inc.(6) 10.16 Pooling and Servicing Agreement dated as of March 30, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (6) 10.17 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) 10.18 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) 10.19 Loan and Security Agreement dated March 30, 1994 by and between Barclays Business Credit, Inc. and Gottschalks Inc.(6) 10.20 Intercreditor Agreement dated March 30, 1994 by and among Gottschalks Inc., Barclays Business Credit, Inc. and Wells Fargo Bank, National Association.(6) 10.21 Assignment and Acceptance by and between Wells Fargo Bank, National Association and Barclays Business Credit, Inc.(6) 10.22 First Amendment to Loan and Security Agreement dated May 12, 1994; Second Amendment to Loan and Security Ag reement 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.) (15) 10.23 1994 Amended and Restated Credit Agreement dated as of March 30, 1994 by and between Gottschalks Inc. and Wells Fargo Bank, National Association.(6) 10.24 Second Amended and Restated Security Agreement dated as of August 26, 1993 by and between Gottschalks Inc. and Wells Fargo Bank, National Association.(10) 10.25 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) 10.26 Waiver Agreement dated November 23, 1994, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.(7) 10.27 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) 10.28 New Term Loan Maturity Date Extension dated November 15, 1994, by and between Gottschalks Inc. and Wells Fargo Bank, N.A.(7) 10.29 Waiver Agreement dated October 21, 1994, by and between Gottschalks Inc. and Wells Fargo Bank, N.A.(7) 10.30 Consulting Agreement dated June 1, 1994 by and between Gottschalks Inc. and Gerald H. Blum.(4)(8) 10.31 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) 10.32 1994 Key Employee Incentive Stock Option Plan.(4)(9) 10.33 1994 Director Nonqualified Stock Option Plan.(4)(9) 10.34 1994 Executive Bonus Plan.(4) 10.35 Promissory Note and Security Agreement dated December 16, 1994 by and between Gottschalks Inc. and Heller Financial, Inc.(11) 10.36 Waiver Agreement dated May 12, 1995, by and between Gottschalks Inc. and Shawmut Capital Credit Corporation. (12) 10.37 Amendment dated July 3, 1995 to 1994 Amended and Restated Credit Agreement dated as of March 30, 1994, as amended, by and between Gottschalks Inc. and Wells Fargo Bank, N.A.(13) 10.38 Sixth Amendment to Loan and Security Agreement dated July 31, 1995, by and between Gottschalks Inc. and Shawmut Capital Corporation.(14) 10.39 Seventh Amendment to Loan and Security Agreement dated August 9, 1995, by and between Gottschalks Inc. and Shawmut Capital Corporation.(14) 10.40 Agreement of Sale dated June 27, 1995, by and between Gottschalks Inc. and Jack Baskin relating to the sale and leaseback of the Capitola, California property.(14) 10.41 Lease and Agreement dated June 27, 1995, by and between Jack Baskin and Gottschalks Inc. relating to the sale and leaseback of the Capitola, California property.(14) 10.42 Eighth Amendment to Loan and Security Agreement dated October 11, 1995 by and between Gottschalks Inc. and Fleet Capital Corporation.(15) 10.43 Promissory Notes and Security Agreements dated October 4, 1995 and October 10, 1995 by and between Gottschalks Inc. and Midland Commercial Funding.(15) 10.44 Forbearance Agreement dated December 11, 1995, by and between Gottschalks Inc. and Fleet Capital Corporation.(15) 10.45 Promissory Note and Deed of Trust with Assignment of Rents dated November 20, 1995 by and between Gottschalks Inc. and Wells Fargo Bank, N. A. 10.46 Note Extension and Modification Agreement dated March 12, 1996, by and between Gottschalks Inc. and Wells Fargo Bank, N. A. 10.47 Ninth and Tenth Amendments to Loan and Security Agreement dated January 26, 1996 and March 7, 1996, respectively, by and between Gottschalks Inc. and Fleet Capital Corporation. 10.48 Waiver Agreement dated April 22, 1996 by and between Gottschalks Inc. and Heller Financial, Inc. 21. Subsidiaries of the Registrant. (11) 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. (11) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 28, 1995 (File No. 1-09100), and incorporated herein by reference. (12) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended April 29, 1995 (File No. 1-09100), and incorporated herein by reference. (13) Filed as an exhibit to the Current Report on Form 8-K dated June 27, 1995 (File No. 1-09100), and incorporated herein by reference. (14) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (File No. 1-09100), and incorporated herein by reference. (15) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended October 28, 1995 (File No. 1-09100), 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 fiscal 1995. (c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedule--The response to this portion of Item 14 is submitted as a separate section of this report. ANNUAL REPORT ON FORM 10-K ITEM 8, 14(a)(1) and (2), (c) and (d) CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE YEAR ENDED FEBRUARY 3, 1996 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 February 3, 1996 and January 28, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 3, 1996. 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 consolidated financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiaries as of February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 1996, 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 29, 1996 (April 16, 1996 as to Note 12) GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands of dollars) February 3, January 28, ASSETS 1996 1995 CURRENT ASSETS: Cash $ 5,113 $ 3,156 Cash held by GCC Trust 2,280 2,365 Receivables: Trade accounts, less allowances of $1,262 in 1995 and $1,297 in 1994 (Note 2) 27,467 27,311 Vendor claims, less allowances of $90 in 1995 and $98 in 1994 5,776 3,125 33,243 30,436 Merchandise inventories 87,507 80,678 Refundable income taxes and deferred tax assets (Note 7) 1,437 1,565 Other 9,478 8,501 Total current assets 139,058 126,701 PROPERTY AND EQUIPMENT (Notes 4 and 6): Land and land improvements 16,064 19,178 Buildings and leasehold improvements 43,696 50,223 Furniture, fixtures and equipment 53,443 44,981 Buildings and equipment under capital leases 14,398 14,399 Construction in progress 1,948 845 129,549 129,626 Less accumulated depreciation and amortization 40,299 35,817 89,250 93,809 OTHER ASSETS: Goodwill, less accumulated amortization of $1,030 in 1995 and $913 in 1994 1,369 1,485 Other 9,364 11,358 10,733 12,843 $239,041 $233,353
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands of dollars) February 3, January 28, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 CURRENT LIABILITIES: Revolving lines of credit (Note 3) $ 45,164 $ 17,844 Bank overdraft 5,096 9,853 Trade accounts payable 22,298 25,179 Accrued expenses 10,633 16,417 Taxes, other than income taxes 2,346 7,487 Accrued payroll and related liabilities 5,112 5,267 Current portion of long-term obligations (Notes 3 and 4) 2,094 5,154 Short-term obligations (Note 3) 2,743 1,600 Deferred income taxes (Note 7) 668 _______ Total current liabilities 96,154 88,801 LONG-TERM OBLIGATIONS, less current portion (Notes 3 and 4): Notes, mortgages and bonds payable 25,654 23,721 Capitalized lease obligations 9,218 9,951 34,872 33,672 DEFERRED INCOME (Note 5) 20,265 16,366 DEFERRED LEASE PAYMENTS AND OTHER (Note 4) 5,902 5,032 DEFERRED INCOME TAXES (Note 7) 3,931 5,905 COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 11 and 12) STOCKHOLDERS' EQUITY (Notes 3 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 issued Common stock 104 104 Additional paid-in capital 55,945 56,112 Retained earnings 21,870 27,509 77,919 83,725 Less common stock in treasury at cost, 338 and 22,000 shares (2) (148) 77,917 83,577 $239,041 $233,353
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) 1995 1994 1993 Net sales $401,041 $363,603 $342,417 Service charges and other income 11,663 9,659 8,938 412,704 373,262 351,355 Costs and expenses: Cost of sales 278,827 247,423 233,715 Selling, general and administrative expenses (Notes 4, 6 and 9) 123,100 103,571 103,675 Depreciation and amortization 8,092 5,860 5,877 Interest expense (Note 3) 11,296 10,238 8,524 Provision for unusual items (Note 10) 3,833 3,427 421,315 370,925 355,218 Income (loss) before income tax expense (benefit) (8,611) 2,337 (3,863) Income tax expense (benefit)(Note 7) (2,972) 821 (1,190) Net income (loss) $ (5,639) $ 1,516 $ (2,673) Net income (loss) per common share $ (.54) $ .15 $ (.26)
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars, except share data) Common Stock Additional Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total 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 Net loss (5,639) (5,639) Net compensation benefit related to stock option plan (170) (170) Purchase of 12,500 shares of treasury stock (94) (94) Contribution of 34,164 shares of treasury stock to Retirement Savings Plan 3 240 243 BALANCE, FEBRUARY 3, 1996 10,416,520 $104 $55,945 $21,870 $ (2) $77,917
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1995 1994 1993 OPERATING ACTIVITIES: Net income (loss) $ (5,639) $ 1,516 $ (2,673) Adjustments: Depreciation and amortization 8,096 5,849 5,876 Deferred income taxes (1,296) 876 (236) Deferred lease payments and other 870 734 619 Deferred income (609) (493) (556) Net compensation (benefit)expense related to stock option plan (170) 24 (43) Provision for credit losses 2,754 2,052 2,164 LIFO (benefit) provision (3,202) 969 Equity in the (income) loss of limited partnership (64) (160) 228 Net (gain) loss from sale of assets (344) 7 37 Loss on securitization and sale of receivables (Note 2) 305 Stockholder litigation settlement (Note 10)(3,000) Lease incentive (Note 5) 4,000 Changes in operating assets and liabilities: Receivables (excluding receivables sold - Note 2) (5,261) (6,952) (5,248) Merchandise inventories (6,215) (16,384) (2,030) Other current and long-term assets (1,711) (35) (3,666) Other current and long-term liabilities(10,304) 14,326 1,944 Net cash used in operating activities (18,893) (1,537) (2,615) INVESTING ACTIVITIES: Purchases of property and equipment, net of reimbursements received (12,773) (4,539) (5,456) Proceeds from sale/leaseback arrangements and other property and equipment sales 11,606 1,881 13 Distribution from limited partnership 86 153 Net cash used in investing activities (1,081) (2,505) (5,443) FINANCING ACTIVITIES: Proceeds from revolving lines of credit 533,433 357,238 113,638 Principal payments on revolving lines of credit (506,113) (389,094) (119,038) Proceeds from short-term and long-term obligations 23,993 12,650 15,253 Principal payments on short-term and long-term obligations (24,710) (16,668) (3,465) Proceeds from securitization and sale of receivables (Note 2) 40,000 Changes in bank overdraft (4,757) 4,228 1,774 Changes in cash held by GCC Trust 85 (2,365) Issuance of common stock pursuant to stock option plan 94 10 Shares purchased and retired (98) (7) Net cash provided by financing activities 21,931 5,985 8,165 INCREASE IN CASH 1,957 1,943 107 CASH AT BEGINNING OF YEAR 3,156 1,213 1,106 CASH AT END OF YEAR $ 5,113 $ 3,156 $ 1,213
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California, currently consisting of thirty-four "Gottschalks" department stores and twenty-five "Village East" specialty stores located primarily in non-major metropolitan cities throughout California, and in Oregon, Washington and Nevada. Gottschalks department stores typically offer a wide range of brand-name and private-label merchandise, including women's, men's, junior's and children's apparel, cosmetics, home furnishings and other consumer goods. Village East specialty stores offer apparel for larger women. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and ass umptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions are subject to inherent uncertainties which may result in actual results differing from reported amounts. Consolidation - The accompanying financial statements 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), (collectively, the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Fiscal Year - The Company's fiscal year ends on the Saturday nearest January 31. Fiscal years 1995, 1994 and 1993 ended on February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Fiscal year 1995 contained 53 weeks and fiscal years 1994 and 1993 each contained 52 weeks. The Company's fiscal 1995 results of operations were not materially affected by results applicable to the 53rd week. Cash Held by GCC Trust - Cash held by GCC Trust relates to the receivable securitization program (Note 2) and includes $2,035,000 and $2,120,000 at February 3, 1996 and January 28, 1995, respectively, designated under the prepayment option to reduce outstanding borrowings under the line of credit collateralized by the Variable Base Certificate subsequent to year end in each of those years. Cash held by GCC Trust also includes $245,000 at February 3, 1996 and January 28, 1995 for the payment of monthly interest to the Fixed Base Certificate holders. Bank Overdraft - Under the Company's cash management program, checks issued by the Company and not yet presented for payment frequently result in overdraft balances for accounting purposes. Such amounts represent interest-free, short-term borrowings to the Company. Receivables - Receivables, excluding receivables sold as of February 3, 1996 and January 28, 1995, 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 card receivables were $10,937,000 in 1995, $8,904,000 in 1994 and $8,100,000 in 1993. 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 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 February 3, 1996 and January 28, 1995. 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 $652,000 at February 3, 1996 and $724,000 at January 28, 1995 are included in other current assets. The amortization of new store pre-opening costs, totaling $2,524,000, $438,000 and $429,000 in 1995, 1994 and 1993, is included in depreciation and amortization in the accompanying statements of operations. 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. Reimbursements received for certain capital expenditures are reported as reductions to the original cost of the related assets. 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 accompanying statements of operations. 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 February 3, 1996 and January 28, 1995, the investment was $1,207,000 and $1,164,000, respectively, and prepaid rent, net of accumulated amortization, was $2,507,000 and $2,756,000, respectively. Such amounts are included in other long-term assets. The Company's equity in the income (loss) of the partnership, totaling $64,000 in 1995, $160,000 in 1994 and ($228,000) in 1993, is 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. The Company periodically analyzes the value of net assets acquired to determine whether any impairment in the value of such assets has occurred. The primary indicators of recoverability used by the Company are current or forecasted profitability of the related acquired assets as compared to their carrying values. Deferred Income - Deferred income consists primarily of donated land, cash received as incentive to construct new stores and cash received as an incentive to enter into a new lease arrangement. Land contributed to the Company is included in land and recorded at appraised fair market values. Except as described at Note 5, donated land and cash received as incentive to construct new stores is recorded as deferred income and amortized to operations 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. Leased Department Sales - Net sales include leased department sales of $29,766,000, $25,985,000 and $25,324,000 in 1995, 1994 and 1993, respectively. Cost of sales include related costs of $25,494,000, $22,326,000 and $21,825,000 in 1995, 1994 and 1993, 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 10,416,520, 10,413,339 and 10,377,201 in 1995, 1994 and 1993, respectively. The effect of common stock equivalents under the stock option plans were antidilutive in 1995, 1994 and 1993, and therefore not included. Non-Cash Transactions - The Company entered into a capital lease obligation of $683,000 in 1994 for leased equipment. 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 cash held by GCC Trust 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 or variable interest rates underlying those instruments. The following methods and assumptions were used to estimate the fair value for each remaining class of financial instruments: Long-term Obligations - The fair values of the Company's long-term obligations are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The aggregate estimated fair value of such obligations with an aggregate carrying value of $27,015,000 at February 3, 1996 is $28,186,000. Off-Balance Sheet Financial Instruments - The Company's off-balance sheet financial instruments consist primarily of the Fixed Base Certificates (Note 2). The aggregate estimated fair value of the Fixed Base Certificates, based on similar issues of certificates at current rates for the same remaining maturities, with an aggregate value of $40,000,000 at February 3, 1996 is $38,606,000. Recently Issued Accounting Standards - Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" was recently issued and is effective for fiscal years beginning after December 15, 1995. The adoption of the standard is not expected to materially impact the Company's financial position or its results of operations. SFAS No. 123, "Accounting for Stock Based Compensation" is also effective for fiscal years beginning after December 15, 1995. As permitted by the statement, the Company intends to continue to measure compensation cost for its stock option plans in accordance with Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees." Reclassifications - Certain amounts in the accompanying 1994 and 1993 consolidated financial statements have been reclassified to conform with the 1995 presentation. 2. SECURITIZATION AND SALE OF RECEIVABLES The Company entered into a five-and-a-half-year receivables securitization program on March 30, 1994. In connection with the program, all of the Company's accounts receivable arising under its private label customer credit cards as of March 30, 1994, in addition to all newly-generated receivables during the period subsequent to March 30, 1994 and through August 31, 1998, together with rights to all collections and recoveries on such receivables, were sold, without recourse, to a wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC") and certain of those receivables were subsequently conveyed to a trust, Gottschalks Credit Card Master Trust ("GCC Trust"), to be used as collateral for securities issued to investors. The Company has continued to service and administer the receivables in return for a monthly servicing fee. On March 30, 1994, GCC Trust sold, at par value, fractional undivided ownership interests in certain of the receivables held as of that date 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. Interest, earned by the certificate holders on a monthly basis, is paid with a portion of finance charges collected during the period. The outstanding principal balance of the certificates is to be repaid in equal monthly installments commencing September 15, 1998 and through September 15, 1999, through the application of the principal portion of credit card collections during that period. The issuance of the Fixed Base Certificates has been accounted for as a sale for financial reporting purposes. Accordingly, the $40,000,000 of receivables underlying the Fixed Base Certificates and the corresponding debt obligations have been excluded from amounts reported in the accompanying financial statements. 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 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 1994 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. 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 to Bank Hapoalim. The Variable Base Certificate, representing a fractional undivided ownership interest in 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 3). The Variable Base Certificate contains a prepayment option which enables the Company, at any time within three days notice, to prepay the full amount, or a portion of outstanding borrowings under the line of credit collateralized by the Variable Base Certificate. Accordingly, the issuance of the Variable Base Certificate was accounted for as a financing in the accompanying financial statements and the receivables underlying the Variable Base Certificate, totaling $17,857,000 at February 3, 1996 and January 28, 1995, are included in receivables reported in the accompanying financial statements. Receivables reported in the accompanying financial statements also include GCRC's retained interest in receivables sold on March 30, 1994, represented by a Subordinated Certificate and an Exchangeable Certificate issued to GCRC by GCC Trust on that date. The outstanding principal balance of such certificates totaled $8,035,000 as of February 3, 1996 and $7,888,000 as of January 28, 1995. Receivables also include accrued finance charges on all receivables, including receivables sold, and receivables that did not meet certain eligibility requirements of the program, totaling $2,837,000 at February 3, 1996 and $2,863,000 at January 28, 1995. Under the program, the Company is required, among other things, to maintain certain portfolio performance standards which include the maintenance of a minimum portfolio yield, maximum levels of delinquencies and write-offs of customer credit card receivables and minimum levels of credit card collection rates. As of February 3, 1996, the Company was in compliance with all applicable requirements of the program. 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 February 3, 1996, no such issuance has occurred. 3. DEBT OBLIGATIONS: Revolving Lines of Credit - The Company's primary revolving line of credit arrangement is with Fleet Capital Corporation ("Fleet" - formerly Shawmut Capital Corporation) and provides for borrowings of up to $66,000,000 through March 30, 1997. Such borrowings are limited to a restrictive borrowing base equal to 60% of eligible merchandise inventories during the months of March 1996 through December 1996 (50% in all other months). During fiscal 1995, interest on outstanding borrowings was charged at a rate of LIBOR, as determined by the bank, plus 2.8% through August 9, 1995 and LIBOR plus 3.4% thereafter (9.0% at February 3, 1996). The maximum amount available for borrowings under the line of credit was $66,000,000 at February 3, 1996, of which $30,200,000 was outstanding as of that date. The Company's arrangement with Fleet contains 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 arrangement provides for the maintenance of minimum adjusted earnings from operations and interest earned ratios and minimum inventory and payables turnover rates. The arrangement with Fleet was amended numerous times during fiscal 1995 and one additional time in early fiscal 1996, primarily to increase the Company's borrowing capacity under the arrangement and to revise certain restrictive covenants that would have otherwise breached. Increases to the borrowing capacity under the arrangement were requested by the Company in order to fund additional inventory purchases and capital requirements that were incurred in connection with opportunities to open new stores that were presented to the Company after the fiscal 1995 borrowing capacity had been established. The Company also required increases to its borrowing capacity to provide funds to cover operating losses during the period. Certain of the restrictive covenants under the arrangement were originally established by Fleet based on the Company's fiscal 1995 financial plan. The Company revised its fiscal 1995 plan several times during the year to reflect its current level of operations and the impact of the new stores added after its original fiscal 1995 plan had been finalized. Accordingly, Fleet amended the agreement several times during the year and in connection with such amendments, increased the interest rate charged under the arrangement and charged the Company additional loan and administrative fees. Notwithstanding the amendments, the Company was in violation of four of the covenants applicable to the Fleet arrangement as of February 3, 1996, including the maintenance of minimum monthly and annual adjusted earnings from operations levels, the minimum interest earned ratio and the minimum debt coverage ratio. Fleet agreed to forebear such violations as of that date and to further amend certain of the restrictive covenants for fiscal 1996. Certain of the restrictive covenants applicable to the arrangement for fiscal 1996 have been established by Fleet based on the Company's fiscal 1996 financial plan (the "1996 Plan"). The 1996 Plan includes various initiatives aimed at improving the Company's operating results. Accomplishing these objectives is subject to a number of risks and uncertainties, including management's ability to execute the 1996 Plan, the accuracy of various assumptions contained in the 1996 Plan, and the impact of external factors including economic conditions in the regions in which the Company operates, competitive pressures and changing consumer preferences. The Company believes that it will be able to maintain compliance with the restrictive covenants in the Fleet arrangement and that the Company will have sufficient liquidity throughout 1996. However, if the Company is unable to comply or to obtain waivers or amendments to the agreement in the future, Fleet will have the ability to deem all outstanding borrowings under the arrangement as immediately due and payable prior to its maturity on March 30, 1997. Management believes alternative financing sources may be available to the Company, however, any delay in obtaining such alternative financing would have a material adverse effect on the Company. The Company also has a revolving line of credit arrangement with Bank Hapoalim (Note 2) which provides for additional borrowings of up to $15,000,000 through March 30, 1997. Borrowings are limited to a percentage of the outstanding principal balance of receivables underlying the Variable Base Certificate and therefore, the Company's borrowing capacity under the line of credit with Bank Hapoalim is subject to 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% (6.625% at February 3, 1996). At February 3, 1996, the maximum amount available for borrowings of $15,000,000 was outstanding under the line of credit with Bank Hapoalim. Short-Term and Long-Term Obligations -
Notes, mortgages and bonds payable consist of the following: February 3, January 28, (In thousands of dollars) 1996 1995 Mortgage loans payable to financial institution, payable in monthly principal installments of $173 including interest at 9.23% and 9.39%, principal due and payable October 1, 2010 and November 1, 2010; collateralized by certain real property, assets and certain property and equipment $19,953 Note payable to bank, payable in monthly installments of $193 including interest at 10 3/4%, principal due and payable June 30, 1996 (paid in October 1995); collateralized by certain real property, assets and certain property and equipment $18,200 Mortgage loan payable to financial institution, payable in monthly principal installments of $79 plus interest at 10.45%, principal due and payable January 1, 2002; collateralized by certain real property, assets and certain property and equipment 5,700 6,650 Commercial Revenue Bonds, payable in monthly installments of $57 including interest at 8.55%, paid December 1, 1995; collateralized by land and building 3,055 Fixture loans and other 1,362 278 27,015 28,183 Less current portion 1,361 4,462 $25,654 $23,721
The note payable to Wells Fargo Bank, N. A., ("Wells Fargo") with an outstanding balance of $18,200,000 at January 28, 1995, was repaid in fiscal 1995, prior to its maturity, with a portion of proceeds from the sale and leaseback arrangement entered into in June 1995 (Note 6) and the mortgage loans finalized in October 1995, in addition to scheduled principal reductions during the period. In October 1995 the Company entered into four fifteen-year mortgage loans with Midland Commercial Funding ("Midland"). The $20,000,000 total proceeds from the arrangements were used to repay the $9,800,000 remaining balance of the previously described note payable to Wells Fargo, with the remaining proceeds used to reduce outstanding borrowings under the Fleet line of credit and pay certain costs associated with the transaction. The Company repaid the Commercial Revenue Bonds upon their maturity on December 1, 1995 with proceeds from a short-term loan extended by Wells Fargo. The short-term loan, with an outstanding balance of $2,743,000 at February 3, 1996, was originally due March 5, 1996 (extended to September 5, 1996), bears interest at a rate of 1/4% above the prime rate of interest through March 5, 1996, (increasing to 1 and 1/2% above the prime rate of interest through June 5, 1996 and to 2% above the prime rate of interest, thereafter), and is collateralized by one of the Company's department store locations. The short-term loan with an outstanding balance of $1,600,000 at January 28, 1995 represented a bridge loan financing provided by Wells Fargo and was repaid in full, prior to its due date, in March 1995. The Company received a total of $1,250,000 in connection with two of its fiscal 1995 store openings for the purpose of financing fixture and equipment expenditures at those locations. The loans, with outstanding balances totaling $1,215,000 at February 3, 1996, are to be repaid over ten-year maturity periods and bear interest at rates ranging from 5.0% to 10.0% over that period. The scheduled annual principal maturities on all notes payable and mortgage loans are $1,361,000, $1,241,000, $1,300,000, $1,373,000 and $1,408,000 for 1996 through 2000, respectively. Debt issuance costs related to the Company's various financing arrangements are included in other current and long-term assets and are 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 $1,995,000 at February 3, 1996 and $1,757,000 at January 28, 1995. Interest paid, net of amounts capitalized, was $10,927,000, $8,608,000 and $9,197,000 in 1995, 1994 and 1993, respectively. Capitalized interest expense was $278,000, $68,000, $46,000 in 1995, 1994 and 1993, respectively. The weighted-average interest rate charged on the Company's various revolving line of credit arrangements was 8.75% in 1995, 7.13% in 1994 and 6.5% in 1993. One of the Company's long-term financing arrangements also includes various restrictive covenants. The Company was in violation of one of those covenants at February 3, 1996 pertaining to the maintenance of a minimum ratio of EBITDA (net income before interest, taxes, depreciation and amortization) to interest expense. The Company has obtained a waiver from the lender for the violation as of that date and the applicable agreement has been amended to avoid expected future violations. Management believes the Company will be able to maintain compliance with the applicable covenants, as amended, throughout fiscal 1996. Accordingly, the related debt is classified as long-term pursuant to its original terms in the accompanying financial statements. 4. 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 totaled $5,584,000 at February 3, 1996 and $4,688,000 at January 28, 1995. 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 February 3, 1996:
Capital Leases Operating (In thousands of dollars) Buildings Equipment Leases 1996 $ 1,430 $273 $ 14,166 1997 1,430 204 13,770 1998 1,430 12,357 1999 1,430 13,042 2000 1,430 11,633 Thereafter 10,862 127,051 Total minimum lease payments 18,012 477 $192,019 Amount representing interest (8,486) ( 52) Present value of minimum lease payments 9,526 425 Less current portion (502) (231) $ 9,024 $194 Rental expense consists of the following: (In thousands of dollars) 1995 1994 1993 Operating leases: Buildings: Minimum rentals $ 9,796 $ 7,804 $ 7,472 Contingent rentals 1,969 1,142 1,118 Fixtures and equipment 4,679 3,177 2,893 16,444 12,123 11,483 Contingent rentals on capital leases 346 605 581 $16,790 $12,728 $12,064
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 February 3, 1996. 5. LEASE INCENTIVE The Company received $4,000,000 in 1995 as an incentive to enter into a lease in connection with one of the fiscal 1995 new store openings. The arrangement provides that in the event gross sales at that location are below a minimum specified amount as of the end of the fifth year of the lease, either the Company or the lessor may elect to terminate the lease at that time. The Company has a further right to terminate the lease after the tenth year of the lease if gross sales are below a minimum specified amount. If either party elected to terminate the lease at the end of the fifth year, the Company would be required to repay the $4,000,000 to the lessor. The $4,000,000 received has been deferred for financial reporting purposes. The Company commenced amortizing the lease incentive on a straight-line basis over the ten-year minimum lease period upon reaching the minimum specified sales amount in the first year of the lease. Management believes the likelihood the lease will be terminated by either party after the fifth year of the lease is remote. 6. SALE AND LEASEBACK ARRANGEMENT On June 27, 1995, the Company sold the land, building and leasehold improvements comprising its department store in Capitola, California and subsequently leased the department store back under a twenty-year lease with four five-year renewal options. The lease has been accounted for as an operating lease for financial reporting purposes. The $11,600,000 proceeds received from the sale were used to reduce the outstanding balance of the Company's long-term note payable to Wells Fargo by $8,000,000 (Note 3), with the remaining $3,600,000 used to reduce outstanding borrowings under the Company's line of credit arrangement with Fleet and pay certain costs associated with the transaction. The gain associated with the sale, totaling $508,000, has been deferred for financial reporting purposes and is being amortized on a straight-line basis over the twenty-year lease term. 7. INCOME TAXES
The components of income tax expense (benefit) are as follows: (In thousands of dollars) 1995 1994 1993 Current: Federal $(1,678) $ (19) $ (955) State 2 (36) 1 (1,676) (55) (954) Deferred: Federal (857) 555 (130) State (439) 321 (106) (1,296) 876 (236) $(2,972) $ 821 $(1,190)
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) 1995 1994 1993 Net operating loss carryforwards $ (516) $ 572 $(2,532) Accrued litigation costs 1,269 (766) (984) General business credit carryforwards 222 (748) (439) LIFO inventory reserve (44) 792 195 Accounting for leases (246) 378 207 Store pre-opening costs (31) 300 (92) Deferred income (1,517) 200 635 Depreciation (81) 179 683 Workers' compensation (463) 104 788 State income taxes 123 (88) 474 Accrued employee benefits (87) 347 Alternative minimum tax credit carryforwards 56 (30) 660 Other items, net (68) 70 (178) $(1,296) $ 876 $ (236)
The principal components of deferred tax assets and liabilities (in thousands of dollars) are as follows:
February 3, January 28, 1996 1995 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Accrued litigation costs $ 1,461 $ 2,730 Vacation and health claims 588 880 Credit losses 546 562 Accrued employee benefits 260 260 State income taxes 174 296 LIFO inventory reserve $ (2,548) $ (2,592) Workers' compensation 235 (228) Supplies inventory (1,044) (872) Other items, net 562 (902) 291 (1,317) 3,826 (4,494) 5,019 (5,009) Long-Term: Net operating loss carryforwards 4,327 3,811 General business credits 1,768 1,989 Alternative minimum tax 597 654 Depreciation expense (8,074) (8,155) Accounting for leases 811 (3,481) 558 (3,473) Deferred income 2,122 (1,550) (1,335) Installment sales (186) (521) Other items, net 726 (991) 665 (98) 10,351 (14,282) 7,677 (13,582) $14,177 $(18,776) $12,696 $(18,591)
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:
1995 1994 1993 Statutory rate (35.0%) 35.0% (35.0)% Nondeductible penalties .3 3.7 Adjustments to previously filed amended returns 7.3 Amortization of goodwill .5 1.7 1.0 Targeted jobs tax credit .5 (12.5) State income taxes, net of federal income tax benefit (2.7) 7.3 (2.0) Other items, net 1.9 (3.7) 1.5 Effective rate (34.5)% 35.1% (30.8)%
The Company received income tax refunds, net of payments, of $1,522,000 and $1,670,000 in 1995 and 1994. Income tax refunds receivable were $1,437,000 at February 3, 1996 and $1,555,000 at January 28, 1995. At February 3, 1996, the Company has net operating loss carryforwards of $9,992,000 which expire in the years 2009 and 2010, and general business credits of $897,000 which expire in the years 2006 through 2011. The Company also has alternative minimum tax credits of $465,000 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 The Company's stock option plans consist of the following: The 1986 Plans: The 1986 Employee Incentive Stock Option 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 1986 ISO Plan were to have been exercised within five years of the date of the grant. As of February 3, 1996, all unexercised options under the 1986 ISO Plan have expired. The 1986 Employee Nonqualified Stock Option Plan (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 (benefit) related to this plan of ($170,000), $24,000 and ($43,000) in 1995, 1994 and 1993, respectively. The benefits relate to the reversal of previously recognized compensation expense upon the forfeiture or expiration of unexercised options. The 1994 Plans: The 1994 Key Employee Incentive Stock Option 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 Stock Option Plan (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 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 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 Cancelled (119,500) $14.00 (40,246) $10.73 Outstanding at February 3, 1996 40,000 $ 9.88 --- Balances as of February 3, 1996: Exercisable 30,000 $ 9.88 --- 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 Granted 28,000 $ 6.63 Cancelled (32,000) $ 9.88 Outstanding at February 3, 1996 440,000 $6.63 to $10.87 20,000 $ 9.75 Balances as of February 3, 1996: Exercisable 103,000 $9.88 to $10.87 5,000 $ 9.75 Available for Future Grants 60,000 30,000
9. 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 currently elect to have up to 15% 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 $500,000, $250,000 and $271,000 in expense representing the Company's annual discretionary contribution to the Plan in 1995, 1994 and 1993, respectively. A Voluntary Employee Beneficiary Association (VEBA) trust has been established by the Company for the purpose of funding employee vacation benefits. 10. PROVISION FOR UNUSUAL ITEMS As described more fully in the Company's 1994 Annual Report on Form 10-K, the Company was the subject of a government investigation related to an employee benefit plan deduction (the "Income Tax Deduction") on its 1985 federal income tax return. 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 income tax return was disallowed. Such deduction was, however, allowed in subsequent years. In connection with the agreement, the Company paid a federal income tax deficiency, interest and penalties totaling $2,282,000 in 1994. The State of California also disallowed the Income Tax Deduction on the Company's 1985 state income tax return, however did allow the deduction in subsequent years. The Company paid a total of $452,000 to the State of California in 1995 in settlement of the state income tax deficiency, interest and penalties arising out of such Income Tax Deduction. The estimated tax deficiencies and penalties paid by the Company related to these matters were substantially accrued by the Company in fiscal 1992. The Company did, however, incur additional interest, legal and accounting fees and other costs related to these matters and such amounts are included in the provision for unusual items in the accompanying 1994 and 1993 statements of operations. The Company was also party to three civil stockholder lawsuits related to the Income Tax Deduction and other matters. The Company reached an agreement to settle all aspects of those lawsuits in August 1994, and included in unusual items in the Company's 1994 results of operations is a provision for $3,500,000, representing the cost to settle the lawsuits and related legal fees and other costs. 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 provision for unusual items included in the Company's consolidated statements of operations, totaling $3,833,000 in 1994 and $3,427,000 in 1993, represents total costs, including legal and accounting fees and other costs, incurred with respect to the previously described matters. No costs in excess of previously accrued amounts have been incurred by the Company in 1995. 11. COMMITMENTS AND CONTINGENCIES The Company is party to a lawsuit filed in 1992 by F&N Acquisition Corporation ("F&N") under which F&N originally claimed 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 claimed unspecified damages for its rejection of the next best offer to purchase the assignment of the lease. In 1992, F&N received 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 judgement was reversed in 1994, however, and remanded to the United States District Court for the Western District of Washington for further proceedings. Management's estimate of amounts that may ultimately be payable to F&N were previously accrued in fiscal 1992. An amendment to the original breach of contract claim contained in the F&N lawsuit was filed on January 29, 1996 alleging, among other things, that the Company breached the contract by deliberately delaying its performance. In addition to breach by intentional delay and impossibility, the plaintiffs have claimed fraud and negligent misrepresentations by executives of the Company. In connection with the F&N lawsuit, an additional complaint was filed against the Company by Sabey Corporation ("Sabey"), the owner of the mall in which the Frederick and Nelson store was located and the F&N and Sabey lawsuits were combined in May 1995. The F&N and Sabey lawsuits are currently scheduled for trial in July 1996. Management is continuing to vigorously defend the lawsuits and does not believe that any additional costs that may be incurred in connection with the lawsuits, as combined, will be material to the operating results of the Company. In addition to the matters described above, 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. The Company arranges for the issue of letters of credit in the ordinary course of business pursuant to certain factor and vendor contracts. As of February 3, 1996, the Company had outstanding letters of credit amounting to $4,200,000. Management believes the likelihood of non-performance under such contracts is remote. The Company opened one new department store and two new department stores as replacements to existing stores in early fiscal 1996. (See Note 12). The estimated cost to open the new stores, net of amounts to be contributed by mall owners or other third parties, is $3,978,000. 12. SUBSEQUENT EVENTS On March 29, 1996, the Company finalized an agreement with Broadway Stores, Inc. ("Broadway"), a wholly-owned subsidiary of Federated Department Stores, Inc. ("Federated"), and the landlord, whereby the Company vacated its present location in the Modesto, California Vintage Faire Mall and sub-leased Broadway's former store in that mall for the remaining twelve years, including renewal periods, of the lease. Pursuant to a letter of intent with Broadway and the landlord dated April 16, 1996, the Company also vacated its present location in the Fresno Fashion Fair Mall and reopened a new store in that mall in the former Broadway store location. Management expects to finalize a twenty-year lease for the Fashion Fair location in the near-term. Lease terms under both of the arrangements are comparable to other leases of the Company. In connection with the arrangements, the Company purchased certain of the existing fixtures and equipment at the Modesto location from Federated for $1.3 million, and Federated financed the purchase price with a five-year note payable bearing interest at a rate of 10.0%. The Company expects Federated to finance the purchase of additional fixtures and equipment under similar terms in connection with the finalization of the Fashion Fair arrangement. Upon the finalization of the arrangements, the Company expects the aggregate estimated fair values of the assets acquired to be less than the aggregate purchase price, and that the resulting goodwill will be amortized over the minimum lease periods of the respective leases. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1995 and 1994 (in thousands, except per share data):
1995 Quarter Ended April 29 July 29 October 28 February 3 Net sales $77,934 $91,884 $86,066 $145,157 Gross profit 22,553 27,490 27,432 44,739 Income (loss) before income tax expense (benefit) (5,100) (3,155) (5,101) 4,745 Net income (loss) (3,162) (1,955) (3,164) 2,642 Net income (loss) per common share (.30) (.19) (.30) .25
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
The Company's quarterly results of operations for the three month period ended February 3, 1996 includes an adjustment to the inventory shrinkage reserve resulting in an increase to the gross margin of $634,000. 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 reduction to previously established workers' compensation reserves of $588,000.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS GOTTSCHALKS INC. AND SUBSIDIARIES _________________________________________________________________________ COL. A COL. B COL. C COL. D COL. E COL. F ADDITIONS Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of DESCRIPTION of Period Expenses Describe Describe Period Year ended February 3, 1996: Deducted from asset accounts: Allowance for doubtful accounts $1,297,231 $2,462,504 (1) $2,497,752(2) $1,261,983 Allowance for vendor claims receivable... $ 98,000 $ (8,000)(4) $ 90,000 Allowance for notes receivable....$ 150,000 $ 132,767 (3) $ 282,767 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)(4) $ 98,000 Allowance for notes receivable....$ 50,000 $ 100,000 (3) $ 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)(4) $ 300,000 Allowance for notes receivable....$ 50,000 $ 50,000
Notes: (1) Provision for loss on credit sales. (2) Uncollectible accounts written off, net of recoveries. (3) Provision for uncollectible portion of note receivable. (4) 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: May 3, 1996 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) May 3, 1996 Joseph W. Levy Vice Chairman of s/Gerald H. Blum the Board May 3, 1996 Gerald H. Blum President, Chief s/Stephen J. Furst Operating Officer May 3, 1996 Stephen J. Furst and Director Senior Vice President and Chief Financial s/Alan A. Weinstein Officer (principal May 3, 1996 Alan A. Weinstein financial and accounting officer) s/O. James Woodward III Director May 3, 1996 O. James Woodward III s/Bret W. Levy Director May 3, 1996 Bret W. Levy s/Sharon Levy Director May 3, 1996 Sharon Levy s/Joseph J. Penbera Director May 3, 1996 Joseph J. Penbera s/Fred Ruiz Director May 3, 1996 Fred Ruiz s/Max Gutmann Director May 3, 1996 Max Gutmann EX-3.2 2 GOTTSCHALKS INC. BYLAWS ARTICLE I - STOCKHOLDERS Section 1. Annual Meeting An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held each year at such place on such date, and at such time as the Board of Directors shall each year fix. Section 2. Special Meetings Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called by the Board of directors or the chief executive officer and shall be held at such place, on such date, and at such time as they or he shall fix. Section 3. Notice of Meetings Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than then nor more than sixty days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law )meaning, here and hereinafter, as required from time to time by the General Corporation Law of the State of Delaware or the Certificate of Incorporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At nay adjourned meeting, any business may be transacted which might have been transacted at the original meeting. At any meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board, (b) in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, or (c) by a stockholder of record entitled to vote at such meeting who complies with the notice procedures set forth in this paragraph. For business to be properly brought before a meeting by a stockholder, the stockholder shall have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, such notice shall be delivered to or mailed and received at the principal executive office of the Corporation not less than thirty (30) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than forty (40) days' notice of the date of the meeting is given by the Corporation, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or otherwise given. Such stockholder's notice to the Secretary of the Corporation shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting, and in the event that such business includes a proposal to amend either the Certificate of Incorporation or the Bylaws of the Corporation, the language of the proposed amendment, (b) the name and address of the stockholder proposing such business, (c) the class and number of shares of stock of the Corporation which are owned by such stockholder and (d) any material personal interest of such stockholder in such business. If notice has not been given pursuant to this paragraph, the chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the proposed business was not properly brought before the meeting, and such business may not be transacted at the meeting. The foregoing provisions of this paragraph do not relieve any stockholder of any obligation to comply with all applicable requirements of the Securities Exchange Act of 1934 and rules and regulations promulgated thereunder. At any meeting of stockholders, a person may be a candidate for election to the Board only if such person is nominated (a) by or at the direction of the Board, (b) by any nominating committee or person appointed by the Board or (c) by a stockholder of record entitled to vote at such meeting who complies with the notice procedures set forth in this paragraph. To properly nominate a candidate to be a director, a stockholder shall give timely notice of such nomination in writing to the Secretary of the Corporation. To be timely, such notice shall be delivered to or mailed and received at the principal executive office of the Corporation not less than thirty (30) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than forty (40) days' notice of the date of the meeting is given by the Corporation, notice of such nomination to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or otherwise given. Such stockholder's notice to the Secretary of the Corporation shall set forth (a) as to each person whom the stockholder proposes to nominate (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of stock of the Corporation which are owned by the person and (iv) any other information relating to the person that would be required to be disclosed in a solicitation of proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the stockholder giving the notice (i) the name and address of such stockholder and (ii) the class and number of shares of stock of the Corporation owned by such stockholder. The Corporation may require such other information to be furnished respecting any proposed nominee as may be reasonably necessary to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election by the stockholders as a director at any meeting unless nominated in accordance with this paragraph. Section 4. Quorum At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purpose, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of the stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization Such person as the Board of Directors may have designated or, in the absence of such a person, the highest ranking officer of the corporation who is present shall call to order any meeting of the stockholders and act a s chairman of the meeting. In the absence of the Secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. Conduct of Business The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seen to him in order. Section 7. Proxies and Voting At any meeting of the stockholders, every stockholder entitled to vote any vote in person or by proxy authorized by an instrument filed in accordance with the procedure established for the meeting. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, except on the election of directors and where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes of the Shares present in person or represented by proxy and entitled to vote on the subject matter. Section 8. Stock List A complete list of stockholders entitled to vote atn any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the numbe of shares registered in his name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to b eheld, which place shall be specified in the notice of the neeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the palce of the meeting during the shole time threr of and shall be open to the examination of any such stockholder who is present. This list shall presuptively dtermine the identity of the sotckholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II - BOARD OF DIRECTORS Section 1. Number and Term of Office The number of directors who shall constitute the whole board shall be such number not less than five nor more than eleven aa the Board of Directors shall a the time have designated. Each director shall be elected for a term of one year and until his successor is elected and qualified, except as otherwise proveded herein or required by law. Whenever the authorized number of directors is increased between annual meetings of the stockholders, a majority of the directors then in office shall have the power to elect such new directors for the balance of a term and until their successors are elected and qualified. Any decrease in the authorized number of directors shall not become effective until the expiration of the term of the directors then in office unless, at the time of such decrease, there shall be bacancies on the board which ar ebeing eliminated by the decrease. Section 2. Vacancies If the office of any director becomes vacant by reason of death, resignation, disqualification, removal or other cause, a majority of the directors remaing in office, althouch less than a quorum, amy elect a successor for the unexpired term and until his successor is elected and qualified. Section 3. Regular Meetings Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings Special meetings of the Board of Directors may be Called by one-third of the directors then in office or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he shall fix. Notice of the place date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than three days before the meeting or by telegraphing the same no less than eighteen hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may b transacted at a special meeting. Section 5. Quorum At any meeting of the Board of Directors, one-third of the total number of the whole board, but not less than two, shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. Participation in Meetings by Conference Telephone Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such board or committee by means of conference telephone or similar communications to here each other. Such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business At any meeting of the Board of Directors, business shall be transacted in such order and manner as the board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may b taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8. Powers The board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorized the creation, making an issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the corporation with or without cause, and from time to time to devolve the powers and duties of nay officer upon any other person for the time being; (5) To confer upon any officer of the corporation the power to appoint, remove and suspend subordinate officers and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers and agents of the corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers and agents of the corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the corporation's business and affairs. Section 9. Compensation of Directors Directors, as such, may receive, pursuant to resolution of the board of Directors, fixed fees and other compensation for their services a s directors, including, without limitation, their services as members of committees of the directors. ARTICEL III - COMMITTEES Section 1. Committees of the Board of Directors The Board of directors, by a vote of a majority of the whole board, may from time to time designate committees fo the board, with such lwfully delegable powers and duties as it therby confers, to serve at the pleaseure of the board and shall, for thos e committees and ny other sprovide for herein, elect a director or directors to serv as the member or members, designating, if i desires, other directors a salternative members who may rplace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend or to authorize the issuance of stock if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or they constitute a quorum, may be unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the member shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV - OFFICERS Section 1. Generally The officers of the corporation shall consist of a chief executive officer, a president, a secretary, a chief financial officer, and such other subordinate officers including one or more vice-presidents as may from time to time be appointed by the Board of Directors. The Board of Directors may also choose to elect a chairman of the board of directors from among its own members. The Board of Directors shall elect officers of the corporation at its first meeting after every annual meeting of stockholders. Each officer shall hold his office until his successor is elected and qualified or until his earlier resignation or removal. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. Any number of offices may be held by the same person. Section 2. Chairman of the Board of Directors The chairman of the board of directors, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. He shall have power to sign all stock certificates, contracts and other instruments of the corporation which are authorized. Section 3. Chief Executive Officer The chief executive officer shall be the chief executive officer of the corporation. Subject to the provisions of these bylaws and to the direction of the Board of Directors, he shall have responsibility for the general management and control of the affairs and business of the corporation and shall perform ll duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him by the Board of Directors. He shall have power to sign all contracts and other instruments of the corporation which are authorized. He shall have general supervision and direction of all of the other officers and agents of the corporation. Section 4. President The president shall be the chief operating officer of the corporation. Subject to the direction of the Board of Directors and the chief executive officer, the president shall have general supervision, direction, and control of the business. He shall have power to sign all stock certificates, contracts and other instruments of the corporation which are authorized. In the absence or disability of the chief executive officer, he shall perform the duties and exercise the powers of the chief executive officer. Section 5. Vice Presidents Each vice president, if appointed by the Board of Directors, shall perform such duties as the Board of Directors shall prescribe. In the absence or disability of the President, the vice president who has served in such capacity for the longest time shall perform the duties and exercise the powers of the President. Section 6. Chief Financial Officer The chief financial officer shall have the custody of all monies and securities of the corporation and shall keep regular books of account. He shall make such disbursements of the funds of the corporation as are proper and shall render from time to time an account of all such transactions and of the financial condition of the corporation. Section 7. Secretary The secretary shall issue all authorized notices for, and keep a record of the proceedings of, all meetings of the stockholders and the Board of Directors. He shall have charge of the corporate books. Section 8. Delegation of Authority The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 9. Removal Any officer of the corporation may be removed at any time, with or without cause, by the Board of Directors. Section 10. Action with Respect to Securities of Other Corporations Unless otherwise directed by the Board of Directors, the chief executive officer shall have power to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this corporation may hold securities and otherwise to exercise any and all rights and powers which this corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS Section 1. Right to Indemnification Each director or officer of the Corporation who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was servicing at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the laws of Delaware, as the same exist or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in the second paragraph of this Section, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was initiated or authorized by one or more members of the Board. The right to indemnification conferred in this Section 1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Delaware General Corporation Law so requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director of officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 2. Non Exclusivity of Rights The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Each person who is or becomes a director or officer of the Corporation shall be deemed to have served or to have continued to serve in such capacity in reliance upon the indemnity provided in this Article. Section 3. Insurance The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or other corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware. Section 4. Expenses as a Witness To the extent that any director, officer, employee or agent of the Corporation is by reason of such position, or a position with another entity at the request of the Corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs and expenses actually and reasonably incurred by him or here or on his or her behalf in connection therewith. Section 5. Indemnity Agreements The Corporation may enter into indemnity agreements with the persons who are members of its board of directors from time to time, and with such officers, employees, and agents of the Corporation and with such officers, directors, employees and agents of subsidiaries as the board may designate, such indemnity agreements to provide in substance that the Corporation will indemnify such persons as contemplated by this Article, and to include any other substantive or procedural provisions regarding indemnification as are not inconsistent with the General Corporation Law of Delaware. The provisions of such indemnity agreements shall prevail to the extent that they limit or condition or differ from the provisions of this Article. Section 6. Definition of Corporation For purposes of this Article V reference to "the Corporation" includes all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director or officer of such a constituent corporation shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation in the same capacity. ARTICLE VI - STOCK Section 1. Certificates of Stock Each stockholder shall be entitled to a certificate signed by, or in the name of the corporation by the chairman of the board of directors, or the president or a vice-president, and by the secretary or an assistant secretary, or the treasurer or an assistant treasurer, certifying the number of shares owned by him. Any of or all of the signatures on the certificate may be facsimile. Section 2. Transfers of Stock Transfers of stock shall be made only upon the transfer books of the corporation kept at an office of the corporation or by transfer agents designated to transfer shares of the stock of the corporation. Except where a certificate is issued in accordance with Section 4 of Article VI of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 3. Record Date The Board of Directors may fix a record date, which shall not be more than sixty nor less than ten days before the date of any meeting of stockholders, nor more than sixty days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to express consent to corporate action in writing without a meeting; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. Regulations The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VII - NOTICES Section 1. Notices Whenever notice is required to be given to any stockholder, director, officer, or agent, such requirement shall not be construed to mean personal notice. Such notice may in every instance be effectively given by depositing a writing in a post office or letter box, in a postpaid, sealed wrapper, or by dispatching a prepaid telegram, addressed to such stockholder, director, officer, or agent at his or her address as the same appears on the books of the corporation. The time when such notice is dispatched shall be the time of the giving of the notice. Section 2. Waivers A written waiver of any notice, signed by a stockholder, director, officer, or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VIII - MISCELLANEOUS Section 1. Facsimile Signatures In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. Corporate Seal The Board of Directors may provide a suitable seal, containing the name of the corporation, which seal shall be in the charge of the secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the treasurer or by the assistant secretary or assistant treasurer. Section 3. Reliance upon Books, Reports and Records Each director, each member of any committee designated by the Board of Directors, and each officer of the corporation shall, in the performance of his duties. be fully protected in relying in good faith upon the books of account or other records of the corporation, including reports made to the corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. Section 4. Fiscal Year The fiscal year of the corporation shall be as fixed by the Board of Directors. Section 5. Time Periods In applying any provision of these bylaws which requires that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included. Section 6. Offices The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of Delaware. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE IX - AMENDMENTS Section 1. Amendments These Bylaws may be amended or repealed by the Board of Directors or by the stockholders at any meeting which has been duly called and for which proper notice has been given, provided that notice of the proposed amendment to these Bylaws has been properly given in accordance with the other provisions of these bylaws, as amended. * * * * CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected and acting Secretary of GOTTSCHALKS INC., a Delaware corporation, and that the foregoing Bylaws are the full, true and correct Bylaws of said corporation as amended to date. IN WITNESS WHEREOF, I have hereunto subscribed my name on this 20th day of November, 1995. s:/Alan A. Weinstein Secretary EX-10.45 3 WELLS FARGO BANK PROMISSORY NOTE $2,743,109.72 Fresno, California November 20, 1995 FOR VALUE RECEIVED, the undersigned GOTTSCHALKS, INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Fresno RCBO, 1206 Van Ness Avenue, Fresno, CA. 93721, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $2,743,109.72, with interest thereon as set forth herein. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear interest at a rate per annum computed on the basis of a 360-day year, actual days elapsed). .25000% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) Payment of Interest. Interest accrued on this Note shall be payable on the 5th day of each month, commencing January 5, 1996. (c) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. (d) Collection of Payments. Borrower authorizes Bank to collect all interest and fees due hereunder by charging Borrower's demand deposit account number 4192-049534 with Bank, or any other demand deposit account maintained by any Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. REPAYMENT AND PREPAYMENT: (a) Repayment. The outstanding principal balance of this Note shall be due and payable in full on March 5, 1996. (b) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. (c) Prepayment. Borrower may prepay principal on this Note at any time, in any amount and without penalty. EVENTS OF DEFAULT: The occurrence of any of the following shall constitute an "Event of Default" under this Note: 1. The failure to pay any principal, interest, fees or other charges when due hereunder or under any contract, instrument or document executed in connection with this Note. 2. The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. 3. The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity. 4. Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation, or any other liability of any kind to any person or entity, including the holder. 5. Any financial statement provided by any Borrower or Third party Obligor to Bank proves false. 6. Any sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of its business. 7. Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust or other document executed in connection with or security this Note. MISCELLANEOUS: (a) Remedies. Upon the sale, transfer, hypothecation, assignment or other encumbrance, whether voluntary, involuntary or by operation of law, of all or any interest in the property described in any deed of trust securing this Note, or upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. GOTTSCHALKS, INC. By: s:\Alan A. Weinstein Title: Senior Vice President/CFO Recording Requested By, And when recorded return to: WELLS FARGO BANK, NATIONAL ASSOCIATION 1206 Van Ness Avenue Fresno, CA. 93721 Attention: Note Department Loan No.:_____________ DEED OF TRUST With Assignment of Rents THIS DEED OF TRUST is entered into as of November 20, 1995, by and among GOTTSCHALKS, INC., A DELAWARE CORPORATION ("Trustor"), AMERICAN SECURITIES COMPANY, a corporation ("Trustee"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Beneficiary"). ARTICLE I. GRANT IN TRUST 1.01 Grant. For the purposes and upon the terms and conditions in this Deed of Trust irrevocably grants, conveys and assigns to Trustee, in trust for the benefit of Beneficiary, with power of sale and right of entry and possession, Trustor's interest in all that real property located in the County of SAN LUIS OBISPO, State of California, described ion Exhibit A attached hereto, together with all appurtenances, easements, rights and rights of way appurtenant or related thereto, all buildings, other improvements and fixtures now or hereafter located thereon, all interest or estate with Trustor now has or may hereafter acquire in the property described above, and all additional and accretions thereto ("Subject Property"). The listing of specific rights or property shall not be interpreted as a limit of general terms. 1.02 Address. The address of the Subject Property (if known) is: 313 MADONNA ROAD, SAN LUIS OBISPO, CA 93403. Neither the failure to designate an address nor any inaccuracy in the address designated shall affect the validity or priority of the lien of this Deed of Trust on the Subject Property as described on Exhibit A. In the event of any conflict between the provisions of Exhibit A and said address, Exhibit A shall control. ARTICLE II. OBLIGATIONS SECURED 2.01 Obligations Secured. Trustor makes this grant and assignment for the purpose of securing the following obligations (each, a "Secured Obligation" and collectively, the "Secured Obligations"): (a) payment to Beneficiary of all sums at any time owing and performance of all other obligations arising under or in connection with that certain promissory note ("Note") dated as of November 20, 1995, in the principal amount of $2,743,109.72, executed by GOTTSCHALKS, INC. and payable to Beneficiary or its order, together with the payment and performance of any other indebtedness or obligations incurred in connection with the credit accommodation evidenced by the Note, whether or not specifically referenced therein; and (b) payment and performance of all obligations of Trustor under this Deed of Trust, together with all advances, payments or other expenditures made by Beneficiary or Trustee as or for the payment or performance of any such obligations of Trustor, and (c) payment and performance of all obligations, if any, and the contracts under which they arise, which any rider attached to and recorded with this Deed of Trust recites are secured hereby; and (d) payment and performance of all future advances and other obligations that the then record owner of the Subject Property may agree to pay and/or perform (whether as principal, surely or guarantor) for the benefit of Beneficiary, when any such, advance or obligation is evidenced by a writing which recites that it is secured by this Deed of Trust, and (e) all modifications, extensions and renewals of any of the Secured Obligations (including without limitation, (i) modifications, extensions or renewals at a different rate of interest, or (ii) deferrals or accelerations of the required principal payment dates or interest payment dates or both, in whole or in part), however evidenced, whether or not any such modification, extension or renewal is evidenced by a new or additional promissory note or notes. 2.02 Obligations. The term "obligations" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, joint or several, including without limitation, all principal, interest, charges, including prepayment charges and late charges, and loan fees at any time accruing or assessed on any Secured Obligation. 2.03 Incorporation. All terms of the Secured Obligations are incorporated herein by this reference. All persons who may have or acquire an interest in the Subject Property are hereby deemed to have notice (a) of the terms of the Secured Obligations and (b) that, if provided therein, (i) the Note or any other Secured Obligation may permit borrowing, repayment and reborrowing, and (ii) the rate of interest on one or more of the Secured Obligations may vary from time to time. ARTICLE III. ASSIGNMENT OF RENTS 3.01 Assignment. For the purposes and upon the terms and conditions set forth herein, Trustor irrevocably assigns to Beneficiary all of Trustor's right, title and interest in, to and under all leases, licenses, rental agreements and other agreements of any kind relating to the use or occupancy of any of the Subject Property, whether existing as of the date hereof or any time hereafter entered into, together with all guarantees of and security for any tenant's or lessee's performance thereunder, and all amendments, extensions, renewals and modifications thereto (each, a "Lease" and collectively, the "Leases"), together with any and all other rents, issues and profits of the Subject Property (collectively, "Rents"). This Assignment shall not impose upon Beneficiary any duty to produce Rents, from the Subject Property, nor cause Beneficiary to be (a) a "mortgagee in possession" for any purpose, (b) responsible for performing any of the obligations of the lessor or landlord under any Lease, or (c) responsible for any waste committed by any person or entity at any time in possession of the Subject Property or any part thereof, or for any dangerous or defective condition of the Subject Property, or for any negligence in the management, upkeep, repair control of the Subject Property. This is an absolute assignment, not an assignment for security only, and Beneficiary's right to Rents is not contingent upon and may be exercised without possession of the Subject Property. Trustor agrees to execute and deliver to Beneficiary, within five (5) days of Beneficiary's written request, such additional documents as Beneficiary or Trustee may reasonably request to further evidence the assignment to Beneficiary of any and all Leases and Rents. 3.02 Protection of Security. To protect the security of this Assignment, Trustor agrees: (a) At Trustor's sole cost and expense: (i) to perform each obligations to be performed by the lessor or landlord under each Lease and to enforce or secure the performance of each obligation to be performed by the lessee or tenant under each Lease; (ii) not to modify any Lease in any material respect, nor accept surrender under or terminate the term of any Lease; (iii) not to anticipate the Rents under any Lease; and (iv) not to waive or release any lessee or tenant of or from any Lease obligations. Trustor assigns to Beneficiary all of Trustor's right and power to modify the terms of any Lease, to accept a surrender under or terminate the term of, or anticipate the Rents under any Lease; and to waive or release any lessee or tenant of or from any Lease obligations, and any attempt on the part of Trustor to exercise any such rights or powers without Beneficiary's prior written consent shall be a breach of the terms hereof. (b) At Trustor's sole cost and expense, to defend any action in any manner connected with any Lease or the obligations thereunder, and to pay all costs of Beneficiary or Trustee, including reasonable attorneys' fees, in any such action relating to a Lease in which Beneficiary or Trustee may appear. (c) That, should Trustor fail to do any act required to be done by Trustor under a Lease, then Beneficiary or Trustee, but without obligation to do so and without notice to Trustor and without releasing Trustor from any obligation hereunder, may make or do the same in such manner and to such extent as Beneficiary or Trustee deems necessary to protect the security hereof, and, in exercising such powers, Beneficiary or Trustee may employ attorneys and other agents, and Trustor shall pay necessary costs and reasonable attorneys' fees incurred by Beneficiary or Trustee, or their agents, in the exercise of the powers granted herein. Trustor shall give prompt notice to Beneficiary of any default by any lessee or tenant under any Lease, and of any notice of default on the part of Trustor under any Lease received from a lessee or tenant thereunder, together with an accurate and complete copy thereof. (d) To pay to Beneficiary immediately upon demand all sums expended under the authority hereof, including reasonable attorneys' fees, together with interest thereon at the highest rate per annum payable under any Secured Obligation, and the same may, at Beneficiary's option, be added to any Secured Obligation and shall be secured hereby. 3.03 License. Beneficiary confers upon Trustor a license ("License") to collect and retain the Rents as, but not before, they come due and payable, until the occurrence of any Default. Upon the occurrence of any Default, the License shall be automatically revoked, and Beneficiary or Trustee may, at Beneficiary's option and without notice, either in person or by agent, with or without bringing any action, or by a receiver to be appointed by a court: (a) enter, take possession of, manage and operate the Subject Property or any part thereof; (b) make, cancel, enforce or modify any Lease; (c) obtain and evict tenants, fix or modify Rents, and do any acts which Beneficiary or Trustee deems proper to protect the security hereof; and (d) either with or without taking possession of the Subject Property, in its own name, sue for or otherwise collect and receive all Rents, including those past due and unpaid, and apply the same in accordance with provisions of Section 5.04 hereof. The entering and taking possession of the Subject Property, the collection of Rents and the application thereof as aforesaid, shall not cure or waive any Default, nor waive, modify or affect any notice of default hereunder, nor invalidate any act done pursuant to such notice. The License shall not grant to Beneficiary or Trustee the right to possession, except as provided in this Deed of Trust. ARTICLE IV. RIGHTS AND DUTIES OF THE PARTIES 4.01 Title. Trustor warrants that, except as otherwise disclosed to Beneficiary prior to the date hereof in a writing which refers to this warranty, Trustor lawfully possesses and holds fee simple title to or a leasehold interest in the Subject Property without limitation on the right to encumber and assign, as herein provided, and that this Deed of Trust is a valid lien on the Subject Property and all of Trustor's interest therein. 4.02 Taxes and Assessments. Trustor shall pay prior to delinquency all taxes, assessments, levies and charges imposed (a) by any public or quasi-public authority or utility company which are or which may become a lien upon or cause a loss in value of the Subject Property or any interest therein, or (b) by any public authority upon Beneficiary by reason of its interest in any Secured Obligation or in the Subject Property, or by reason of any payment made to Beneficiary pursuant to any Secured Obligation; but Trustor shall have no obligation to pay any income taxes of Beneficiary. 4.03 Performance of Secured Obligations. Trustor shall promptly pay and perform each Secured Obligation when due. 4.04 Liens, Encumbrances and Charges. Trustor shall immediately discharge any lien not approved by Beneficiary in writing that has or may attain priority over this Deed of Trust. Except as otherwise provided in any Secured Obligation or other agreement with Beneficiary, Trustor shall pay when due all obligations secured by or reducible to liens and encumbrances which shall now or hereafter encumber the Subject Property, whether senior or subordinate hereto, including without limitation, any mechanics' liens. 4.05 Insurance. Trustor shall insure the Subject Property against loss or damage by fire and such other risks as Beneficiary shall from time to time require. Trustor shall carry public liability insurance, flood insurance as required by applicable law and such other insurance as Beneficiary may reasonably require, including without limitation, business interruption insurance or loss of rental value insurance. Trustor shall maintain all required insurance at Trustor's expense, under policies insured by companies and in form and substance satisfactory to Beneficiary. Neither Beneficiary nor Trustee, by reason of accepting, rejecting, approving or obtaining insurance shall incur any liability for: (a) the existence, nonexistence, form or legal sufficiency thereof; (b) the solvency of any insurer; or (c) the payment of losses. All policies and certificates of insurance shall name Beneficiary as loss payee, and shall provide that the insurance cannot be terminated as to Beneficiary except upon a minimum of ten (10) days' prior written notice to Beneficiary. Immediately upon any request by Beneficiary, Trustor shall deliver to Beneficiary the original of all such policies or certificates, with receipts evidencing annual prepayment of the premiums. 4.06 Security Account. Beneficiary may require, at its option, but subject to applicable law and to any specific limits on exercise of that option contained herein, that Trustor pay to Beneficiary each month an additional sum estimated by Beneficiary to be equal to the annual amount of (a) taxes, bonds, assessments, levies and charges described in Section 4.02 hereof, and (b) premiums for fire and other hazard and mortgage insurance next due, divided by, in each instance, the number of months to lapse before one month before said annual amount will become due. Such payments of additional sums by Trustor to Beneficiary shall be held in a security account, and Trustor hereby grants, and transfers to Beneficiary a security interest in all sums to held in said security account, and all proceeds thereof, to secure the payment and performance of each Secured Obligation. All sums so paid shall not bear interest except to the extent and in the amount required by law. Beneficiary shall apply said sums to the payment of, or at the sole option of Beneficiary, release said sums to Trustor for application to and payment of, such taxes, bonds, assessments, levies, charges and insurance premiums. Upon the occurrence of any Default, Beneficiary at its sole option may apply all or any part of said sums to any Secured Obligation. To cure any Default, Trustor shall restore all sums so applied, as well as correct any Default not corrected by the application thereof. The relationship where Beneficiary shall be deemed a trustee, special depository or other fiduciary acting for the benefit of Trustor. The existence of said security account shall not limit Beneficiary's rights under any other provision of this Deed of Trust or the total amount to be paid therefrom for any year, or may continue to hold the excess and reduce proportionately the required monthly deposits for the next year. 4.07 Damages; Insurance and Condemnation Proceeds. (a) (i) All awards of damages and all other compensation payable directly or indirectly by reason of a condemnation or proposed condemnation for public or private use affecting the Subject Property: (ii) all other claims and awards for damages to or decrease in value of the Subject Property; (iii) all proceeds of any insurance policies payable by reason of loss sustained to the Subject Property; and (iv) all interest which may accrue on any of the foregoing, are all absolutely and irrevocably assigned to and shall be paid to Beneficiary. At the absolute discretion of Beneficiary, whether or not its security is or may be impaired, but subject to applicable law if any, and without regard to any requirement contained in Section 4.08(c) hereof, Beneficiary may apply all or any of the proceeds it receives to any order, and release all or any part of the proceeds to Trustor upon any conditions Beneficiary may impose. Beneficiary may commence, appear in, defend or prosecute any assigned claim or action, and may adjust, compromise, settle and collect all claims and awards assigned to Beneficiary, but shall not be responsible for any failure to collect any claim or award, regardless of the cause of the failure. (b) At its sole option Beneficiary may permit insurance or condemnation proceeds held by Beneficiary to be used for repair or restoration but may impose any conditions on such use as Beneficiary deems necessary. 4.08 Maintenance and Preservation of Subject Property. Subject to the provisions of any Secured Obligation, Trustor covenants: (a) to keep the Subject Property in good condition and repair; (b) except with Beneficiary's prior written consent, not to remove or demolish the Subject Property; not to alter, restore or add to the Subject Property; and not to initiate or acquiesce in any change in any zoning or other land classification which affects the Subject Property; (c) to restore promptly and in good workmanlike manner any portion of the Subject Property which may be damaged or destroyed, unless Beneficiary requires all of the insurance proceeds by used to reduce the Secured Obligations as provided in Section 4.07 hereof; (d) to comply with and not to suffer violation of any or all of the following which govern acts or conditions on, or otherwise affect, the Subject Property: (i) laws, ordinances, regulations, standards and judicial and administrative rules and orders; (ii) covenants, conditions, restrictions and equitable servitudes, whether public or private; and (iii) requirements of insurance companies and any bureau or agency which establishes standards of insurability; (e) not to commit or permit waste of the Subject Property; and (f) to do all other acts which from the character or use of the Subject Property may be reasonably necessary to maintain and preserve its value. 4.09 Hazardous Substances; Environmental Provisions. Trustor represents and warrants to Beneficiary that, except as disclosed to and acknowledged by Beneficiary in writing prior to the date hereof: (a) during the period of Trustor's ownership or possession of the Subject Property, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or hazardous substance (as said terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, any other applicable state or Federal environmental laws, and any rules or regulations adopted pursuant to any of the foregoing) by any person from, on, under or about the Subject Property; and (b) Trustor has no knowledge of, nor any reason to believe that there has been, (i) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or hazardous substance by any prior owners or occupants of the Subject Property, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. Trustor agrees to indemnify and hold Beneficiary harmless from and against any and all claims, losses, liabilities, damages, penalties and expenses of any kind or character, including reasonable attorneys' fees, which Beneficiary may directly or indirectly sustain or suffer as a result of any breach of this Section 4.09 or as a consequence of any use, generation, manufacture, storage, treatment, disposal, release or threatened release occurring prior to Trustor's ownership of any interest in the Subject Property, whether or not the same was or should have been known to Trustor. This obligation to indemnify shall survive the payment of the Secured Obligations and the satisfaction of this Deed of Trust, and shall not be affected by Beneficiary's acquisition of any interest in the Subject Property, whether by foreclosure or otherwise. Trustor and Beneficiary agree that this Section 4.09 intended as Beneficiary's written request for information (and Trustor's response) concerning the environmental condition of the Subject Property as required by California Code of Civil Procedure 726.5, and that each representation and warranty contained in this Section 4.09 (together with any indemnity applicable to a breach of any such representation and warranty) with respect to the environmental condition of the Subject Property is intended by Trustor and Beneficiary to be an "environmental provision" for purposes of California Code of Civil Procedure 736. 4.10 Protection of Security. Trustor shall, at Trustor's sole expense: (a) protect, preserve and defend the Subject Property and Trustor's title and right to possession of the Subject Property against all adverse claims; (b) if Trustor's interest in the Subject Property is a leasehold interest or estate, pay and perform in a timely manner all obligations to be paid and/or performed by the lessee or tenant under the lease or other agreement creating such leasehold interest or estate; and (c) protect, preserve, and defend the security of this Deed of Trust against all adverse claims. Trustor shall give Beneficiary and Trustee prompt notice in writing of the assertion of any claim, the filing of any action or proceeding, or the occurrence of any damage, condemnation offer or other action relating to or affecting the Subject Property and, if Trustor's interest in the Subject Property is a leasehold interest or estate, of any notice of default or demand for performance under the lease or other agreement pursuant to which such leasehold interest or estate was created or exists. 4.11 Acceptance of Trust; Powers and Duties of Trustee. Trustee accepts this trust when this Deed of Trust is executed. From time to time, upon written request of Beneficiary and presentation of this Deed of Trust for endorsement, and without affecting the personal liability of any person for payment of any indebtedness or performance of any of the Secured Obligations, Trustee may, without obligation to do so and without liability therefor and without notice: (a) reconvey all or any part of the Subject Property; (b) consent to the making of any map of the Subject Property; and (c) join in any grant of easement thereon, any declaration of covenants and restrictions, any extension agreement or any agreement subordinating the lien or charge of this Deed of Trust. Trustee or Beneficiary may from time to time apply to any court of competent jurisdiction for aid and direction in the execution of the trusts and the enforcement of the rights and remedies available under this Deed of Trust, and may obtain orders or remedies. Trustee has no obligation to notify any party of any pending sale or any action or proceeding (including, but not limited to, actions in which Trustor, Beneficiary or Trustee shall be a party) unless held or commenced and maintained by Trustee under this Deed of Trust. Trustee shall not be obligated to perform any act required of it under this Deed of Trust unless the performance of the act is requested in writing and Trustee is reasonably indemnified against all losses, costs, liabilities and expenses in connection therewith. 4.12 Compensation; Exculpation; Indemnification. (a) Trustor shall pay all Trustee's fees and reimburse Trustee for all expenses in the administration of this trust, including reasonable attorneys' fees. Trustor shall pay Beneficiary reasonable compensation for services rendered concerning this Deed of Trust, including without limitation, the providing of any statement of amounts owing under any Secured Obligation. Beneficiary shall not directly or indirectly be liable to Trustor or any other person as a consequence of: (i) the exercise of any of the rights, remedies or powers granted to Beneficiary in this Deed of Trust; (ii) the failure or refusal of Beneficiary to perform or discharge any obligation or liability of Trustor under any Lease or other agreement related to the Subject Property or under this Deed of Trust; or (iii) any loss sustained by Trustor or any third party as a result of Beneficiary's failure to lease the Subject Property after any Default or from any other act or omission of Beneficiary in managing the Subject Property after any Default unless such loss is caused by the willful misconduct or gross negligence of Beneficiary; and no such liability shall be asserted or enforced against Beneficiary, and all such liability is hereby expressly waived and released by Trustor. (b) Trustor shall indemnify Trustee and Beneficiary against, and hold them harmless from, any and all losses, damages, liabilities, claims, causes of action, judgments, court costs, attorneys' fees and other legal expenses, costs of evidence of title, costs of evidence of value, and other expenses which either may suffer or incur: (i) by reason of this Deed of Trust; (ii) by reason of the execution of this trust or the performance of any act required or permitted hereunder or by law; (iii) as a result of any failure of Trustor to perform Trustor's obligations; or (iv) by reason of any alleged obligation or undertaking of Beneficiary to perform or discharge any of the representations, warranties, conditions, covenants or other obligations contained in any other document related to the Subject Property, including without limitation, the payment of any taxes, assessments, rents or other lease obligations, liens, encumbrances or other obligation of Trustor under this Deed of Trust. Trustor's duty to indemnify Trustee and Beneficiary shall survive the payment, discharge or cancellation of the Secured Obligations and the release or reconveyance, in whole or in part, of this Deed of Trust. (c) Trustor shall pay all indebtedness arising under this Section 4.12 immediately upon demand by Trustee or Beneficiary, together with interest thereof from the date such indebtedness arises at the highest rate per annum payable under any Secured Obligation. Beneficiary may, at its option, add such indebtedness to any Secured Obligation. 4.13 Substitution of Trustees. From time to time, by a writing signed and acknowledged by Beneficiary and recorded in the Office of the Recorder of the County in which the Subject Property is situated, Beneficiary may appoint another trustee to act in the place and stead of Trustee or any successor. Such writing shall set forth the date, book and page of its recordation and any other information required by law. The recordation of such instrument of substitution shall discharge Trustee herein named substitution shall discharge Trustee herein named and shall appoint the new trustee as the trustee hereunder with the same effect as if originally named Trustee herein. A writing recorded pursuant to the provisions of this Section 4.13 shall be conclusive proof of the proper substitution of such new Trustee. 4.14 Due on Sale or Encumbrance. Except as permitted by the provision of any Secured Obligation or applicable law, if the Subject Property or any interest therein shall be sold, transferred, mortgaged, assigned, encumbered or leased, whether voluntarily, involuntarily or by operation of law (each of which actions and events is called a "Transfer"), without any Beneficiary's prior written consent, then Beneficiary may, at its sole option, declare all Secured Obligations immediately due and payable in full. Trustor shall notify in writing of each Transfer within ten (10) business days of the date thereof. 4.15 Releases, Extensions, Modification and Additional Security. Without notice to or the consent, approval or agreement of any persons or entities having any interest any time in the Subject Property or in any manner obligated under any Secured Obligation ("Interested Parties"), Beneficiary may, from time to time, release any of the Interest Parties from liability for the payment of any Secured Obligation, take any action or make any agreement extending the maturity or otherwise altering the terms or increasing the amount of any Secured Obligation, accept additional security, and enforce, waive, subordinate or release all or a portion of the Subject Property or any other security for any Secured Obligation. None of the foregoing actions shall release or reduce the personal liability of any of the Interested Parties, nor release or impair the priority of the lien of this Deed of Trust upon the Subject Property. 4.16 Reconveyance. Upon Beneficiary's written request, and upon surrender of this Deed of Trust and every note or other instrument setting forth any Secured Obligations to Trustee for cancellation, Trustee shall reconvey, without warranty, the Subject Property or that portion thereof then covered hereby. The recitals of any matters or facts in any reconveyance executed hereunder shall be conclusive proof of the truthfulness thereof. To the extent permitted by law, the reconveyance may describe the grantee as "the person or persons legally entitle thereto." Neither Beneficiary nor Trustee shall have any duty to determine the rights of persons claiming to be rightful grantees of any reconveyance. When the Subject Property has been fully reconveyed, the last such reconveyance shall operate as a reassignment of all future Rents to the person or persons legally entitle thereto. Upon Beneficiary's demand, Trustor shall pay all costs and expenses incurred by Beneficiary in connection with any reconveyance. 4.17 Subrogation. Beneficiary shall be subrogated to the lien of all encumbrances, whether released of record or not, paid in whole or in part by Beneficiary pursuant to this Deed of Trust or by the proceeds of any Secured Obligation. 4.18 Trustor Different From Obligor ("Third Party Trustor"). As used in this Section 4.18, the term "Obligor" shall mean each person or entity which is obligated in any manner under any of the Secured Obligations; and the term "Third Party Trustor" shall mean (1) each person or entity which is included in the definition of Trustor herein and which is not an Obligor under all of the Secured Obligations, and (2) each person or entity which is included in the definition of Trustor herein if there is any Obligor which is not included in said definition of Trustor. (a) Representations and Warranties. Each Third Party Trustor represents and warrants to Beneficiary that: (i) this Deed of Trust is executed at an Obligor's request; (ii) this Deed of Trust complies with all agreements between each Third Party Trustor and any Obligor regarding such Third Party Trustor's execution hereof; (iii) Beneficiary has made no representation to any Third Party Trustor as to the creditworthiness of any Obligor; and (iv) each Third party Trustor has established adequate means of obtaining from each Obligor on a continuing basis financial and other information pertaining to such Obligor's financial condition. Each Third party Trustor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect such Third Party Trustor's risks hereunder. Each Third Party Trustor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect such Third Party Trustor' risks hereunder. Each Third Party Trustor further agrees that Beneficiary shall have no obligation to disclose to any Third Party Trustor any information or material about any Obligor which is acquired by Beneficiary in any manner. The liability of each Third Party Trustor hereunder shall be reinstated and revived, and the rights of Beneficiary shall continue if and to the extent that for any reason any amount at any time paid on account of any Secured Obligation is rescinded or must otherwise be restored by Beneficiary, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any amount so paid must be rescinded or restored shall be made by Beneficiary in its sole discretion; provided however, that if Beneficiary chooses to contest any such matter at the request of any Third Party Trustor, each Third Party Trustor agrees to indemnify and hold Beneficiary harmless from and against all costs and expenses, including reasonable attorneys' fees, expended or incurred by Beneficiary in connection therewith, including without limitation, in any litigation with respect thereto. (b) Waivers. (i) Each Third Party Trustor waives any right to require Beneficiary to: (A) proceed against any Obligor or any other person; (B) proceed against or exhaust any security held form any Obligor or any other person; (C) give notice of the terms, time and place of any public or private sale of personal property security held from any Obligor or any other person, or otherwise comply with any other provisions of Section 9504 of the California Uniform Commercial Code; (D) pursue any other remedy in Beneficiary's power; or (E) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by Beneficiary as security for or which constitute in whole or in part any Secured Obligation, or in connection with the creation of new or additional obligations. (ii) Each Third Party Trustor waives, any defense to its obligations hereunder based upon or arising by reason of: (A) any disability or other defense of any Obligor or any other person; (B) the cessation or limitation from any cause whatsoever, other than payment in full, of any Secured Obligation; (C) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of any Obligor which is a corporation, partnership, or other type of entity, or any defect in the formation of any such Obligor; (D) the application by any Obligor of the proceeds of any Secured Obligation for purposes other than the purposes represented by any Obligor to, or intended or understood by, Beneficiary or any Third Party Trustor; (E) any act or omission by Beneficiary which directly or indirectly results in or aids the discharge of any Obligor or any portion of any Secured Obligation by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Beneficiary against thereof, including without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security or any modification of any Secured Obligation, in any form whatsoever, including without limitation the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of such Secured Obligation or any portion thereof, including increase or decrease of the rate of interest thereon. Until all Secured Obligations shall have been paid in full, no Third Party Trustor shall have any right of subrogation. Each Third Party Trustor waives all wrights and defenses it may have arising out of (1) any respect to any security for any portion of any Obligor's obligations, destroys such Third Party Trustor's rights of subrogation or such Third Party Trustor's rights to proceed against any Obligor for reimbursement, or (2) any loss of rights any Third Party Trustor may suffer by reason of any rights, powers or remedies of any Obligor in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging any Obligor's obligations, whether by operation of Sections 726 or 580d of the Code of Civil Procedure as from time to time amended, or otherwise. Until all Secured Obligations shall have been paid in full, each Third Party Trustor further waives any right to enforce any remedy with Beneficiary now has or may hereafter have against any Obligor or any other person, and waives any benefit, or any right to participate in, any security now or hereafter held by Beneficiary. (iii) If any of said waivers is determined to be contrary to any applicable law or public policy, such waiver shall be effective to the extent permitted by law. ARTICLE V. DEFAULT PROVISIONS 5.01 Default. The occurrence of any of the following shall constitute a "Default" under this Deed of Trust; (a) Trustor shall observe or fail to perform any obligation or agreement contained herein; (b) any representation or warranty of Trustor herein shall prove to be incorrect, false or misleading in any material respect when made; or (c) any default in the payment or performance of any obligation, or any defined event of default, under any provisions of the Note or any other document executed in connection with, or with respect to, any Secured Obligation. 5.02 Rights and Remedies. Upon the occurrence of any Default, and at any time thereafter, Beneficiary and Trustee shall have all the following rights and remedies: (a) With or without notice, to declare all Secured Obligations immediately due and payable in full; (b) With or without notice, and without releasing Trustor from any Secured Obligation, and without becoming a mortgagee in possession, to cure any Default of Trustor and, in connection therewith, to enter upon the Subject Property and to do such acts and things as Beneficiary or Trustee deems necessary or desirable to protect the security of this Deed of Trust, including without limitation, to appear in and defend any action or proceeding purporting to affect the security of this Deed of Trust or the rights or powers of Beneficiary or Trustee hereunder; to pay, purchase, contest or compromise any encumbrance, charge, lien or claim of lien which, in the judgment of either Beneficiary or Trustee, is senior in priority to this Deed of Trust, the judgment of Beneficiary or Trustee being conclusive as between the parties hereto; to obtain, and to pay any premiums or charges with respect to any insurance required to be carried hereunder; and to employ counsel, accountants, contractors and other appropriate persons to assist them; (c) To commence and maintain an action or actions in any court of competent jurisdiction to foreclose this Deed of Trust as a mortgage or to obtain specific enforcement of the covenants of Trustor under this Deed of Trust, and Trustor agrees that such covenants shall be specifically enforceable by injunction or any other appropriate equitable remedy and that for the purposes of any suit brought under this subsection, Trustor waives the defense of laches and any applicable statute of limitations; (d) To apply to a court of competent jurisdiction for and obtain appointment of a receiver of the Subject Property as a matter of strict right and without regard to: (i) the adequacy of the security for the repayment of the Secured Obligations; (ii) the existence of a declaration that the Secured Obligations are immediately due and payable; or (iii) the filing of a notice of default; and Trustor consents to such appointment; (e) To take and possess all documents, books, records, papers and accounts of Trustor or the then owner of the Subject Property; to make or modify Leases of, and other agreements with respect to, the Subject Property upon such terms and conditions as Beneficiary deems proper and to make repairs, alterations and improvements to the Subject Property deemed necessary, in Trustee's or Beneficiary's judgment, to protect or enhance the security hereof; (f) To execute a written notice of such Default and of its election to cause the Subject Property to be sold to satisfy the Secured Obligations. Trustee shall give and record such notice as the law then requires as a condition precedent to a trustee's sale. When the minimum period of time required by law after such notice has elapsed, Trustee, without notice to or demand upon Trustor, except as otherwise required by law, shall sell the Subject Property at the time and place of sale fixed by it in the notice of sale, at one or several sales, either as a whole or in separate parcels and in such manner and order, all as Beneficiary in its sole discretion may determine, at public auction to the highest bidder for cash, in lawful money of the United States, payable at the time of sale (the Secured Obligations being the equivalent of cash for purposes of said sale). Neither Trustor nor any other person or entity shall have the right to direct the order in which the Subject Property is sold. Subject to requirements and limits imposed by law, Trustee may postpone any sale of the Subject Property by public announcement at such time and place of sale, and from time to time may postpone such sale by public announcement at the time and place fixed by the preceding postponement. Trustee shall deliver to the purchaser at such sale a deed conveying the Subject Property or portion thereof so sold, but without any covenant or warranty, express or implied. The recitals in said deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustee, Trustor or Beneficiary, may purchase at such sale; (g) To resort to and realize upon the security hereunder and any other security now or later held by Beneficiary concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken non-judicial proceedings, or both, and to apply the proceeds received to payment of the Secured Obligations, all in such order and manner as Trustee and Beneficiary, or either of them, shall determine in their sole discretion. 5.03 Application of Foreclosure Sale Proceeds. After deducting all costs, fees and expenses of Trustee, and of this trust, including costs of evidence of title and attorney's fees in connection with a sale, Trustee shall apply all proceeds of any foreclosure sale first, to payment of all Secured Obligations (including without limitation, all sums expended by Beneficiary under the terms hereof and not then repaid, with accrued interest at the highest rate per annum payable under any Secured Obligation), in such order and amounts as Beneficiary in its sole discretion shall determine; and the remainder, if any, to the person or persons legally entitled thereto. 5.04 Application of Other Sums. All Rents or other sums received by Beneficiary hereunder, less all costs and expenses incurred by Beneficiary or any receiver, including reasonable attorneys' fees, shall be applied to payment of the Secured Obligations in such order as Beneficiary shall determine in its sole discretion (but Beneficiary shall have no liability for funds not actually received by Beneficiary). 5.05 No Cure or Waiver. Neither Beneficiary's Trustee's or any receiver's entry upon and taking possession of the Subject Property, nor any collection of Rents, insurance proceeds, condemnation proceeds or damages, other security or proceeds of other security, or other sums, nor the application of any collected sum of any Secured Obligation, nor the exercise of any other right or remedy by Beneficiary, Trustee or any receiver shall impair the status of the security of this Deed of Trust, or cure or waive any breach, Default or notice of default under this Deed of Trust, or nullify the effect of any notice of default or sale (unless all Secured Obligations and any other sums then due hereunder have been paid in full, and Trustor has cured all other Defaults), or prejudice Beneficiary or Trustee in the exercise of any right or remedy, or be construed as an affirmation by Beneficiary of any tenancy, lease or option or a subordination of the lien of this Deed of Trust. 5.06 Payment of Costs, Expenses and Attorneys' Fees. Trustor agrees to pay to Beneficiary immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including court costs and reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Beneficiary's in-house counsel, whether or not incurred or expended in litigation), expended or incurred by Trustee or Beneficiary pursuant to subsections (a) through (g) inclusive of Section 5.02 hereof, with interest from the date of expenditure until such sums have been paid at the highest rate per annum payable under any Secured Obligation. Beneficiary shall be entitled to bid, at any sale of the Subject Property held pursuant to Section 5.02 (f) hereof or pursuant to any judicial foreclosure of this Deed of Trust, the amount of all of the foregoing, including interest thereon, in addition to the amount of the other Secured Obligations, as a credit bid, the equivalent of cash. 5.07 Power to File Notices and Cure Defaults. Trustor hereby irrevocably appoints Beneficiary and its successors and assigns as Trustor's true attorney-in-fact to perform any of the following powers, which agency is coupled with an interest, (a) to execute and/or record any notices of completion, cessation of labor or any other notices that Beneficiary deems appropriate to protect Beneficiary's interest, and (b) upon the occurrence of any event, act or omission which with the giving of notice or the passage of time, or both, would constitute a Default, to perform any obligation of Trustor hereunder; provided that: (i) Beneficiary, as such attorney-in-fact, shall only be accountable for such funds as are actually received by Beneficiary; and (ii) Beneficiary shall not be liable to Trustor or any other person or entity for any failure to act under this section. 5.08 Remedies Cumulative. All rights and remedies of Beneficiary and Trustee hereunder are cumulative and are in addition to all rights and remedies provided by law or in any other agreements between Trustor and Beneficiary. ARTICLE VI. MISCELLANEOUS PROVISIONS 6.01 Merger. No merger shall occur as a result of Beneficiary's acquiring any other estate in, or any other lien on, the Subject Property unless Beneficiary specifically consents to a merger in writing. 6.02 Recourse to Separate Property. Any married person who executes this Deed of Trust as a Trustor and who is obligated under any Secured Obligation agrees that any money judgment which Beneficiary or Trustee obtains pursuant to the terms of this Deed of Trust or any other obligation of that married person secured by this Deed of Trust may be collected by execution upon that person's separate property, and any community property of which that person is a manager. 6.03 Disclosure of Information. Beneficiary reserves the right to sell, assign, transfer, negotiate or grant participation in all or any part of, or any interest in, Beneficiary's rights and benefits under the Note, any and all other Secured Obligations and this Deed of Trust. In connection therewith, Beneficiary may disclose all documents and information which Beneficiary now has or hereafter acquires relating to the Subject Property, all or any of the Secured Obligations and/or Trustor and, as applicable, any partners or joint venturers of Trustor, whether furnished by any Trustor or otherwise. 6.04 Rules of Construction. (a) When the identify of the parties or other circumstances make it appropriate, the masculine gender includes the feminine or neuter or both, and the singular number includes the plural; (b) the term "Subject Property" means all and any part and any interest in the Subject Property; (c) if any term of this Deed of Trust shall be invalid or unenforceable, the remainder of this Deed of Trust shall not be affected thereby, and each term of this Deed of Trust shall be valid and enforceable to the fullest extent permitted by law; (d) all Section headings herein are for convenience of reference only, are not a part of this Deed of Trust, and shall be disregarded in the interpretation of any portion of this Deed of Trust; and (e) if more than one person or entity has executed this Deed of Trust as "Trustor", the obligations of all such Trustees hereunder shall be joint and several. 6.05 Successors; Assigns. This Deed of Trust shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto; provided however, that this Section does not waive the provisions of Section 4.14 hereof. 6.06 Statement of Obligation. Upon demand by Beneficiary, Trustor shall pay Beneficiary a fee not to exceed $60.00 or such other maximum as may be imposed by law for furnishing any Statement of Obligation as provided by Section 2943 of the California Civil Code. 6.07 Execution of Documents. Trustor agrees, upon demand by Beneficiary or Trustee, to execute any and all documents and instruments required to effectuate the provisions hereof. 6.08 Right of Inspection. Beneficiary or its agents or employees may enter onto the Subject Property at any reasonable time for the purpose of inspecting the Subject Property and ascertaining Trustor's compliance with the terms hereof. 6.09 Incorporation. All terms of Exhibit A and each other exhibit and/or rider attached hereto and recorded herewith, are hereby incorporated into this Deed of Trust by this reference. 6.10 Address: Requests for Notice. Notice to Beneficiary shall be sent to Beneficiary addressed to: WELLS FARGO BANK, NATIONAL ASSOCIATION 1206 Van Ness Avenue Fresno CA 93721 Attention: Note Department, MAC #______ Loan Number _________________ or at such other place as Beneficiary from time to time may designate. Any Trustor whose address is set forth below hereby requests that a copy of any notice of default and notice of sale be mailed to such Trustor at that address. Failure to insert an address shall constitute a designation of Trustor's last known address as the address for any such notice. Trustee's address is AMERICAN SECURITIES COMPANY, c/o CORPORATE SECRETARY, MAC #0202-121, 464 California Street, San Francisco CA 94163. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the date first set forth above. TRUSTOR PLEASE NOTE: IN THE EVENT OF YOUR DEFAULT, CALIFORNIA PROCEDURE PERMITS THE TRUSTEE TO SELL THE SUBJECT PROPERTY AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER EXPIRATION OF A PERIOD PRESCRIBED BY LAW (SEE SECTION 5.02(f) HEREOF). UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY NOT BE ENTITLED TO OTHER NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. BY EXECUTION OF THIS DEED OF TRUST, YOU CONSENT TO SUCH PROCEDURE. IF YOU HAVE ANY QUESTIONS CONCERNING IT, YOU SHOULD CONSULT YOUR LEGAL ADVISOR. BENEFICIARY URGES YOU TO GIVE IT PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS SO THAT YOU MAY RECEIVE PROMPTLY ANY NOTICE GIVEN PURSUANT TO THIS DEED OF TRUST. Trustor(s) GOTTSCHALKS INC. By: s:\ Alan A. Weinstein SVP/CFO EXHIBIT A (Description of Property) Exhibit A to Deed of Trust executed by GOTTSCHALKS INC., A DELAWARE CORPORATION, as "Trustor," to AMERICAN SECURITIES COMPANY, as "Trustee," for the benefit of WELLS FARGO BANK, NATIONAL ASSOCIATION, as "Beneficiary," dated as of November 20, 1995. Description of Property Lot 6 of Tract No. 1258, in the City of San Luis Obispo, int he County of San Luis Obispo, State of California, according to map recorded August 27, 1986 in Book 13, Page 46 of Maps, in the office of the County Recorder of said County. DOCUMENT SIGNED AND NOTARIZED ON NOVEMBER 30, 1995. WELLS FARGO BANK CORPORATE RESOLUTION: BORROWING TO: WELLS FARGO BANK, NATIONAL ASSOCIATION RESOLVED: That this corporation, GOTTSCHALKS INC. proposes to obtain credit from time to time, or has obtained credit from Wells Fargo Bank, National Association ("Bank"). BE IT FURTHER RESOLVED, that any one of the following officers:______________ together with any one of the following officers: NONE of this corporation be and they are hereby authorized and empowered for and on behalf of and in the name of this corporation and as its corporate act and deed: (a) To borrower money from Bank and to assume any liabilities of any other person or entity to Bank, in such form and on such terms and conditions as shall be agreed upon by those authorized above and Bank, and to sign and deliver such promissory notes and other evidences of indebtedness for money borrowed or advanced and/or for indebtedness assumed as Bank shall require; such promissory notes or other evidences of indebtedness may provide that advances by requested by telephone communication and by any officer, employee or agent of this corporation so long as the advances are deposited into any deposit account of this corporation with Bank; this corporation shall be bound to Bank by, and Bank may rely upon, any communication or act, including telephone communications, purporting to be done by any officer, employee or agent of this corporation provided that Bank believes, in good faith, that the same is done by such person. (b) To contract for the issuance by Bank of letters of credit, to discount with Bank notes, acceptances and evidences of indebtedness payable to or due this corporation, to endorse the same and execute such contracts and instruments for repayment thereof to Bank as Bank shall require, and to enter into foreign exchange transactions with or through Bank. (c) To mortgage, encumber, pledge, convey, grant, assign or otherwise transfer all or any part of this corporation's real or personal Property for the purpose of securing the payment of any of the promissory notes, contracts, instruments and other evidences of indebtedness authorized hereby, and to execute and deliver to Bank such deeds of trust, mortgages, pledge agreements and/or other security agreements as Bank shall require. (d) To perform all acts and to execute and deliver all documents described above and all other contracts and instruments which Bank deems necessary or convenient to accomplish the purposes of this resolution and/or to perfect or continue the rights, remedies and security interest to be given to Bank hereunder, including without limitation, any modifications, renewals and/or extensions of any of this corporation's obligations to Bank, however evidenced; provided that the aggregate principal amount of all sums borrowed and credits established pursuant to this resolution shall not at any time exceed the sum of $31,000,000.00 outstanding and unpaid. Loans made pursuant to a special resolution and loans made by offices of Bank other then the office to which this resolution is delivered shall be in addition to foregoing limitation. BE IT FURTHER RESOLVED, that the authorize hereby conferred is in addition to that conferred by any other resolution heretofore or hereafter delivered to Bank and shall continue in full force and effect until Bank shall have received notice in writing, certified by the Secretary of this corporation, of the revocation hereof by a resolution duly adopted by the Board of Directors of this corporation. Any such revocation shall be effective only as to credit which is extended or committed by Bank, or actions which are taken by this corporation pursuant to the resolutions contained herein, subsequent to Bank's receipt of such notice. The authority hereby conferred shall be deemed retroactive, and any and all acts authorized herein which were performed prior to the passage of this resolution are hereby approved and ratified. CERTIFICATION I, Alan A. Weinstein, Secretary of GOTTSCHALKS INC., a corporation created and existing under the laws of the State of DELAWARE, do hereby certify and declare that the foregoing is a full, true and correct copy of the resolutions duly passed and adopted by the Board of Directors of said corporation, by written consent of all Directors of said corporation or at a meeting of said Board duly and regularly called, noticed and held on November 15, 1995, at which meeting a quorum of the Board of Directors was present and voted in favor of said resolutions; that said resolutions are now in full force and effect; that there is no provision in the Articles of Incorporation or Bylaws of said corporation, or any shareholder agreement, limiting the power of the Board of Directors of said corporation to pass the foregoing resolutions and that such resolutions are in conformity with the provisions of such Articles of Incorporation and Bylaws; and that no approval by the shareholders of, or of the outstanding shares of, said corporation is required with respect to the matters which are the subject of the foregoing resolutions. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate seal of said corporation as of November 20, 1995. s:\ Alan A. Weinstein Secretary WELLS FARGO BANK CERTIFICATE OF INCUMBENCY TO: WELLS FARGO BANK, NATIONAL ASSOCIATION The undersigned, Alan A. Weinstein, Secretary of GOTTSCHALKS INC., a corporation created and existing under the laws of the State of Delaware, hereby certifies to Wells Fargo Bank, National Association ("Bank") that the following named persons are those duly elected officers of this corporation specified in the Corporate Resolution attached hereto and that the signatures opposite their names are their true signatures: Title Name Signature Senior Vice President/ Alan A. Weinstein s:\Alan A. Weinstein The undersigned further certifies that should any of the above named officers change, or should the signature requirements of said Corporate Resolution change, this corporation shall provide Bank immediately with a new Certificate of Incumbency. Bank is hereby authorized to rely on this Certificate until a new Certificate certified by the Secretary of this corporation is received by Bank. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate seal of said corporation as of November 20, 1995. s:\Alan A. Weinstein Secretary Recording Requested by, And After Recording, Return to: WELLS FARGO BANK, NATIONAL ASSOCIATION Commercial Finance Division 9000 Flair Drive El Monte, CA. 91731 Attn: Michael Baranowski FIRST MODIFICATION OF DEED OF TRUST This First Modification of Deed of Trust (this "Modification") is entered into as of March 6, 1996, by and between GOTTSCHALKS INC. ("Trustor"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Beneficiary"). RECITALS This Modification is entered into upon the basis of the following facts and understandings of the parties: A. This Modification pertains to that certain Deed of Trust dated as of November 20, 1995, executed by Trustor to American Securities Company, as Trustee, in favor of Beneficiary, and recorded on December 5, 1995, as Document No. 1995-056390 of the Official Records of the County of San Luis Obispo, State of California ("Deed of Trust"). B. The obligations secured by the Deed of Trust have been modified, and Trustor and Beneficiary have agreed to modify the Deed of Trust to accurately reflect the obligations secured thereby. NOW, THEREFORE, the parties hereto agree as follows: 1. The promissory note dated as of November 20, 1995, executed by Trustor and payable to Beneficiary or its order, in the principal amount of $2,743,109.72, which is described in Section 2.01(a) of, and is secured, by the Deed of Trust, has been modified by extending the maturity date and increasing the rate of interest applicable thereto. 2. The real property and the whole thereof described in the Deed of Trust shall remain subject to the lien, charge or encumbrance of the Deed of Trust and nothing herein contained or done pursuant hereto shall affect or be construed to affect the liens, charges or encumbrances of the Deed of Trust, or the priority thereof over other liens, charges or encumbrances, or to release or affect the liability of any party or parties who may now or hereafter be liable under or on account of said promissory notes and/or the Deed of Trust. 3. All terms and conditions of the Deed of Trust not expressly modified herein remain in full force and effect, without waiver or amendment. This Modification and the Deed of Trust shall be read together, as one document. IN WITNESS WHEREOF, the parties hereto have caused this Modification to be executed as of the day and year first above written. BENEFICIARY: TRUSTOR: WELLS FARGO BANK GOTTSCHALKS INC. By: By: s:\Alan A. Weinstein Title: Title: SVP/CFO (ATTACH NOTARY ACKNOWLEDGMENTS) EX-10.46 4 NOTE EXTENSION AND MODIFICATION AGREEMENT This Extension Agreement is made and entered into as of March 5, 1996 by and between WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and GOTTSCHALKS, INC. ("Borrower"). RECITALS WHEREAS, Borrower has executed a promissory note dated November 20, 1995 in the original principal amount of $2,743,109.72 (the "Note") in favor of Bank, which Note is secured pursuant to a Deed of Trust with Assignment of Rents dated November 20, 1995 recorded as Doc. No. 1995-056390 in the Official Records of San Luis Obispo County (the "Deed"); WHEREAS, Borrower has requested that Bank extend the maturity date of the Note to September 5, 1996; and WHEREAS, Bank has so agreed subject to the terms and conditions that follow: 1. The maturity date of the Note is hereby extended to September 5, 1996. 2. From the date hereof to and including June 5, 1996, the Note shall bear interest at a fluctuating rate per annum equal to one and one-half percent (1.50%) above the Prime Rate in effect from time to time. 3. From June 6, 1996, the Note shall bear interest at a fluctuating rate per annum equal to two percent (2.00%) above the Prime Rate in effect from time to time. 4. Borrower shall pay to Bank non-refundable extension fees in the following amounts on the following dates: Date Fee March 6, 1996 0.5% of the outstanding principal balance on March 6, 1996 June 6, 1996 0.5% of the outstanding principal balance on June 6, 1996 5. Borrower shall, at its expense and concurrently with execution hereof, execute a first Modification of Deed of Trust and cause to be issued and delivered to Bank a modification indorsement insuring the priority of the Deed. 6. Except as so extended and modified, the Note remains in full force and effect and remains secured by the Deed. GOTTSCHALKS INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By: s:/ Alan A. Weinstein By: Title: Senior V.P./CFO Title:_____________________ EX-10.47 5 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Ninth Amendment") is entered into as of January 26, 1996 by and between Fleet Capital Corporation, formerly known as Shawmut Capital Corporation, a Connecticut corporation, as successor-in-interest to 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 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 Security Agreement dated as of December 30, 1994, (iv) that certain Fourth Amendment to Loan and Security Agreement dated as of March 22, 1995, (v) that certain Fifth Amendment to Loan and Security Agreement dated as of March 31, 1995, (vi) that certain Sixth Amendment to Loan and Security Agreement dated as of July 31, 1995, (vii) that certain Seventh Amendment to Loan and Security Agreement dated as of August 9, 1995, and (viii) that certain Eighth Amendment to Loan and Security Agreement dated as of October 17, 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 "Bank" set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and the following is substituted therefor: Bank - Fleet National Bank of Connecticut. 2.2 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) (I) at any time during the period from April 1, 1996 through December 31, 1996, the lesser of (x) sixty percent (60%) or (y) the Inventory Valuation Percentage at such time, calculated on a first-in, fist-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, and (II) at any other time, 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. 2.3 A new definition of "Contract Year" is added to Section 1.1 of the Loan Agreement, as follows: Contract Year - the yearly period beginning on March 31 of any year and ending on March 30 of the following year. 2.4 A new definition of "Inventory Valuation Percentage" is added to Section 1.1 of the Loan Agreement, as follows: Inventory Valuation Percentage - at any time, the percentage determined by Lender's special retail consultant to approximate the orderly liquidation value of Borrower's Eligible Inventory. 2.5 The definition of "Lender" set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and the following is substituted therefor: Lender - Fleet Capital Corporation, a Connecticut corporation. 2.6 The definition of "Payable Turnover Rate" set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and the following is substituted therefor: 2.7 A new Section 2.1(D) is added to the Loan Agreement, as follows: (D) Without limiting the generality of the last sentence of Section 2.1(A), Borrower acknowledges that Lender will establish a specific reserve with respect to Borrower's potential liability in connection with the 1992 lawsuit filed against Borrower by F&N Acquisition Corp. (the "F&N Litigation"), which reserve (the "F&N Litigation Reserve") shall start at $700,000 on February 4, 1996 and shall increase by $700,000 on the first day of each of March, April, May and June 1996. Lender shall maintain the F&N Litigation Reserve until the earlier of (i) Lender's disbursement of Revolving Loans (which may include some or all of the amount covered by the F&N Litigation Reserve) requested by Borrower to fully satisfy all obligations and liabilities of Borrower in connection with the F&N Litigation, or (ii) Borrower's otherwise satisfying Lender that no actual or potential obligations or liabilities of Borrower in connection with the F&N Litigation continue to exist. 2.8 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 and three-quarters percent (3.75%) above the LIBOR Rate. 2.9 A new Section 3.1(J) is added to the Loan Agreement, as follows: (J) Facility Fee. As additional consideration for Lender's entering into the Ninth Amendment to this Agreement and Lender's costs and risks of continuing to make funds available and administering the transactions contemplated by this Agreement, Borrower shall pay to Lender an annual facility fee of $100,000 for each Contract Year commencing on or after March 31, 1996 while this Agreement is in effect. The annual facility fee for each Contract Year shall be deemed fully-earned and non-refundable on the first day of such Contract Year, but shall be due and payable by Borrower in four installments of $25,000 each on March 31, June 30, September 30 and December 31 of such Contract Year. Any unpaid installments of the annual facility fee shall be immediately due and payable upon any termination of this Agreement for any reason. 2.10 Section 4.7 of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 4.7 Audits and Appraisals. Lender or its designee may conduct a maximum of four (4) audits per year, and Arthur Andersen & Co. or such other special retail consultant selected by Lender may conduct up to two (2) inventory appraisals per year, unless an Event of Default has occurred and is continuing, in which event the number of audits and appraisals conducted will be in Lender's reasonable discretion. Borrower will reimburse Lender for all out-of-pocket expenses incurred by Lender in connection with such audits and appraisals upon Lender's demand therefor. 2.11 A new sentence is added at the end of Section 6.2 of the Loan Agreement, as follows: Notwithstanding the foregoing, if the amount of unused borrowing availability under the Revolving Loans is at any time less than $5,000,000, Borrower will at all times thereafter deliver a Borrowing Base Certificate to Lender on a daily basis, which Borrowing Base Certificate shall include an update of all Inventory on a daily basis; provided, that if the average amount of unused borrowing availability under the Revolving Loans, measured on a monthly basis, equals or exceeds $5,000,000 for a subsequent period of three consecutive months, then Borrower may resume providing a Borrowing Base Certificate on a weekly basis as originally provided, unless and until the amount of unused borrowing availability under the Revolving Loans is again less than $5,000,000. 2.12 A new sentence is added at the end of Section 8.2(L) of the Loan Agreement, as follows: Notwithstanding the foregoing, from and after February 3, 1996, Borrower shall not open any new stores or undertake any store Expansions without the prior written consent of Lender, except for the following: (x) the opening of a new store in Reno, Nevada; and (y) provided that Borrower receives a minimum of $3,000,000 in total additional third-party debt or equity financing to finance such relocations and that Borrower extends a maximum of $500,000 per relocation for additional fixtures and remodeling costs, the relocations of the existing Modesto, California and Fashion Fair (Fresno, California) stores within the malls in which they are currently located. 2.13 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 January 1996 <$3,000,000> February 1996 <$2,400,000> March 1996 <$950,000> April 1996 <$900,000> May 1996 <$325,000> June 1996 <$225,000> July 1996 <$1,200,000> August 1996 <$1,200,000> September 1996 <$50,000> October 1996 <$500,000> November 1996 $250,000 December 1996 $8,100,000 January 1997 <$2,150,000> February 1997 <$2,400,000> March 1997 <$950,000> (ii) Maintain at all times, on a fiscal quarter-to-date basis, not less than the following Consolidated corresponding fiscal quarters set forth below: Fiscal Quarter Amount First fiscal quarter <$4,250,000> of Fiscal Year ending January 1997 Second fiscal quarter <$1,750,000> of Fiscal Year ending January 1997 Third fiscal quarter <$1,750,000> of Fiscal Year ending January 1997 Fourth fiscal quarter $6,200,000 of Fiscal Year ending January 1997 Each fiscal quarter <$2,000,000> thereafter (iii) Maintain at all times not less than the following Consolidated Adjusted Net Earnings from Operations for the period of twelve (12) consecutive Fiscal Periods including and ending with the corresponding Fiscal Periods set forth below: Fiscal Period Amount January 1996 <$7,200,000> February 1996 <$6,900,000> March 1996 <$6,700,000> April 1996 <$6,900,000> May 1996 <$6,300,000> June 1996 <$6,200,000> July 1996 <$6,450,000> August 1996 <$6,100,000> September 1996 <$5,550,000> October 1996 <$4,700,000> November 1996 <$3,450,000> December 1996 <$450,000> January 1997 <$325,000> Each Fiscal Period $0.00 thereafter 2.14 Section 8.3(F) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: (F) Senior Debt Coverage Ratio. Maintain at all times a Senior Debt Coverage Ratio of not less than the following amounts as of the end of the corresponding Fiscal Periods set forth below: Fiscal Period Amount February 1996 0.40 to 1.0 March 1996 0.40 to 1.0 April 1996 0.40 to 1.0 May 1996 0.55 to 1.0 June 1996 0.55 to 1.0 July 1996 0.55 to 1.0 August 1996 0.55 to 1.0 September 1996 0.70 to 1.0 October 1996 0.70 to 1.0 November 1996 1.00 to 1.0 December 1996 1.50 to 1.0 January 1997 1.50 to 1.0 Each Fiscal Period 1.00 to 1.0 thereafter 2.15 Section 8.3 (G) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor. (G) Times Interest Earned Ratio. Maintain at all times a Times Interest Earned Ratio of not less than the following amounts as of the end of the corresponding Fiscal Periods set forth below: Fiscal Period Amount February 1996 0.10 to 1.0 March 1996 0.10 to 1.0 April 1996 0.10 to 1.0 May 1996 0.27 to 1.0 June 1996 0.27 to 1.0 July 1996 0.27 to 1.0 August 1996 0.35 to 1.0 September 1996 0.40 to 1.0 October 1996 0.50 to 1.0 November 1996 0.65 to 1.0 December 1996 0.90 to 1.0 January 1997 1.00 to 1.0 Each Fiscal Period 1.00 to 1.0 thereafter 2.16 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 of not less than the following number of days as of the end of the corresponding Fiscal Periods set forth below: Fiscal Period Number of Days February 1996 59 March 1996 51 April 1996 55 May 1996 42 June 1996 40 July 1996 49 August 1996 58 September 1996 72 October 1996 81 November 1996 53 December 1996 20 January 1997 66 February 1997 59 March 1997 51 2.17 The third sentence of Section 11.17 of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURTS OF LOS ANGELES COUNTY, CALIFORNIA, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA, SHALL EACH HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. 3. Conditions to Effectiveness. This Ninth Amendment shall not become effective unless and until each of the following conditions precedent have been satisfied: 3.1 Lender's special retail consultant shall have completed and delivered to Lender a new appraisal of Borrower's Inventory, the results of which appraisal are satisfactory to Lender; and 3.2 Lender and Wells shall have each executed a Second Amendment to Participation Agreement with respect to Wells' participation in the Revolving Loans made by 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 Ninth 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 Ninth Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Ninth 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 Ninth Amendment does not constitute an amendment or waiver Default, Event of Default, or other default by Borrower thereunder. The Loan Agreement, as modified by this Ninth 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 Ninth Amendment or the Loan Agreement. 7. Counterparts. This Ninth 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 Ninth Amendment to Loan and Security Agreement as of the day and year first written above. ("Lender") FLEET CAPITAL CORPORATION By: s:/Alisa Frederick Vice President ("Borrower") GOTTSCHALKS INC. By: s:/Alan A. Weinstein Senior Vice President and Chief Financial Officer TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Tenth Amendment") is entered into as of March 7, 1996 by and between Fleet Capital Corporation, formerly known as Shawmut Capital Corporation, a Connecticut corporation, as successor-in-interest to 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 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 Security Agreement dated as of December 30, 1994, (iv) that certain Fourth Amendment to Loan and Security Agreement dated as of March 22, 1995, (v) that certain Fifth Amendment to Loan and Security Agreement dated as of March 31, 1995, (vi) that certain Sixth Amendment to Loan and Security Agreement to Loan and Security Agreement dated as of August 9, 1995, (viii) that certain Eighth Amendment to Loan and Security Agreement dated as of October 17, 1995, and (ix) that certain Ninth Amendment to Loan and Security Agreement dated as of January 26, 1996, 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 fact amount of any LC Guaranty or Letter of Credit issued by Lender or any of its Affiliates outstanding at such date; or (B) (I) at any time during the period from March 8 through December 31, 1996, the lesser of (x) sixty percent (60%) or (y) the Inventory Valuation Percentage at such time, 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, and (II) at any other time, fifty percent (50%) of the value of Eligible Inventory at such date, calculated on a firs-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. 3. Conditions to Effectiveness. This Tenth Amendment shall not become effective unless and until each of the following conditions precedent have been satisfied: 3.1 Borrower shall have paid to Lender a fee of $10,000 in consideration of Lender's entering into this Tenth Amendment; and 3.2 Wells shall have executed and delivered to Lender a Participant's Consent Under Participation Agreement with respect to this Tenth Amendment. 4. Continuing Representations of Borrower. Borrower hereby represents and warrants to Lender that as of the date hereof all representations and warranties continued 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 Tenth 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 Tenth Amendment and any other provision of the Loan Agreement, the terms and provisions of this Tenth Amendment shall govern and control. Except to the extent specifically amended or superseded by the terms of this Tenth 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 Tenth 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 Tenth 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 Tenth Amendment or the Loan Agreement. 7. Counterparts. This Tenth 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 Tenth Amendment to Loan and Security Agreement as of the day and year first written above. ("Lender") FLEET CAPITAL CORPORATION By: s/Alisa Frederick Vice President ("Borrower") GOTTSCHALKS INC. By: s/Alan A. Weinstein Senior Vice President Chief Financial Officer EX-10.48 6 April 22, 1996 Mr. Alan Weinstein Senior Vice President Chief Financial Officer Gottschalks Inc. 7 River Park Place East Fresno, CA. 93729 RE: Fiscal 1995 Covenant Default and Waiver Dear Alan: As of January 31, 1996, Gottschalks Inc. ("Gottschalks") was in default of the Loan and Security Agreement, (the "Agreement"), dated December 16, 1994 between Gottschalks, as Borrower, and Heller Financial, Inc., as Lender ("Heller"). The default exists as a result of Gottschalks not being in compliance with the covenant contained under section 4(aa) which states "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)". Based on the preliminary year end financial information provided by Gottschalks to Heller the year end calculation of this covenant resulted in a coverage of 1.01 times. Per your request, and based on our review of Gottschalks preliminary year end financial information and projections for fiscal year 1996 (year ending 1/31/97), and the nature and extent of the defaults, Heller, as Lender, hereby waives compliance under the Agreement as it pertains to sections 4(aa). This waiver is effective as of the fiscal year ended January 31, 1996. Heller's waiver of this covenant pertains only to the violation as of the fiscal year ended 1/31/96 and is not intended to be a waiver of any future defaults under the Agreement, nor is it a waiver of any other defaults which may currently exist. To our knowledge no other defaults presently exist. Per your request to modify the covenant contained in 4(aa) of the Loan and Security Agreement for the first, second and third quarters of fiscal 1996 Heller is agreeable to adjusting these covenants to .75 for the first quarter, .85 for the second quarter and 1.0 times for the third quarter per your letter request dated January 26, 1996. The modification of these covenants is subject to receipt of the year end audit for January 31, 1996 and no material change in the audited numbers from the preliminary year end numbers already provided. As a further condition of Heller agreeing to waive the year end default and modification of the covenant for the first three quarters of fiscal 1996, Heller will require that Gottschalks pay a Waiver and Modification Fee of $5,700.00 which represents 0.1% of the outstanding loan balance of $5,699,999.96 as January 31, 1996. You will be invoiced for this amount accordingly. If you have any questions please feel free to give me a call. Sincerely, HELLER FINANCIAL INC. s:/John Watson Assistant Vice President cc: Terry McMullen, Vice President EX-27 7
5 THE FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T AND INCLUDES UNAUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S 10-K REPORT FOR THE YEAR ENDED FEBRUARY 3, 1996. 1000 YEAR FEB-3-1996 FEB-3-1996 5,113 0 34,595 1,352 87,507 139,058 129,549 40,299 239,041 96,154 34,872 0 0 104 77,813 239,041 401,041 412,704 278,827 278,827 8,091 3,030 11,296 (8,611) (2,972) (5,639) 0 0 0 (5,639) (.54) (.54)
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