-----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, SOdKBOuHa/UGQSkhdruUcHYed6Q65h9fn1+ofMVSvmbUKcfKwZHaxJ50AhUpQGCk Ghbgrf4dWC9jGVGg9b1JQw== 0000790414-97-000006.txt : 19970416 0000790414-97-000006.hdr.sgml : 19970416 ACCESSION NUMBER: 0000790414-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970415 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: 97581433 BUSINESS ADDRESS: STREET 1: 7 RIVER PARK PL E STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 BUSINESS PHONE: 2094348000 MAIL ADDRESS: STREET 1: 7 RIVER PARK PLACE EAST STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For The Fiscal Year Ended February 1, 1997 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, 1997: Common Stock, $.01 par value: $40,353,374 On March 31, 1997 the Registrant had outstanding 10,472,915 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 26, 1997, 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-four "Village East" specialty stores located primarily in non-major metropolitan cities throughout California, and in Oregon, Washington and Nevada. Gottschalks and Village East sales totaled $422.2 million for the year ended February 1, 1997 (referred to herein as fiscal 1996), with Gottschalks sales comprising 97.5% and Village East sales comprising 2.5% of total sales. Gottschalks department stores typically offer a wide range of brand-name and private-label merchandise, including men's, women's, junior's and children's apparel; cosmetics and accessories; shoes and jewelry; home furnishings including china, housewares, electronics and small electric 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 or as a separate department within some of the Company's larger Gottschalks stores. The Company's stores carry primarily moderately-priced brand-name merchandise, complemented with private-label merchandise and a mix of higher and budget-priced merchandise. Brand-name apparel, cosmetic and accessory lines carried by the Company include Estee Lauder, Lancome, Dooney & Bourke, Liz Claiborne, Carole Little, Calvin Klein, Ralph Lauren, Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan Picone, Haggar, Koret and Levi Strauss. Merchandise carried in the Company's home division include brands such as Sony, Mitsubishi, Lenox, Krups, Calphalon, Royal Velvet, KitchenAid and Samsonite. 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 and its predecessor, E. Gottschalk & Co., have operated continuously for over 92 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-seven of its thirty-five Gottschalks stores, opened twenty of its twenty-four Village East specialty stores and constructed its distribution center. Gottschalks is currently the largest independent department store chain based in California. (See Part I, Item I, "Business--Store Location and Growth Strategy"). 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".) _____________________ OPERATING STRATEGY Merchandising Strategy. The Company's merchandising strategy is directed at offering and promoting nationally advertised, brand-name merchandise recognized by its customers for style and value. Brand-name apparel, cosmetic and accessory lines carried by the Company include Estee Lauder, Lancome, Dooney & Bourke, Liz Claiborne, Carole Little, Calvin Klein, Ralph Lauren, Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit, Evan Picone, Haggar, Koret and Levi Strauss. Merchandise carried in the Company's home division include brands such as Sony, Mitsubishi, Lenox, Krups, Calphalon, Royal Velvet, KitchenAid and Samsonite. 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:
1996 1995 1994 1993 1992 Softlines: Cosmetics & Accessories.17.5% 17.2% 16.6% 16.5% 16.2% Women's Clothing........15.9 15.5 16.1 16.5 17.1 Men's Clothing......... 14.4 14.3 13.9 13.6 13.2 Women's Dresses, Coats & Lingerie............ 7.9 7.8 7.9 7.8 8.6 Shoes & Other Leased Departments........... 7.8 7.4 7.1 7.4 7.1 Junior's Clothing...... 5.5 6.0 6.3 7.0 7.2 Children's Clothing..... 5.3 4.9 4.9 4.9 4.1 Village East........... 2.5 2.6 2.6 2.7 2.8 Total Softlines...... 76.8 75.7 75.4 76.4 76.3 Hardlines: Housewares & Stationary 10.4 11.0 10.9 10.7 11.0 Domestics & Luggage... 7.9 8.1 8.1 7.1 6.7 Electronics & Furniture 4.9 5.2 5.6 5.8 6.0 Total Hardlines...... 23.2 24.3 24.6 23.6 23.7 Total Sales.......... 100.0%100.0%100.0%100.0% 100.0%
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, 46 buyers and 27 assistant buyers. The Company also has a merchandise planning and allocation division which works closely with the buying division to develop merchandising plans and to link the Company's merchandising activities with actual performance in its stores. 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. One of the Company's most important sources of current information about marketing and emerging fashion trends is derived from its membership in Frederick Atkins. 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 and merchandise planning and allocation divisions meet frequently with store management to ensure that 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 and Technology.") Each of the Company's stores carry substantially the same merchandise, but in different mixes according to individual market demands. Some of the previously described brand-name apparel merchandise may not be currently available in all of the Company's store locations. The mix of merchandise in a particular market 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. The Company closed its clearance center in 1993 in connection with its cost-savings efforts and now liquidates slow-moving merchandise through certain of its existing stores. The Company's membership in Frederick Atkins, a national association of major retailers, provides it with group purchasing opportunities. In fiscal 1996, the Company purchased approximately 5.6% 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 1996 were Estee Lauder, Inc., Levi Strauss & Co., Liz Claiborne, Inc., Cosmair, Inc. (Lancome), Haggar Apparel, Calvin Klein Cosmetics, Koret of California, All-That-Jazz, Chaps by Ralph Lauren and Bugle Boy Industries. Purchases from those vendors accounted for approximately 21.0% of the Company's total purchases in fiscal 1996. Management believes that alternative sources of supply are available for each category of merchandise it purchases. Promotion Strategy. 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 cardholders and, through its computer database, generating specific lists of customers who may be most responsive to specific promotional mailings. The Company has 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--Private-Label Credit Card" and "Business--Information Systems and Technology.") The Company's stores experience seasonal sales and earnings patterns typical of the retail industry. Peak sales occur during the Christmas selling months of November and December, and to a lesser extent, during the Back-to-School and Easter selling 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"). Store Location and Growth Strategy. The Company's stores are located primarily in diverse, growing, non-major metropolitan areas. 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 where there is a strong demand for nationally advertised, brand-name merchandise and fewer competitors offering such merchandise. Some of the Company's stores are 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. The Company generally seeks to open two new stores per year, although more stores may be opened in any given year if it is believed to be financially attractive to the Company. The Company has also continued to invest in the renovation and refixturing of its existing store locations in order to maintain and improve market share in those market areas. The 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: 1996 1995 1994 1993 1992 Gottschalks (1) 35 34 29 27 25 Village East 24 (2) 26 24 23 22 TOTAL 59 60 53 50 47 Gross store square footage (in thousands) 3,276 2,984 2,425 2,202 2,093
(1) The number of stores does not include the Company's clearance center (opened -1988, closed - 1993). (2) The Company incorporated two Village East stores into larger Gottschalks stores as separate departments during fiscal 1996, reducing the total number of free-standing Village East stores open to twenty-four as of the end of fiscal 1996. The Company has continued to combine sales generated by these departments with total sales reported for Village East. Since the Company's initial public offering in 1986, the Company has constructed or acquired twenty-seven of its thirty-five 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-four Village East specialty stores. Gross store square footage added during this period was approximately 2.5 million square feet, resulting in approximately 3.3 million total Company gross square feet. As of the end of fiscal 1996, the Company's operations included thirty-one department stores located in California, two stores in Nevada and one store in each of Oregon and Washington. Recent store expansion included the opening of the Company's second Gottschalks store in Nevada in Reno (March 1996) and the relocation of two pre-existing stores in the Modesto, California Vintage Faire Mall (March 1996) and Fresno, California Fashion Fair Mall (April 1996) to larger anchor space in those malls which were previously occupied by a major competitor of the Company. The Company has entered into agreements to open two new stores in the second half of fiscal 1997, to be located in the current Macy's location in Santa Rosa, California and the current K-Mart location in Sonora, California. The Company generally seeks prime locations in regional malls as sites for new department stores, and has historically avoided expansion into major metropolitan areas. 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. 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, most merchandise arriving at the distribution center is inspected, recorded by computer into inventory and tagged with a bar-coded price label. The Company utilizes universal product codes ("UPC") with vendors that have also 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 is ready for immediate distribution to the stores. The Company also participates in the "VIC's" program which has standardized hangers for apparel merchandise. Merchandise purchased from vendors participating in the VIC's program arrives at the distribution center already on standardized hangers and ready for immediate distribution to stores. 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 and Technology", the Company is in process of implementing new technology at the distribution center in fiscal 1997 that is expected to reduce certain costs associated with the purchase, handling and distribution of merchandise. 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. Private-Label Credit Card. The Company issues its own credit card, which management believes enhances the Company's ability to generate and retain market acceptance and increase sales and other revenues for the Company. The Company has one of the highest levels of proprietary credit card sales in the retail industry, with credit sales as a percent of total sales of 44.7%, 44.7%, 43.0%, 38.4% and 38.2% in fiscal 1996, 1995, 1994, 1993 and 1992. Service charge revenues associated with the Company's customer credit cards were $10.5 million, $10.9 million, $8.9 million, $8.1 million and $8.6 million in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. The Company had approximately 481,000 active credit accounts as of March 31, 1997 as compared to approximately 461,000 as of March 31, 1996, an increase of 4.3%. 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 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 has implemented a variety of credit-related programs which have resulted in enhanced customer service and increased service charge revenues. The Company has an "Instant Credit" program, through which successful credit applicants receive a discount ranging from 10% to 50% (depending on the results of the Instant Credit scratch-off card) on the first days' purchases made with the Company's credit card; a "55-Plus" charge account program, which offers additional merchandise and service discounts to customers 55 years of age and older; and "Gold Card" and "55-Plus Gold Card" programs, which offer special services at a discount for customers who have a net minimum spending history on their charge accounts of $1,000 per year. In fiscal 1997, the Company expects to implement the "Gottschalks Reward Program" which offers an annual rebate certificate for up to 5% of annual credit purchases on the Company's credit card (up to a maximum of $10,000 of annual purchases) which can be applied towards future purchases of merchandise. Prior to the Gottschalks Reward Program, the Company offered a 1% annual rebate certificate to Gold Card and 55-Plus Gold Card holders. The Company has also launched a credit card reactivation program in an attempt to recapture credit cardholders who have not utilized their credit card for a specified period of time. Management believes holders of the Company's credit card typically buy more merchandise from the Company than other customers. The Company's credit management software system has automated substantially all aspects of the Company's credit authorization, collection and billing process, and enhances the Company's ability to provide customer service. The credit management system also enables the Company to access target markets with sophisticated direct marketing techniques. This system, combined with a credit scoring system, enables the Company to process thousands of credit applications daily at a rate of less than three minutes per application. The Company also has an automated advanced call management system through which the Company manages the process of collecting delinquent customer accounts. As described more fully in "Business--Promotion Strategy", the Company is also able to utilize the advanced call management system for telemarketing activities. 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 may be assessed on unpaid balances at an annual percentage rate of up to 21.6%; a late charge fee on delinquent charge accounts may be assessed at a rate of up to $15 per late payment occurance. Such charges may vary depending on applicable state law. Information Systems and Technology. The Company has continued to invest in technology and systems improvements in its efforts to improve customer service and reduce inventory-related costs and operating costs. The Company's information systems include 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 sales, inventory, credit, payroll and financial reporting systems. The Company has installed approximately 1,800 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 believes the continued enhancement of its merchandise-related systems is essential for merchandise cost and shrinkage control. The Company has an automatic markdown system which has assisted in the more timely and accurate processing of markdowns and reduced inventory shortage resulting from paperwork errors. The Company's price management system has improved the Company's POS price verification capabilities, resulting in fewer POS errors and enhanced customer service. Combined 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 1.1% of net sales in fiscal 1996, from 1.3%, 1.4%, 2.1% and 2.3% fiscal 1995, 1994, 1993 and 1992, respectively. Management also believes improved technology is critical for future reductions in costs related to the purchase, handling and distribution of merchandise, traditionally labor-intensive tasks. The Company's merchandise management and allocation ("MMS") system has enhanced the Company's ability to allocate merchandise to stores more efficiently and make prompt reordering and pricing decisions. The 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 implemented 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, invoicing and charge-back entry. Such systems have automated certain processes associated with the purchasing and payment for merchandise. Management expects to complete the installation of an enhanced merchandise receiving and distribution system at the Company's distribution center by mid-fiscal 1997. This new system is expected to enhance the automation of certain processes related to the receipt and distribution of apparel and non-apparel merchandise and enable the Company to deliver merchandise to stores more quickly. Management believes this new system may improve the Company's ability to sell more merchandise at its original retail price and may result in lower distribution center payroll. The Company is also in process of installing a workflow and imaging system to automate certain aspects of its merchandise and general expense payables system. Management expects this system to reduce certain costs associated with the payment for merchandise. Other systems implemented by the Company in its efforts to control its selling, general and administrative costs include the following: (i) a payroll system, which has enhanced the Company's ability to manage payroll-related costs; (ii) an advertising management software system, which enables the Company to measure individual item sales performance derived from a particular advertisement; and (iii) the Company's credit management system, described in Part I, Item I "Business--Private Label-Credit Card". Competition. The Company operates in a highly competitive environment. 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 92 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. Leased Departments. The Company currently leases the fine jewelry, shoe and maternity wear departments, custom drapery, certain of its restaurants, coffee bars 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 7.8%, 7.4%, 7.1%, 7.4% and 7.1% in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. Gross margin applicable to the leased departments was 14.6%, 14.4%, 14.1%, 13.8% and 14.4% in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. Employees. As of February 1, 1997, the Company had 5,429 employees, of whom 1,517 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 lease contains two consecutive ten-year renewal options and the Company receives favorable rental 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 $6.19, $6.29, $6.38, $6.54 and $6.09 per gross square foot in lease expense in fiscal 1996, 1995, 1994, 1993 and 1992, 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-four Village East stores are located in regional shopping malls. While there is no assurance that the Company will be able to negotiate further extensions of any particular lease, management believes that satisfactory extensions or suitable alternative store locations will be available. The following table contains specific information about each of the Company's stores open as of the end of fiscal 1996:
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 2017(3) 2 five yr. opt. Capitola............105,000 89,352 1990 2015 4 five yr. opt. Carson City, Nevada. 58,000 51,848 1995 2005 2 five yr 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......163,000 120,000 1970 2016(7) 4 five yr opt. 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.....161,500 124,100 1977 2007(7) 1 eight yr. opt. and 5 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. Reno, Nevada........138,000 110,000 1996 2016 2 ten 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..3,204,700 2,607,052 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 N/A N/A N/A (5) N/A 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 1997(6) None Modesto: Vintage Faire..... 2,900 N/A N/A N/A (5) N/A 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....71,205 60,877 Total Square Footage........3,275,905 2,667,929 __________________________
(1) Reflects total store square footage, including office space, storage, service and other support space that is not 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) This lease was revised and extended during fiscal 1996 in connection with the remodeling and 23,000 square foot expansion of the store, expected to be completed in fiscal 1997. (4) This lease is automatically renewed every 60 days. Either party can terminate the lease upon 60 days' notice. (5) These Village East store leases were not renewed upon their expiration as the Company incorporated these stores into the nearby Gottschalks store as a separate department during fiscal 1996. The Company does not include these locations in the total number of free-standing Village East stores open as of the end of fiscal 1996. The Company does, however, include sales applicable to these locations in total Village East sales amounts reported. (6) The Company reached an agreement to terminate this lease in August 1997. The original lease expired in the year 2001. (7) Represents new leases entered into during fiscal 1996. (See Note 4 to the Consolidated Financial Statements.) Item 3. LEGAL PROCEEDINGS Not Applicable. 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 ("NYSE") and the Pacific Stock Exchange. The following table sets forth the high and low sales prices per share of common stock as reported on the NYSE Composite Tape under the symbol "GOT" during the periods indicated:
1996 1995 Fiscal Quarters High Low High Low 1st Quarter......... 7 3/8 5 5/8 7 7/8 6 3/4 2nd Quarter......... 7 1/4 5 3/4 7 3/8 6 1/2 3rd Quarter......... 6 1/2 5 1/8 8 3/8 6 1/2 4th Quarter......... 7 5 1/8 7 4 3/4
On March 31, 1997, the Company had 1,014 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, 1997 was $5.75 per share. The Company has not paid a cash dividend since its initial public offering in 1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future depending on the Company's earnings, financial condition and capital requirements. In addition, the Company's credit agreement with Congress Financial Corporation prohibits the Company from paying dividends without prior written consent from that lender. There were no sales of unregistered securities by the Company during fiscal 1996. 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 1, 1997, February 3, 1996, January 28, 1995, January 29, 1994 and January 30, 1993 are referred to herein as fiscal 1996, 1995, 1994, 1993 and 1992, respectively. All fiscal years noted include 52 weeks, except for fiscal 1995 which includes 53 weeks. The selected financial data below should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and related notes included elsewhere herein.
RESULTS OF OPERATIONS: 1996 1995 1994 1993 1992 (In thousands, except per share data) Net sales(1)........... $422,159 $401,041 $363,603 $342,417 $331,133 Service charges and other income......... 13,285 11,663 9,659 8,938 9,458 435,444 412,704 373,262 351,355 340,591 Costs and expenses: Cost of sales(2)..... 287,164 278,827 247,423 233,715 226,319 Selling, general and administrative expenses(3)........ 126,591 123,100 103,571 103,675 105,044 Depreciation and amortization(4).... 6,922 8,092 5,860 5,877 6,408 Interest expense..... 11,675 11,296 10,238 8,524 6,965 Unusual items(5)..... 3,833 3,427 7,852 432,352 421,315 370,925 355,218 352,588 Income (loss) before income tax expense (benefit)............ 3,092 (8,611) 2,337 (3,863) (11,997) Income tax expense (benefit)............ 1,258 (2,972) 821 (1,190) (4,006) Net income (loss)...... $ 1,834 $ (5,639) $ 1,516 $ (2,673) $(7,991) Net income (loss) per common share...... $ .18 $ (.54) $ .15 $ (.26) $ (.77) Weighted-average number of common shares outstanding.......... 10,461 10,416 10,413 10,377 10,410
SELECTED BALANCE SHEET DATA: 1996 1995 1994 1993 1992 (In thousands of dollars) Receivables, net(6).. $ 22,689 $ 27,467 $ 27,311 $ 21,460 $ 59,508 Merchandise inventories(7)...... 89,472 87,507 80,678 60,465 58,777 Property and equipment, net(8)... 87,370 89,250 93,809 96,396 95,933 Total assets......... 233,193 239,041 233,353 248,330 239,910 Working capital (9).. 70,231 42,904 37,900 32,147 16,827 Long-term obligations, less current portion(9) 60,241 34,872 33,672 31,493 14,992 Stockholders' equity.... 80,139 77,917 83,577 82,118 84,529
SELECTED OPERATING DATA: 1996 1995 1994 1993 1992 Sales growth: Total store sales(10)... 5.3% 10.3% 6.2% 3.4% 5.2% Comparable store sales . 1.4% (3.1%) 3.3% 1.3% (1.0%) Average net sales per square foot of selling space(11): Gottschalks........... $170 $181 $196 $198 $209 Village East.......... 163 161 164 176 218 Gross margin percent: Owned sales........... 33.4% 31.8% 33.3% 33.2% 32.7% Leased sales.......... 14.6% 14.4% 14.1% 13.8% 14.4% Credit sales as a % of total sales........ 44.7% 44.7% 43.0% 38.4% 38.2%
SELECTED FINANCIAL DATA: 1996 1995 1994 1993 1992 Capital expenditures, net of reimbursements.. $ 6,845 $12,773 $ 4,539 $ 5,456 $12,078 Current ratio............ 2.10:1 1.45:1 1.43:1 1.30:1 1.15:1 Inventory turnover ratio(12).............. 2.6 2.7 2.9 2.9 2.9 Days credit sales in receivables(13)..... 132.9 136.8 157.3 170.8 171.4 __________________
(1) Includes net sales from leased departments of $32.8 million, $29.8 million, $26.0 million, $25.3 million and $23.4 million in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. (See Part I, Item 1, "Business--Leased Departments.") (2) Includes cost of sales attributable to leased departments of $28.0 million, $25.5 million, $22.3 million, $21.8 million and $20.1 million in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. (See Part I, Item 1, "Business--Leased Departments.") (3) Includes provision for credit losses associated with the Company's private-label credit card of $2.7 million, $2.5 million, $2.1 million, $2.2 million and $2.5 million in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. (4) Includes the amortization of new store pre-opening costs of $1.3 million, $2.5 million, $438,000, $429,000 and $1.0 million in fiscal 1996, 1995, 1994, 1993 and 1992, respectively. (5) See the Company's 1995 Annual Report on Form 10-K and Note 8 to the accompanying Consolidated Financial Statements. (6) Net receivables does not include receivables sold ($46.0 million as of the end of fiscal 1996 and $40.0 million as of the end of both fiscal 1995 and 1994) or receivables held for securitization and sale ($40.0 million as of the end of fiscal 1993). (See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for description of receivables securitization program.) (7) The increase in merchandise inventories is generally attributable to new store openings. (See Part I, Item I,"Business--Store Location and Growth Strategy", for table of number of stores open at each fiscal year-end.) (8) The decreases in property and equipment from fiscal 1993 through fiscal 1996 is primarily due to various sale and leaseback financings and, in fiscal 1996, to the write-off of assets under terminated capital leases. (See Note 4 to Consolidated Financial Statements.) (9) The increases in working capital and long-term obligations from fiscal 1995 to 1996 and from fiscal 1992 to 1993 occurred primarily as a result of the classification of certain debt as long-term that was classified as current in the previous year. (See Note 3 to the Consolidated Financial Statements for current year discussion.) (10) See Part I, Item I, "Business--Store Location and Growth Strategy", for table of number of stores open at each fiscal year-end. (11) 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. (12) The inventory turnover ratio excludes certain inventory received at year-end if held for stores opened early in the subsequent fiscal year. (13) Days credit sales in receivables include receivables sold ($46.0 million as of the end of fiscal 1996 and $40.0 million as of the end of both fiscal 1995 and 1994) and $40.0 million of receivables held for securitization and sale as of the end of fiscal 1993. The Company services and administers 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 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:
1996 1995 1994 Net sales........................ 100.0% 100.0% 100.0% Service charges and other income. 3.1 2.9 2.6 103.1 102.9 102.6 Costs and expenses: Cost of sales................. 68.0 69.5 68.0 Selling, general and administrative expenses..... 30.0 30.7 28.5 Depreciation and amortization. 1.6 2.0 1.6 Interest expense.............. 2.8 2.8 2.8 Unusual items................. 1.1 102.4 105.0 102.0 Income (loss) before income tax expense (benefit)............. 0.7 (2.1) 0.6 Income tax expense (benefit)..... 0.3 (0.7) 0.2 Net income (loss)................ 0.4% (1.4)% 0.4%
Fiscal 1996 Compared to Fiscal 1995 Net Sales Net sales increased by $21.2 million to $422.2 million in fiscal 1996 as compared to $401.0 million in fiscal 1995, an increase of 5.3%. This increase resulted from a 1.4% increase in comparable store sales, combined with additional sales volume generated by new store openings in fiscal 1996 and 1995. Fiscal 1996 included 52 weeks of sales as compared to 53 weeks of sales in fiscal 1995. Excluding the 53rd week in fiscal 1995, net sales increased by 6.4% in fiscal 1996, with a 2.4% increase in comparable store sales. Fiscal 1996 new store openings included one new 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. Stores operating in fiscal 1996 not open for the entire year in fiscal 1995 included five new stores located in California in Auburn (February 1995), San Bernardino (April 1995), a larger replacement store for a pre-existing store in Visalia (August 1995), Watsonville (August 1995) and Tracy (October 1995), and one new store opened in Nevada in Carson City (March 1995). The Company has entered into agreements to open two additional stores in fiscal 1997, to be located in Santa Rosa and Sonora, California. While these stores are expected to open in the second half of fiscal 1997, there can be no assurance that such openings will not be delayed subject to a variety of conditions precedent or other factors. Service Charges and Other Income Service charges and other income increased by $1.6 million to $13.3 million in fiscal 1996 as compared to $11.7 million in fiscal 1995, an increase of 13.7%. As a percent of net sales, service charges and other income increased to 3.1% in fiscal 1996 as compared to 2.9% in fiscal 1995. Service charges associated with the Company's customer credit cards decreased by $400,000 to $10.5 million in fiscal 1996 as compared to $10.9 million in fiscal 1995, a decrease of 3.7%. Credit sales as a percent of total sales remained unchanged at 44.7% in fiscal 1996 and 1995. The dollar decrease in service charges is primarily due to the more timely payment of customer credit card balances in fiscal 1996 as compared to fiscal 1995. This decrease was partially offset by additional income generated by an increase to the interest rate charged on outstanding customer credit card balances to an annual percentage rate of 21.6% from 19.8% and an increase to the late charge assessed on delinquent credit card balances, both effective in late fiscal 1996. Other income, which includes the amortization of deferred income and other miscellaneous income and expense items, increased by $2.1 million to $2.8 million in fiscal 1996 as compared to $726,000 in fiscal 1995. Other income in fiscal 1996 includes a pre-tax gain of $1.3 million resulting from the termination of two leases and income related to the amortization of a lease incentive (see Note 4 to the Consolidated Financial Statements). Other income in fiscal 1995 was reduced by certain general claim and valuation reserves. Cost of Sales Cost of sales increased by $8.4 million to $287.2 million in fiscal 1996 as compared to $278.8 million in fiscal 1995, an increase of 3.0%. The Company's gross margin percent increased to 32.0% in fiscal 1996 as compared to 30.5% in fiscal 1995. Excluding the effect of certain indirect costs related to inventory which are reclassified to cost of sales by the Company for financial reporting purposes, the gross margin percent increased to 36.8% in fiscal 1996 as compared to 35.7% in fiscal 1995. (See Note 1 to the Consolidated Financial Statements.) This increase in gross margin percent is primarily due to increased sales of higher gross margin men's, women's and children's apparel, a higher initial inventory mark-on percentage on certain merchandise (through favorable vendor pricing), and a reduction of seasonal clearance and storewide sale event markdowns as compared to the prior year. The Company's inventory shrinkage also continued to improve, decreasing to 1.1% of net sales in fiscal 1996 as compared to 1.3% in fiscal 1995. The Company's gross margin percent in fiscal 1995 was negatively impacted by (i) increased competition resulting from pricing policies of two financially troubled retailers operating in certain of the Company's market areas; (ii) increased markdowns taken in an attempt to improve sales of slow-moving apparel and in connection with a revision in the Company's women's apparel merchandising strategy; and (iii) increased promotional activity related to new store openings and storewide sale events. Management is continuing efforts to improve its gross margin, primarily by maintaining tight controls over inventory levels, shifting inventories into more profitable lines of business based on current selling trends, expanding guaranteed gross margin arrangements with key vendors, and by continuing to focus on the enhancement of its information systems and technology as a means to reduce inventory-related costs. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $3.5 million to $126.6 million in fiscal 1996 as compared to $123.1 million in fiscal 1995, an increase of 2.8%. As a percent of net sales, selling, general and administrative expenses decreased to 30.0% in fiscal 1996 as compared to 30.7% in fiscal 1995. Including the effect of certain indirect costs related to inventory which are reclassified to cost of sales, selling, general and administrative costs as a percent of net sales decreased to 34.7% in fiscal 1996 as compared to 35.7% in fiscal 1995. (See Note 1 to the Consolidated Financial Statements.) This decrease as a percent of net sales is primarily due to the increase in sales volume. The Company's sales increased at a faster rate than its selling, general and administrative expenses in fiscal 1996, primarily due to ongoing Company-wide expense control measures. Depreciation and Amortization Depreciation and amortization, which includes the amortization of new store pre-opening costs, decreased by $1.2 million to $6.9 million in fiscal 1996 as compared to $8.1 million in fiscal 1995, a decrease of 14.8%. The amortization of new store pre-opening costs decreased by $1.2 million to $1.3 million in fiscal 1996 as compared to $2.5 million in fiscal 1995 as a result of fewer new store openings during the period. Excluding the amortization of new store pre-opening costs, depreciation and amortization as a percent of net sales remained unchanged at 1.5% in fiscal 1996 and 1995. Higher depreciation expense (in dollars) related to capital expenditures for new stores was fully offset by lower depreciation expense resulting from sale and leaseback arrangements completed in fiscal 1996 and 1995, including that of the Company's department store in Capitola, California, and by the termination of two capital leases in fiscal 1996. (See Note 4 to the Consolidated Financial Statements). Interest Expense Interest expense increased by $400,000 to $11.7 million in fiscal 1996 as compared to $11.3 million in fiscal 1995, an increase of 3.5%. Due to the increase in sales volume, interest expense as a percent of net sales remained unchanged at 2.8% in fiscal 1996 and 1995. The increase (in dollars) resulted primarily from additional long-term financing arrangements entered into late in fiscal 1995 and in fiscal 1996 and higher interest costs associated with the Company's former line of credit facility with Fleet Capital Corporation ("Fleet"). These increases were partially offset by a decrease in the weighted-average interest rate charged on outstanding borrowings under the Company's various lines of credit (8.62% in fiscal 1996 as compared to 8.75% in fiscal 1995), which resulted from (i) a decrease in LIBOR during the period; (ii) a higher percentage of borrowings outstanding under more cost-effective financing arrangements, including the line of credit with Bank Hapoalim and the securitization program; and (iii) a lower interest rate applicable to the new line of credit agreement with Congress Financial Corporation ("Congress"), entered into in December 1996, which replaced the Fleet facility. Assuming relatively stable LIBOR rates in fiscal 1997, management expects interest expense to be lower in fiscal 1997 as compared to fiscal 1996 as a result of the new line of credit agreement with Congress. (See "Liquidity and Capital Resources.") Income Taxes The Company's effective tax rate was 40.7% in fiscal 1996 as compared to an effective tax benefit of (34.5%) in fiscal 1995. (See Note 5 to the Consolidated Financial Statements.) Net Income (Loss) As a result of the foregoing, the Company's net income increased by $7.5 million to net income of $1.8 million in fiscal 1996 as compared to a net loss of ($5.6) million in fiscal 1995. On a per share basis, net income increased by $.72 per share to net income of $.18 per share in fiscal 1996 as compared to a net loss of ($.54) per share in fiscal 1995. Fiscal 1995 Compared to Fiscal 1994 Net Sales Net sales increased by $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 resulted from sales generated by the opening of the previously described six new Gottschalks stores during fiscal 1995 and two new stores not open for the entire year in fiscal 1994, and was partially offset by a 3.1% decrease in comparable store sales in fiscal 1995 as compared to fiscal 1994. As described more fully in "Cost of Sales" below, fiscal 1995 comparable store sales were negatively impacted by unusual weather variances and temporary competitive pressures in certain of the Company's market areas during the period. Stores operating in fiscal 1995 not open for the entire year in fiscal 1994 include Oakhurst (October 1994) and Sacramento, California (November 1994). Service Charges and Other Income Service charges and other income increased by $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 by $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 a $1.2 million increase in late charge fees. In addition, credit sales as a percent of total sales increased to 44.7% in fiscal 1995 as compared to 43.0% in fiscal 1994, primarily due to the success of a variety of new credit-related programs first implemented by the Company in fiscal 1994 and 1993, in addition to increased marketing efforts aimed at the Company's 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--Private-Label Credit Card.) 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 by $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. Excluding the effect of certain indirect costs related to inventory which are reclassified to cost of sales, the gross margin percent decreased to 35.7% in fiscal 1995 as compared to 37.3% in fiscal 1994. (See Note 1 to the Consolidated Financial Statements.) The Company's gross margin percent in fiscal 1995 was negatively impacted by (i) increased competition resulting from pricing policies of two financially troubled retailers operating in certain of the Company's market areas; (ii) increased markdowns taken in an attempt to improve sales of slow-moving apparel and in connection with a revision in the Company's women's apparel merchandising strategy; and (iii) increased promotional activity related to new store openings and storewide sale events. The Company's inventory shrinkage was 1.3% of net sales in fiscal 1995 as compared to 1.4% in fiscal 1994, partially offsetting the negative impact of higher markdowns on the Company's gross margin. 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 was eliminated as a result of the fiscal 1994 adjustment and no similar benefit was recognized in fiscal 1995 or 1996. (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. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $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. Including the effect of certain indirect costs related to inventory which are reclassified to cost of sales, selling, general and administrative costs as a percent of net sales increased to 35.7% in fiscal 1995 as compared to 33.7% in fiscal 1994. (See Note 1 to the Consolidated Financial Statements.) This increase as a percent of net sales is 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 also experienced an increase in building and equipment rental expense as a result of sale and leaseback financings, including that of the Company's department store in Capitola, California, completed during the period. (See Note 4 to the Condensed Financial Statements.) The higher rental expense was partially offset by lower depreciation and amortization expense as a result of such sales. 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, substantially eliminating the potential for future significant favorable or unfavorable experience adjustments. Depreciation and Amortization Depreciation and amortization, which includes the amortization of new store pre-opening costs, increased by $2.2 million to $8.1 million in fiscal 1995 as compared to $5.9 million in fiscal 1994, an increase of 37.3%. The amortization of new store pre-opening costs 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 sale and leaseback arrangements completed in fiscal 1995 and 1994, including that of the Company's department store in Capitola, California, and was 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 Note 4 to the Consolidated Financial Statements.) Interest Expense Interest expense increased by $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 increase in sales volume, interest expense as a percent of net sales remained unchanged at 2.8% in fiscal 1995 and 1994. The increase (in dollars) 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 and other costs associated with new stores and operating losses during the year; and interest expense associated with additional long-term borrowings entered into during the period. These increases were partially offset by the application of proceeds from mortgage financings and sale and leaseback arrangements entered into during the period. (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 were incurred by the Company. (See Note 8 to the Consolidated Financial Statements.) 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 5 to the Consolidated Financial Statements.) Net Income (Loss) As a result of the foregoing, the Company realized a net loss of ($5.6) million in fiscal 1995 as compared to net income of $1.5 million in fiscal 1994. On a per share basis, the net loss was ($.54) per share in fiscal 1996 as compared to net income of $.15 per share in fiscal 1994. Liquidity and Capital Resources Sources of Liquidity. As described more fully below, the Company's working capital requirements are currently met through a combination of cash provided by operations, borrowings under its revolving lines of credit and its securitization program. The Company's liquidity improved as compared to the prior year as a result of improved operating results and its new revolving line of credit agreement. Revolving Lines of Credit. On December 20, 1996, the Company entered into a new three-and-one-quarter year revolving line of credit arrangement with Congress Financial Corporation ("Congress"). The new line of credit with Congress replaced the Company's former line of credit agreement with Fleet Capital Corporation ("Fleet") and provides the Company with an $80.0 million working capital facility through March 30, 2000. Borrowings under the arrangement are limited to a restrictive borrowing base equal to 65% of eligible merchandise inventories, increasing to 70% of such inventories during the period of September 1 through December 20 of each year to fund increased seasonal inventory requirements. Interest under the facility is charged at a rate of approximately LIBOR plus 2.5% (8.28% at February 1, 1997), with the potential to reduce the interest rate by 1/4% each year, up to a maximum possible reduction of 1/2% beginning in fiscal 1998, if specified pre-tax income levels are attained by the Company. Initial proceeds from the arrangement were used to repay all outstanding borrowings under the line of credit with Fleet. The maximum amount available for borrowings under the line of credit with Congress was $51.9 million as of February 1, 1997, of which $31.3 million was outstanding as of that date. Of that amount, $25.0 million has been classified as long-term in the accompanying financial statements as the Company does not anticipate repaying that amount prior to one year from the balance sheet date. The agreement contains one financial covenant, pertaining to the maintenance of a minimum tangible net worth, with which the Company was in compliance as of February 1, 1997. The Company's former facility with Fleet provided the Company with a $66.0 million working capital facility, limited to a restrictive borrowing base equal to 50% of eligible merchandise inventories, increasing to 60% during certain periods for increased seasonal requirements. Interest on outstanding borrowings under the Fleet facility was charged at a rate of LIBOR plus 3.75%, and the arrangement contained numerous restrictive financial covenants. Management believes the Company's improved operating results enabled the Company to obtain the more favorable financing arrangement with Congress, which provides the Company with increased borrowing capacity at a lower interest rate, and greater flexibility due to the elimination of all but one restrictive financial covenant. In addition to the Congress 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 1999. The Company's borrowing capacity under the line of credit with Bank Hapoalim is limited to a percentage of the outstanding balance of receivables collateralizing the line, and is therefore subject to seasonal variations that may affect the outstanding balance of such receivables. Interest on outstanding borrowings under the line of credit is charged at a rate equal to LIBOR plus 1.0% (6.44% at February 1, 1997). At February 1, 1997, $7.6 million was outstanding under the line of credit with Bank Hapoalim, which was the maximum amount available for borrowings as of that date. As described more fully in the "Cash Flows from Securitization Program" portion of this section, the issuance of an additional $6.0 million Fixed Base Certificate in fiscal 1996 reduced the level of receivables available to collateralize the Variable Base Certificate, and thus has reduced the Company's borrowing capacity under the facility in the near-term. Other Financings. As described more fully in Note 3 to the Consolidated Financial Statements, the Company has four fifteen-year mortgage loans with Midland Commercial Funding ("Midland") with outstanding balances totaling $19.7 million at February 1, 1997. The Midland loans, due 2010, bear interest at rates ranging from 9.23% to 9.39%. The Company also has the following other long-term loan facilities as of February 1, 1997: (i) a 10.45% mortgage loan payable with Heller Financial, Inc. ("Heller") due 2002, with an outstanding loan balance of $4.8 million; an additional mortgage loan payable for $6.0 million with Heller, due March 2004, bearing interest at a fixed rate of 9.97%; (iii) two five-year 10.0% notes payable to Federated Department Stores, Inc., due 2001, with outstanding balances totaling $2.4 million; and (iv) other long-term obligations with outstanding balances totaling $2.1 million. All 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 additional long-term secured borrowing. 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. Accordingly, the Company continually seeks to divert as large a percentage of total borrowings as possible to its securitization program. As described more fully in Note 2 to the Consolidated Financial Statements, $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates were issued in 1994 under the receivables securitization program (the "1994 Fixed Base Certificates"). On October 31, 1996, an additional $6.0 million principal amount 6.79% Fixed Base Certificate (the "1996 Fixed Base Certificate") was issued under the program. Proceeds from the issuance of the 1996 Fixed Base Certificate were used to reduce outstanding borrowings under the line of credit with Bank Hapoalim and pay certain costs associated with the transaction. Interest on the 1994 and 1996 Fixed Base Certificates (collectively the "Fixed Base Certificates") is earned by the certificate holders on a monthly basis and is paid through finance charges collected under the program. The outstanding principal balance of the certificates are 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 issuances of the Fixed Base Certificates have been accounted for as sales for financial reporting purposes. Accordingly, the $46.0 million of receivables underlying those certificates and the corresponding debt obligations have been excluded from the accompanying financial statements. In 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 Certificates, additional series of certificates may be issued as a source of additional working capital financing to the Company. Management does not currently anticipate any additional certificate issuances in fiscal 1997. Management believes the previously described sources of liquidity are adequate to meet the Company's working capital, capital expenditure and debt service requirements for fiscal 1997. Management also believes it has sufficient sources of liquidity for its long-term growth plans at moderate levels. The Company may engage in other financing activities if it is deemed to be advantageous. Additional Cash Flow and Working Capital Analysis. Working capital increased by $27.3 million to $70.2 million in fiscal 1996 as compared to $42.9 million in fiscal 1995. The Company's ratio of current assets to current liabilities increased to 2.10:1 as of the end of fiscal 1996 as compared to 1.45:1 as of the end of fiscal 1995. The increases from fiscal 1995 to 1996 are primarily due to the reclassification of $25.0 million of outstanding borrowings under the line of credit with Congress to long-term in the accompanying financial statements. 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 provided by operating activities was $8.7 million in fiscal 1996 as compared to net cash used in operating activities of ($18.8) million in fiscal 1995. The increase in cash provided by operating activities is primarily due to (i) improved operating results; (ii) the payment of approximately $7.6 million of operating expenses related to fiscal 1996 during the 53rd week of fiscal 1995 as a result of the fiscal 1995 calendar shift; (iii) the receipt of $3.4 million in connection with the filing of certain amended income tax returns; and (iv) lower costs associated with new store openings. These increases were partially offset by cash used to fund an increase in merchandise inventories, resulting from the earlier receipt of certain spring merchandise in fiscal 1996 as compared to fiscal 1995, a decrease in trade accounts payable and cash paid to settle previously pending litigation (see Note 8 to the Consolidated Financial Statements.) Net cash used in investing activities was ($4.7) million in fiscal 1996 as compared to ($1.1) million in fiscal 1995. Net cash used in investing activities in each of those years consisted primarily of 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. Such expenditures were partially offset by proceeds from various sale and sale/leaseback arrangements during those periods. Net cash used in financing activities was ($4.3) million in fiscal 1996 as compared to net cash provided by financing activities of $21.8 million in fiscal 1995. Proceeds from financing arrangements finalized during fiscal 1996, including the $6.0 million received from the issuance of the 1996 Fixed Base Certificate and the combined total of $5.6 million received from the previously described Heller and Federated loans, were more than fully offset by principal payments made on various short-term and long-term obligations during the year. Increased cash flows from operating activities enabled the Company to reduce net borrowings under its lines of credit during the year. Net cash provided by financing activities of $21.8 million in fiscal 1995 consisted primarily of net borrowings under the Company's lines of credit. The $20.0 million provided by the Midland financing was fully applied against previously outstanding obligations. The Company has entered into agreements to open two new department stores in fiscal 1997, to be located in the current Macy's location in Santa Rosa, California and the current K-Mart location in Sonora, California. The Company has also commenced the remodel and 23,000 square foot expansion of its existing store located in the Valley Plaza Mall in Bakersfield, California. The estimated cost to complete these projects, consisting primarily of tenant improvements, fixtures and equipment, net of amounts to be contributed by a mall owner, is $8.7 million. Management expects to complete these projects during the second half of fiscal 1997, however, there can be no assurance that the completion of such projects will not be delayed subject to a variety of conditions precedent or other factors. 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 Christmas selling months of November and December of each year, and to a lesser extent, during the Easter and Back-to-School selling seasons. The Company's results may also vary from quarter to quarter as a result of, among other things, the timing and level of the Company's sales promotions, weather, fashion trends and the overall health of the economy, both nationally and in the Company's market areas. Working capital requirements also fluctuate during the year, increasing substantially prior to the Christmas selling season when the Company must carry significantly higher inventory levels. The following table sets forth unaudited quarterly results of operations for fiscal 1996 and 1995 (in thousands, except per share data). (See Note 10 to the Consolidated Financial Statements.)
1996 Quarter Ended May 4 August 3 November 2 February 1 Net sales $85,560 $95,675 $95,675 $145,249 Gross profit 26,830 30,392 30,719 47,054 Income (loss) before income tax expense (benefit) (2,099) (1,245) (2,430) 8,866 Net income (loss) (1,322) ( 785) (1,530) 5,471 Net income (loss) per common share (.13) (.07) (.15) .52 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
Recently Issued Accounting Standards In addition to the recently issued accounting standards described in Note 1 to the Consolidated Financial Statements, the Financial Accounting Standards Board recently issued Statement of Accounting Standards No. 128, "Earnings Per Share" which is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted earnings per share and changes the method in which earnings per share is determined. Adoption of this statement by the Company is not expected to have a material impact on earnings per share. Safe Harbor Statement The preceding sections including Part I, Item I, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of management for future operations and the future economic performance of the Company, and such forward-looking statements can be identified by words including, but not limited to: believes, anticipates, expects, intends and seeks. The forward-looking statements are qualified by important factors that could cause actual results to differ materially from those in those identified in such forward-looking statements, including, without limitation, the following: (i) the ability of the Company to guage fashion trends and preferences of its customers; (ii) the level of demand for the merchandise offered by the Company; (iii) the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, and hire and train employees; (iv) the ability of management to manage the planned expansion; (v) the continued ability to obtain adequate credit from factors and vendors and the timely availability of branded and other merchandise; (vi) the effect of economic conditions, both nationally and in the Company's specific market areas; (vii) the effect of severe weather or natural disasters; and (viii) the effect of competitive pressures from other retailers. Results actually achieved thus may differ materially from expected results in these statements as a result of the foregoing factors or other factors affecting the Company. _________________________________ Item 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 26, 1997, to be filed pursuant to Regulation 14A. The following table lists the executive officers of the Company:
Name Age(1) Position Joseph W. Levy 65 Chairman and Chief Executive Officer James R. Famalette 44 President and Chief Operating Officer Gary L. Gladding 57 Executive Vice President/General Merchandise Manager Alan A. Weinstein 52 Senior Vice President and Chief Financial Officer Michael J. Schmidt 55 Senior Vice President/ Director of Stores __________________________
(1) As of March 31, 1997 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, the Executive Committee of Frederick Atkins, Inc, and the Board of Directors of Air 21, a regional airline based in Fresno, California, which filed for protection under federal bankruptcy laws in January 1997 and is currently being liquidated. Mr. Levy was formerly Chairman of the California Transportation Commission, a former member of the Board of Directors of Community Hospitals of Central California, and has also served on numerous other state and local commissions and public service agencies. James R. Famalette became the President and Chief Operating Officer of the Company on April 14, 1997. Prior to joining the Company, Mr. Famalette was President and Chief Executive Officer of Liberty House, a department and specialty store chain based in Honolulu, Hawaii, from March 1993 through April 1997, and served in a variety of other positions with Liberty House from 1987 through 1993, including Vice President, Stores and Vice President, General Merchandise Manager. From 1982 through 1987, he served as Vice President, General Merchandise Manager and later President of Village Fashions/Cameo Stores in Philadelphia, Pennsylvania, and from 1975 to 1982 served as a Divisional Merchandise Manager for Colonies, a specialty store chain, based in Allentown, Pennsylvania. Mr. Famalette serves on the Board of Directors of the National Retail Federation and Frederick Atkins. Gary L. Gladding has been Executive Vice President of the Company since 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 of 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. Mr. Weinstein serves on the Board of Directors of the American Heart Association of Fresno and Combined Health Appeal and is a member of the Fig Garden Rotary in Fresno and of the Community Relations Action Committee of the Central California Blood Center. 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 26, 1997, 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 26, 1997, 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 26, 1997, 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 1, 1997 and February 3, 1996 Consolidated statements of operations -- Fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 Consolidated statements of stockholders' equity -- Fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 Consolidated statements of cash flows -- Fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 Notes to consolidated financial statements -- Three years ended February 1, 1997 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) 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 Nonqualified Stock Option Plan with form of stock option agreement thereunder.(3)(4) 10.3 Gottschalks Inc. Retirement Savings Plan.(3)(16) 10.4 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) 10.5 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) 10.6 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) 10.7 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) 10.8 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) 10.9 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) 10.10 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) 10.11 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) 10.12 Receivables Purchase Agreement dated as of March 30, 1994 by and between Gottschalks Credit Receivables Corporation and Gottschalks Inc.(6) 10.13 Pooling and Servicing Agreement dated as of March 30, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company. (6) 10.14 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) 10.15 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) 10.16 Waiver Agreement dated November 23, 1994, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.(7) 10.17 Consulting Agreement dated June 1, 1994 by and between Gottschalks Inc. and Gerald H. Blum.(4)(8) 10.18 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) 10.19 1994 Key Employee Incentive Stock Option Plan.(4)(9) 10.20 1994 Director Nonqualified Stock Option Plan.(4)(9) 10.21 1994 Executive Bonus Plan.(4)(10) 10.22 Promissory Note and Security Agreement dated December 16, 1994 by and between Gottschalks Inc. and Heller Financial, Inc.(10) 10.23 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.(11) 10.24 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.(11) 10.25 Promissory Notes and Security Agreements dated October 4, 1995 and October 10, 1995 by and between Gottschalks Inc. and Midland Commercial Funding.(12) 10.26 Waiver Agreement dated April 22, 1996 by and between Gottschalks Inc. and Heller Financial, Inc.(13) 10.27 Amended and Restated Series 1994-1 Supplement to Pooling and Servicing Agreement, dated October 31, 1996, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.(14) 10.28 Series 1996-1 Supplement to Pooling and Servicing Agreement dated as of November 1, 1996, by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.(14) 10.29 Promissory Note and Security Agreement dated October 2, 1996, by and between Gottschalks Inc. and Heller Financial, Inc.(14) 10.30 Promissory Notes dated March 28, 1996 and September 11, 1996, by and between Gottschalks Inc. and Broadway Stores, Inc., a wholly-owned division of Federated Department Stores, Inc.(16) 10.31 Loan and Security Agreement dated December 29, 1996, by and between Gottschalks Inc. and Congress Financial Corporation. (15) 10.32 Employment Agreement dated March 14, 1997 by and between Gottschalks Inc. and James R. Famalette.(4)(15) 21. Subsidiaries of the Registrant.(10) 23. Consent of Deloitte & Touche LLP.(15) 27. Financial Data Schedule.(15) _______________________ (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 Annual Report on Form 10-K for the year ended January 28, 1995 (File No. 1-09100), and incorporated herein by reference. (11) 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. (12) 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. (13) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 3, 1996 (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 November 2, 1997 (File No. 1-09100), and incorporated herein by reference. (15) Filed herein as an exhibit to this Annual Report on Form 10-K for the year ended February 1, 1997 (File No. 1-09100). (16) Filed as an exhibit to the Registration Statement on Form S-8 (File #33-00061), 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 1996. (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 1, 1997 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 1, 1997 and February 3, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 1, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiaries as of February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997, 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 27, 1997 (March 13, 1997 as to the fourth paragraph of Note 3)
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) February 1, February 3, ASSETS 1997 1996 CURRENT ASSETS: Cash $ 4,764 $ 5,113 Cash held by GCC Trust 1,895 2,280 Receivables: Trade accounts, less allowances of $1,322 in 1996 and $1,262 in 1995 (Note 2) 22,689 27,467 Vendor claims, less allowances of $80 in 1996 and $90 in 1995 2,818 5,776 25,507 33,243 Merchandise inventories 89,472 87,507 Refundable income taxes (Note 5) 1,437 Other 12,593 9,478 Total current assets 134,231 139,058 PROPERTY AND EQUIPMENT (Note 4): Land and land improvements 15,074 16,064 Buildings and leasehold improvements 46,925 43,696 Furniture, fixtures and equipment 57,648 53,443 Buildings and equipment under capital leases 7,302 14,398 Construction in progress 309 1,948 127,258 129,549 Less accumulated depreciation and amortization 39,888 40,299 87,370 89,250 OTHER ASSETS: Goodwill, less accumulated amortization of $1,146 in 1996 and $1,030 in 1995 1,252 1,369 Other 10,340 9,364 11,592 10,733 $233,193 $239,041
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) February 1, February 3, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 CURRENT LIABILITIES: Revolving lines of credit (Note 3) $ 13,904 $ 45,164 Cash management liability 1,504 5,096 Trade accounts payable 19,906 22,298 Accrued expenses 10,714 10,633 Taxes, other than income taxes 8,202 2,346 Accrued payroll and related liabilities 5,208 5,112 Current portion of long-term obligations (Notes 3 and 4) 2,408 2,094 Short-term obligation (paid 1996) 2,743 Deferred income taxes (Note 5) 2,154 668 Total current liabilities 64,000 96,154 LONG-TERM OBLIGATIONS, less current portion (Notes 3 and 4): Line of credit 25,000 Notes and mortgage loans payable 29,861 25,654 Capitalized lease obligations 5,380 9,218 60,241 34,872 DEFERRED INCOME (Note 4) 19,580 20,265 DEFERRED LEASE PAYMENTS AND OTHER (Note 4) 6,369 5,902 DEFERRED INCOME TAXES (Note 5) 2,864 3,931 COMMITMENTS AND CONTINGENCIES (Notes 2, 4 and 9) STOCKHOLDERS' EQUITY: Preferred stock, par value of $.10 per share; 2,000,000 shares authorized; none issued Common stock, par value of $.01 per share; 30,000,000 shares authorized; 10,472,915 and 10,416,520 issued Common stock 105 104 Additional paid-in capital 56,332 55,945 Retained earnings 23,704 21,870 80,141 77,919 Less common stock in treasury at cost, 338 shares (2) (2) 80,139 77,917 $233,193 $239,041 See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) 1996 1995 1994 Net sales $422,159 $401,041 $363,603 Service charges and other income (Note 4) 13,285 11,663 9,659 435,444 412,704 373,262 Costs and expenses: Cost of sales 287,164 278,827 247,423 Selling, general and administrative expenses (Notes 4, 6 and 7) 126,591 123,100 103,571 Depreciation and amortization 6,922 8,092 5,860 Interest expense (Note 3) 11,675 11,296 10,238 Provision for unusual items (Note 8) 3,833 432,352 421,315 370,925 Income (loss) before income tax expense (benefit) 3,092 (8,611) 2,337 Income tax expense (benefit)(Note 5) 1,258 (2,972) 821 Net income (loss) $ 1,834 $ (5,639) $ 1,516 Net income (loss) per common share $ .18 $ (.54) $ .15
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars, except share data) Additional Common Stock Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total BALANCE, JANUARY 30, 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 Net income 1,834 1,834 Issuance of 56,395 shares to Retirement Savings Plan 56,395 1 387 388 BALANCE, FEBRUARY 1, 1997 10,472,915 $105 $56,332 $23,704 $ (2) $80,139
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1996 1995 1994 OPERATING ACTIVITIES: Net income (loss) $ 1,834 $ (5,639) $ 1,516 Adjustments: Depreciation and amortization 6,922 8,096 5,849 Deferred income taxes 419 (1,296) 876 Deferred lease payments and other 467 870 734 Deferred income (767) (609) (493) Net compensation (benefit) expense related to stock option plan (170) 24 Provision for credit losses 2,724 2,754 2,052 LIFO benefit (3,202) Equity in the income of limited partnership (133) (64) (160) Net (gain) loss from sale of assets (344) 7 Net gain from termination of capital leases (Note 4) (1,344) Loss on securitization and sale of receivables 20 305 Litigation settlements (Notes 8 and 9) (2,400) (3,000) Lease incentive (Note 4) 4,000 Changes in operating assets and liabilities: Receivables (excluding receivables sold - Note 2) (988) (5,261) (6,952) Merchandise inventories (1,370) (6,215) (16,384) Other current and long-term assets (3,017) (1,711) (35) Other current and long-term liabilities 6,310 (10,210) 14,629 Net cash provided by (used in) operating activities 8,677 (18,799) (1,234) INVESTING ACTIVITIES: Purchases of property and equipment, net of reimbursements received (6,845) (12,773) (4,539) Proceeds from sale/leaseback arrangements and other property and equipment sales 2,026 11,606 1,881 Distribution from limited partnership 112 86 153 Net cash used in investing activities (4,707) (1,081) (2,505) FINANCING ACTIVITIES: Net (payments) borrowings under lines of credit (6,260) 27,320 (31,856) Proceeds from short-term and long-term obligations 3,878 23,993 12,650 Principal payments on short-term and long-term obligations (4,850) (24,710) (16,668) Proceeds from securitization and sale of receivables (Note 2) 6,000 40,000 Changes in cash management liability (3,472) (4,757) 4,228 Changes in cash held by GCC Trust 385 85 (2,365) Payments to acquire treasury stock (94) (303) Issuance of common stock pursuant to stock option plan 94 Shares purchased and retired (98) Net cash (used in) provided by financing activities (4,319) 21,837 5,682 INCREASE (DECREASE) IN CASH (349) 1,957 1,943 CASH AT BEGINNING OF YEAR 5,113 3,156 1,213 CASH AT END OF YEAR $ 4,764 $ 5,113 $ 3,156 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-five "Gottschalks" department stores and twenty-four "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 men's, women's, junior's and children's apparel, cosmetics and accessories, 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 assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions are subject to inherent uncertainties which may 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"), and Gottschalks Credit Card Master Trust ("GCC Trust") (collectively, the "Company"). (See Note 2.) 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 1996, 1995 and 1994 ended on February 1, 1997, February 3, 1996 and January 28, 1995, respectively. Fiscal years 1996 and 1994 each contained 52 weeks; fiscal year 1995 contained 53 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 $1,616,000 and $2,035,000 at February 1, 1997 and February 3, 1996, 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 $279,000 and $245,000 at February 1, 1997 and February 3, 1996, respectively, for the payment of monthly interest to the holders of the Fixed Base Certificates. Cash Management Liability - Under the Company's cash management program, checks issued by the Company and not yet presented for payment frequently result in overdraft balances for accounting purposes. Such amounts represent interest-free, short-term borrowings to the Company. Receivables - Receivables, excluding receivables sold as of February 1, 1997 and February 3, 1996, 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 $10,493,000 in 1996, $10,937,000 in 1995 and $8,904,000 in 1994. 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 1, 1997 and February 3, 1996. 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 $136,000 at February 1, 1997 and $652,000 at February 3, 1996 are included in other current assets. The amortization of new store pre-opening costs, totaling $1,337,000, $2,524,000 and $438,000 in 1996, 1995 and 1994, respectively, 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, $3,212,000 was allocated to the investment in limited partnership based on the estimated fair market value of the land and building and the remaining $1,788,000 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 1, 1997 and February 3, 1996, the investment was $2,766,000 and $2,745,000, respectively, and prepaid rent, net of accumulated amortization, was $911,000 and $1,054,000, respectively. Such amounts are included in other long-term assets. The Company's equity in the income of the partnership, totaling $133,000 in 1996, $64,000 in 1995 and $160,000 in 1994, 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 and cash incentives received to construct a new store and enter into a new lease arrangement. Land contributed to the Company is included in land and recorded at appraised fair market values. Donated income is 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 minimum lease periods of the related building leases with respect to locations that are leased by the Company, ranging from 10 to 70 years. Leased Department Sales - Net sales include leased department sales of $32,781,000, $29,766,000 and $25,985,000 in 1996, 1995 and 1994, respectively. Cost of sales include related costs of $28,006,000, $25,494,000 and $22,326,000 in 1996, 1995 and 1994, 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 10,461,424, 10,416,520 and 10,413,339 in 1996, 1995 and 1994, respectively. The effect of common stock equivalents under the stock option plans were antidilutive in 1996, 1995 and 1994, and therefore not included. Non-Cash Transactions - The Company acquired fixtures and equipment under long-term debt obligations totaling $2,650,000 in 1996. In 1994, the Company entered into a capital lease obligation of $683,000 for leased equipment. The Company issued or contributed common stock to the Retirement Savings Plan with a value of $388,000, $243,000 and $226,000 in 1996, 1995 and 1994, respectively. Fair Value of Financial Instruments - Financial Accounting Standards 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 cash management liability), 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 notes and mortgage loans payable 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 values of such obligations with aggregate carrying values of $31,933,000 and $27,015,000 at February 1, 1997 and February 3, 1996, respectively, is $32,024,000 and $28,186,000, respectively. 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 values of the Fixed Base Certificates, based on similar issues of certificates at current rates for the same remaining maturities, with aggregate face values of $46,000,000 and $40,000,000 at February 1, 1997 and February 3, 1996, respectively, is $44,249,000 and $38,606,000, respectively. Stock-based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees". Long-lived Assets - Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of" requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal 1996, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets. Recently Issued Accounting Standards - Statement of Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" is effective for transfers of financial assets, including those with continuing involvement by the transferor, after December 31, 1996. In December 1996, SFAS No. 127 was issued and defers, for one year, the effective date of the implementation of SFAS No. 125 for certain transactions. Management does not believe the effect of adoption of these standards will be material. Reclassifications - Certain amounts in the accompanying 1995 and 1994 consolidated financial statements have been reclassified to conform with the 1996 presentation. 2. SECURITIZATION AND SALE OF RECEIVABLES The Company automatically sells all of its accounts receivable arising under its private label customer credit cards 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 services and administers the receivables in return for a monthly servicing fee. The followingsecurities have been issued under the securitization program: Fixed Base Certificates. In 1994, fractional undivided ownership interests in certain of the receivables were sold through the issuance of $40,000,000 principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates (the "1994 Fixed Base Certificates") to third-party investors. On October 31, 1996, an additional $6,000,000 principal amount 6.79% Fixed Base Class A-1 Credit Card Certificate (the "1996 Fixed Base Certificate") was issued under the program. Proceeds from the issuance of the 1996 Fixed Base Certificate were used to reduce outstanding borrowings under the line of credit with Bank Hapoalim (Note 3) and pay certain costs associated with the transaction. Interest on the 1994 and 1996 Fixed Base Certificates (collectively the "Fixed Based Certificates") is earned by the certificate holders on a monthly basis and the outstanding principal balances of such certificates are to be repaid in equal monthly installments commencing September 15, 1998 through September 15, 1999, through the application of the principal portion of credit card collections during that period. The issuances of the Fixed Base Certificates have been accounted for as sales for financial reporting purposes. Accordingly, the $46,000,000 of receivables underlying the Fixed Base Certificates in fiscal 1996 ($40,000,000 in fiscal 1995) and the corresponding debt obligations have been excluded from amounts reported in the accompanying financial statements. Variable Base Certificate. In 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 $9,048,000 at February 1, 1997 and $17,857,000 at February 3, 1996, 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, represented by Subordinated and Exchangeable Certificates issued to GCRC by GCC Trust. The outstanding principal balances of such certificates totaled $11,824,000 at February 1, 1997 and $8,035,000 at February 3,1996. 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 $3,139,000 at February 1, 1997 and $2,837,000 at February 3, 1996. 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. Management is not contemplating any such issuance in fiscal 1997. 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. The Company was in compliance with all applicable requirements of the program at February 1, 1997. 3. DEBT OBLIGATIONS: Revolving Lines of Credit. On December 20, 1996, the Company entered into a new three-and-one-quarter year revolving line of credit arrangement with Congress Financial Corporation ("Congress"). The new line of credit with Congress replaced the Company's former line of credit agreement with Fleet Capital Corporation and provides the Company with an $80,000,000 working capital facility through March 30, 2000. Borrowings under the arrangement are limited to a restrictive borrowing base equal to 65% of eligible merchandise inventories, increasing to 70% of such inventories during the period of September 1 through December 20 of each year to fund increased seasonal inventory requirements. Interest under the facility is charged at a rate of approximately LIBOR plus 2.5% (8.28% at February 1, 1997). Under the agreement, the Company also has the potential of reducing the interest rate by 1/4% each year, up to a maximum possible reduction of 1/2% beginning in fiscal 1998, if specified pre-tax income levels are attained by the Company. The maximum amount available for borrowings under the line of credit was $51,900,000 as of February 1, 1997, of which $31,304,000 was outstanding as of that date. Of that amount, $25,000,000 has been classified as long-term in the accompanying financial statements as the Company does not anticipate repaying that amount prior to one year from the balance sheet date. The agreement contains one financial covenant, pertaining to the maintenance of a minimum tangible net worth, with which the Company was in compliance as of February 1, 1997. 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, 1999. 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 plus 1.0%, not to exceed a maximum of 12.0% (6.44% at February 1, 1997). At February 1, 1997, $7,600,000 was outstanding under the line of credit with Bank Hapoalim, which was the maximum amount available for borrowings as of that date.
Short-Term and Long-Term Obligations. Notes and mortgage loans payable consist of the following: February 1, February 3, (In thousands of dollars) 1997 1996 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 $19,738 $19,953 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 4,750 5,700 Mortgage loan payable to financial institution (see terms below) 3,000 Notes payable to Federated Department Stores, Inc., payable in quarterly principal installments of $169 plus interest at 10.0%, principal due and payable March 2001 and July 2001 2,351 Fixture loans and other 2,094 1,362 31,933 27,015 Less current portion 2,072 1,361 $29,861 $25,654
The mortgage loan payable to financial institution with an outstanding balance of $3,000,000 at February 1, 1997 consists of amounts advanced to the Company under a seven-year financing arrangement with Heller Financial, Inc. ("Heller") entered into on October 2, 1996, providing for the mortgage of its department store in San Luis Obispo, California. The Company received $3,000,000 of the total $6,000,000 arrangement in October 1996, and received the remaining $3,000,000 in March 1997. Interest was charged on the first $3,000,000 received at a variable rate equal to LIBOR plus 3.0% (8.44% at February 1, 1997) during the period of October 1996 through March 1997, and will be charged at a fixed rate of 9.97% on the entire $6,000,000 beginning in April 1997. Federated Department Stores, Inc. financed the Company's acquisition of certain fixtures and equipment located in the Broadway store locations that were assumed by the Company during fiscal 1996. (See Note 4). The scheduled annual principal maturities on notes payable and mortgage loans are $2,072,000, $2,249,000, $2,381,000, $2,476,000 and $2,105,000 for 1997 through 2001, 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 $2,260,000 at February 1, 1997 and $1,995,000 at February 3, 1996. Interest paid, net of amounts capitalized, was $11,059,000, $10,927,000 and $8,608,000 in 1996, 1995 and 1994, respectively. Capitalized interest expense was $37,000, $278,000 and $68,000 in 1996, 1995 and 1994, respectively. The weighted-average interest rate charged on the Company's various revolving line of credit arrangements was 8.62% in 1996, 8.75% in 1995 and 7.13% in 1994. One of the Company's long-term financing arrangements includes various restrictive covenants. The Company was in compliance with such covenants as of February 1, 1997. 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 2021. 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 operating 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 $6,157,000 at February 1, 1997 and $5,584,000 at February 3, 1996. 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 1, 1997:
Capital Operating (In thousands of dollars) Leases Leases 1997 $ 922 $ 15,930 1998 752 15,176 1999 752 15,618 2000 752 13,527 2001 752 12,969 Thereafter 7,646 131,442 Total minimum lease payments 11,576 $204,662 Amount representing interest (5,860) Present value of minimum lease payments 5,716 Less current portion (336) $ 5,380
Rental expense consists of the following: (In thousands of dollars) 1996 1995 1994 Operating leases: Buildings: Minimum rentals $11,897 $ 9,796 $ 7,804 Contingent rentals 2,166 1,969 1,142 Fixtures and equipment 5,439 4,679 3,177 19,502 16,444 12,123 Contingent rentals on capital leases 47 346 605 $19,549 $16,790 $12,728
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 1, 1997. During 1996, the Company finalized agreements with Broadway Stores, Inc. ("Broadway"), a wholly-owned subsidiary of Federated Department Stores, Inc., and the landlord, whereby the Company vacated its original location in the Modesto, California Vintage Faire Mall and sub-leased the Broadway's former store in that mall for the remaining twelve years of the Broadway lease. The Company also vacated its original location in the Fresno, California Fashion Fair Mall and reopened a store in that mall under a new 20-year lease in the former Broadway store location. The Company recognized a pre-tax gain of $1,344,000 upon the termination of the original leases, which were accounted for as capital leases by the Company, representing the difference between the capital lease obligations and the net book value of the related assets recorded under the capital leases. The gain is included in service charges and other income for the year ended February 1, 1997. The new leases have been accounted for as operating leases for financial reporting purposes. 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 lease 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. In the event the lease is terminated at that time by either party, 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 and is being amortized into operations over the ten-year minimum lease period. At February 1, 1997, the deferred lease incentive, net of accumulated amortization, amounted to $3,731,000. Management believes the likelihood the lease will be terminated by either party after the fifth year of the lease is remote. Sale and Leaseback Arrangement. In 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 previously outstanding borrowings and 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. 5. INCOME TAXES
The components of income tax expense (benefit) are as follows: (In thousands of dollars) 1996 1995 1994 Current: Federal $ 375 $(1,678) $ (19) State 464 2 (36) 839 (1,676) (55) Deferred: Federal 704 (857) 555 State (285) (439) 321 419 (1,296) 876 $1,258 $(2,972) $ 821
The principal components of deferred tax assets and liabilities (in thousands of dollars) are as follows:
February 1, February 3, 1997 1996 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Accrued litigation costs $ 75 $ 1,461 Vacation accrual and employee vacation benefits 467 588 Credit losses 566 546 Accrued employee benefits 257 260 State income taxes 124 174 LIFO inventory reserve $ (2,841) $ (2,548) Workers' compensation 17 235 Supplies inventory (951) (1,044) Other items, net 800 (668) 562 (902) 2,306 (4,460) 3,826 (4,494) Long-Term: Net operating loss carryforwards 4,674 4,327 General business credits 1,985 1,768 Alternative minimum tax 510 597 Depreciation expense (8,143) (8,074) Accounting for leases 915 (3,433) 811 (3,481) Deferred income 1,988 (1,746) 2,122 (1,550) Installment sales (186) Other items, net 697 (311) 726 (991) 10,769 (13,633) 10,351 (14,282) $13,075 $(18,093) $14,177 $(18,776)
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:
1996 1995 1994 Statutory rate 35.0% (35.0)% 35.0% State income taxes, net of federal income tax benefit 5.7 (2.7) 7.3 Adjustments to previously filed amended returns 7.3 Amortization of goodwill 1.3 .5 1.7 Targeted jobs tax credit .5 (12.5) Nondeductible penalties .3 Other items, net (1.3) 1.9 (3.7) Effective rate 40.7% (34.5)% 35.1%
The Company received income tax refunds, net of payments, of $3,399,000 in 1996 and $1,522,000 in 1995. There were no income tax refunds receivable at February 1, 1997. Income tax refunds receivable were $1,437,000 at February 3, 1996. At February 1, 1997, the Company has, for federal tax purposes, net operating loss carryforwards of $11,135,000 which expire in the years 2010 and 2011, general business credits of $897,000 which expire in the years 2007 through 2010, and alternative minimum tax credits of $510,000 which may be used for an indefinite period. At February 1, 1997, the Company has, for state tax purposes, net operating loss carryforwards of $10,048,000 which expire in the years 1997 through 2001, enterprise zone credits of $948,000 which expire in the years 2004 through 2011, and alternative minimum tax credits of $140,000 which may be used for an indefinite period. These carryforwards are available to offset future taxable income and are expected to be fully utilized. 6. 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. All unexercised options under the 1986 ISO Plan expired as of the year ended February 3, 1996. 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 (benefit) expense related to this plan of ($170,000) in 1995 and $24,000 in 1994. No compensation expense related to this plan was required to be recognized in 1996. The benefit resulted from 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 certain 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. Option activity under the plans is as follows:
Weighted- Average Number of Exercise Shares Price Outstanding, January 29, 1994 230,246 $12.00 Granted 449,000 9.94 Exercised (13,500) 7.00 Canceled (22,000) 9.95 Outstanding, January 28, 1995 (179,746 exercisable at a weighted- average price of $12.81) 643,746 10.74 Granted (weighted-average fair value of $4.25) 28,000 6.63 Canceled (191,746) 12.63 Outstanding, February 3, 1996 (133,000 exercisable at a weighted- average price of $9.93) 480,000 9.74 Granted (weighted-average fair value of $3.69) 45,000 5.75 Canceled (34,000) 9.88 Outstanding, February 1, 1997 (236,000 exercisable at a weighted- average price of $9.84) 491,000 $ 9.37
Additional information regarding options outstanding as of February 1, 1997 is as follows: Options Outstanding Options Exercisable Weighted-Avg. Remaining Range of Number Contractual Weighted-Avg. Number Exercise Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price $5.75 to $10.87 491,000 7.1 yrs. $9.37 236,000 $9.84
At February 1, 1997, 49,000 and 30,000 shares were available for future grants under the 1994 ISO Plan and the 1994 Director Nonqualified Plan, respectively. Additional Stock Plan Information. As described in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees", and its related interpretations. Accordingly, with the exception of compensation (benefit) expense recognized in connection with the Company's 1986 Plan, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," requires the disclosure of pro-forma net income (loss) and earnings (loss) per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted-average assumptions: expected life, 5 years; stock volatility, 41.85% in 1996 and 1995; risk-free interest rates, 6.30% in 1996 and 1995; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The impact on pro-forma net income (loss) and earnings (loss) per share, had the computed fair values of the 1996 and 1995 awards been amortized to expense over the vesting period of the awards, was insignificant in 1996 and 1995. The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro-forma calculation; accordingly, the 1996 and 1995 pro-forma adjustments are not indicative of future period pro-forma adjustments, when the calculation will apply to all applicable stock options. 7. 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 $275,000, $500,000 and $250,000 in expense representing the Company's annual discretionary contribution to the Plan in 1996, 1995 and 1994, respectively. A Voluntary Employee Beneficiary Association ("VEBA") trust has been established by the Company for the purpose of funding employee vacation benefits. 8. PROVISION FOR UNUSUAL ITEMS The provision for unusual items included in the Company's 1994 statement of operations, totaling $3,833,000, represents the cost to settle three civil stockholder lawsuits and related legal fees and other costs. Pursuant to the terms of the settlement agreement, the Company funded $3,000,000 into an irrevocable trust on February 1, 1995, and such amount is included in the Company's 1995 statement of cash flows. 9. COMMITMENTS AND CONTINGENCIES The Company was party to a lawsuit filed in 1992 by F&N Acquisition Corporation ("F&N") under which, among other things, 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. The Company was also party to a related lawsuit filed by Sabey Corporation ("Sabey"), the owner of the mall in which the Frederick and Nelson store was located. On July 16, 1996, the Company reached agreements with F&N and Sabey to settle the lawsuits. The combined total of the settlements (paid in July 1996), including legal fees and other costs, were not materially different from the Company's previously recorded reserves. 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 issuance of letters of credit in the ordinary course of business pursuant to certain factor and vendor contracts. As of February 1, 1997, the Company had outstanding letters of credit amounting to $2,000,000. Management believes the likelihood of non-performance under such contracts is remote. The Company has entered into agreements to open two new department stores in fiscal 1997 and is in process of remodeling one existing store location. These projects are expected to be fully complete in fiscal 1997. The estimated cost to complete such projects is $8,700,000. 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1996 and 1995 (in thousands, except per share data):
1996 Quarter Ended May 4 August 3 November 2 February 1 Net sales $85,560 $95,675 $95,675 $145,249 Gross profit 26,830 30,392 30,719 47,054 Income (loss) before income tax expense (benefit) (2,099) (1,245) (2,430) 8,866 Net income (loss) (1,322) ( 785) (1,530) 5,471 Net income (loss) per common share (.13) (.07) (.15) .52 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
The Company's quarterly results of operations for the three month periods ended February 1, 1997 and February 3, 1996 include adjustments to the inventory shrinkage reserve resulting in an increase to the gross margin of $795,000 and $634,000, respectively.
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 1, 1997: Deducted from asset accounts: Allowance for doubtful accounts... $1,261,983 $2,730,502 (1) 2,670,378(2) $1,322,107 Allowance for vendor claims receivable. $ 90,000 $ (10,000)(4) $ 80,000 Allowance for notes receivable. $ 282,767 $ (282,767)(5) $ 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 $ (80,000)(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
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. (5) Reversal of uncollectible portion of note receivable recorded in connection with transferring related asset to a held for sale classification during the year ended February 1, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 14, 1997 GOTTSCHALKS INC. By: \s\Joseph W. Levy Joseph W. Levy Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Chairman and Chief Executive Officer (principal executive \s\ Joseph W. Levy officer) April 14, 1997 Joseph W. Levy Vice Chairman of \s\ Gerald H. Blum the Board April 14, 1997 Gerald H. Blum Senior Vice President and Chief Financial \s\ Alan A. Weinstein Officer (principal April 14, 1997 Alan A. Weinstein financial and accounting officer) \s\ O. James Woodward III Director April 14, 1997 O. James Woodward III \s\ Bret W. Levy Director April 14, 1997 Bret W. Levy \s\ Sharon Levy Director April 14, 1997 Sharon Levy \s\ Joseph J. Penbera Director April 14, 1997 Joseph J. Penbera \s\ Fred Ruiz Director April 14, 1997 Fred Ruiz \s\ Max Gutmann Director April 14, 1997 Max Gutmann
EX-10.31 2 Loan and Security Agreement by and between CONGRESS FINANCIAL CORPORATION (WESTERN) as Lender and GOTTSCHALKS INC. as Borrower Dated: December 20, 1996 TABLE OF CONTENTS PAGE(S) SECTION 1. DEFINITIONS . . . . . . 1 SECTION 2. CREDIT FACILITIES . . . 10 2.1 Revolving Loans . . . . 10 2.2 Letter of Credit Accommodations 11 SECTION 3. INTEREST AND FEES . . . 13 3.1 Interest. . . . . . . . 13 3.2 Closing Fee . . . . . . 15 3.3 Loan Servicing and Audit Fee 15 3.4 Changes in Laws and Increased Costs of Loans . . . . . . . . . . . . 15 3.5 Compensation Adjustment 16 SECTION 4. CONDITIONS PRECEDENT. . 17 4.1 Conditions Precedent to Initial Loans and the Letter of Credit Accommodations. . . . . 17 4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations 19 SECTION 5. GRANT OF SECURITY INTEREST 20 SECTION 6. COLLECTION AND ADMINISTRATION 21 6.1 Borrower's Loan Account 21 6.2 Statements. . . . . . . 21 6.3 Collection of Accounts. 21 6.4 Payments. . . . . . . . 23 6.5 Authorization to Make Loans 24 6.6 Use of Proceeds . . . . 24 SECTION 7. COLLATERAL REPORTING AND COVENANTS 24 7.1 Collateral Reporting. . 24 7.2 Accounts Covenants. . . 25 7.3 Inventory Covenants . . 26 7.4 Equipment Covenants . . 27 7.5 Power of Attorney . . . 27 7.6 Right to Cure . . . . . 28 7.7 Access to Premises. . . 28 SECTION 8. REPRESENTATIONS AND WARRANTIES 29 8.1 Corporate Existence, Power and Authority; Subsidiaries. . . . . 29 8.2 Financial Statements; No Material Adverse Change.. . . . . . . . . 29 8.3 Chief Executive Office; Collateral Locations. . . . . . . . . . . . 29 8.4 Priority of Liens; Title to Properties . . . . . . . . . . . 30 8.5 Tax Returns . . . . . . 30 8.6 Litigation. . . . . . . 30 8.7 Compliance with Other Agreements and Applicable Laws. . . . . . . . . 30 8.8 Environmental Compliance 30 8.9 Employee Benefits . . . 31 8.10 Accuracy and Completeness of Information. . . . . . . . . . . 32 8.11 Survival of Warranties; Cumulative 32 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 32 9.1 Maintenance of Existence 32 9.2 New Collateral Locations 32 9.3 Compliance with Laws, Regulations, Etc. . . . . . . . . . . . . . . 33 9.4 Payment of Taxes and Claims 33 9.5 Insurance . . . . . . . 34 9.6 Financial Statements and Other Information. . . . . . . . . . . 34 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc . . . . 35 9.8 Encumbrances. . . . . . 36 9.9 Indebtedness. . . . . . 36 9.10 Revolving Loans, Investments, Guarantees, Etc. . . . . . . . . 37 9.11 Dividends and Redemptions 37 9.12 Transactions with Affiliates 37 9.13 Compliance with ERISA . 38 9.14 Adjusted Net Worth. . . 38 9.15 Costs and Expenses. . . 38 9.16 Securitization Facility 39 9.17 Amendment of Securitization Facility 39 9.18 Renewal of Securitization Facility 39 9.19 No Defaults . . . . . . 39 9.20 Use of Private Label Card 39 9.21 GCRC Receivables Collections 40 9.22 Purchase Price for GCRC Receivables 40 9.23 Further Assurances. . . 40 SECTION 10. EVENTS OF DEFAULT AND REMEDIES 40 10.1 Events of Default . . . 40 10.2 Remedies. . . . . . . . 42 SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 44 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. . . . . . . . . 44 11.2 Waiver of Notices . . . 45 11.3 Amendments and Waivers. 45 11.4 Waiver of Counterclaims 45 11.5 Indemnification . . . . 45 SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 46 12.1 Term. . . . . . . . . . 46 12.2 Notices . . . . . . . . 48 12.3 Partial Invalidity. . . 48 12.4 Successors. . . . . . . 48 12.5 Entire Agreement. . . . 48 12.6 Publicity . . . . . . . 49 INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate Schedule 6.3 Deposit Accounts Schedule 7.3(i) Consignment Inventory Schedule 8.4 Other Liens Schedule 8.8 Environmental Disclosures LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated December 20, 1996 is entered into by and between Congress Financial Corporation (Western), a California corporation ("Lender"), and Gottschalks Inc., a Delaware corporation ("Borrower"). W I T N E S S E T H: WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the California Uniform Commercial Code shall have the respective meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3. Any accounting term used herein unless otherwise defined in this Agreement shall have the meaning customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one percent (1%), determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. 1.3 "Adjusted Net Worth" shall mean as to any Person, at any time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory for this purpose on a first-in-first-out basis, at the lower of cost or market, utilizing the retail method of accounting, after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including income tax expense or benefit and other related accruals, but excluding adjustments to deferred income tax accounts) plus (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender. 1.4 "Appraised Value" shall mean, with respect to Eligible Inventory, the appraised value of such Eligible Inventory, expressed as a percentage of either the Value or the Retail Sales Price, as required by Lender, determined on a "going out of business sale" basis, net of all estimated liquidation expenses, shrinkage and markdowns, pursuant to an appraisal conducted, at Borrower's expense, by an independent appraisal firm acceptable to Lender in its sole and absolute discretion. 1.5 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets or business of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect any state of facts which Lender determines in good faith constitutes an Event of Default. Without limiting the generality of the foregoing, Lender (i) shall establish on the date hereof and maintain throughout the term of this Agreement and throughout any renewal term an Availability Reserve in an amount equal to two (2) months gross rent for Borrower's Distribution Facility and for each of the Borrower's retail locations in States other than California and Nevada for which Lender has not received a landlord waiver and consent in form and substance satisfactory to Lender, and (ii) may establish and maintain an additional Availability Reserve from time to time to compensate for any increase in the percentage of Inventory not otherwise deemed ineligible represented by slow moving Inventory (defined as Inventory held for longer than one (1) year), and (iii) may establish and maintain throughout the term of this Agreement and any renewal term an additional Availability Reserve in an amount equal to the Value of consigned Inventory located at any one time at Borrower's Distribution Facility or retail stores in excess of One Million Dollars ($1,000,000), and (iv) may establish and maintain throughout the term of this Agreement and any renewal term an additional Availability Reserve in an amount equal to one hundred percent (100%) of the total sales of Concession Inventory during the same month of the preceding fiscal year as the month during which determination of this Availability Reserve is to be made, less any amounts to be retained by Borrower as a percentage rental payment or similar charge, and this Availability Reserve shall be subject to increase, in such amount as Lender shall determine, to cover any payments of sale proceeds due to concessionaires for the sale of Concession Inventory that are not made within thirty (30) days of the date of sale. 1.6 "Blocked Account" shall have the meaning set forth in Section 6.3 hereof. 1.7 "Business Day" shall mean (a) for the Prime Rate Loans, any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the Commonwealth of Pennsylvania, and a day on which the Reference Bank and Lender are open for the transaction of business, and (b) for all Eurodollar Rate Loans, any such day as described in (a) above in this definition of Business Day, excluding any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. 1.8 "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.9 "Collateral" shall have the meaning set forth in Section 5 hereof. 1.10 "Concession Inventory" shall mean any goods of a concessionaire located at Borrower's Distribution Facility or retail stores, (which goods would otherwise be considered Inventory if the property of the Borrower, but as to which Borrower has no right, title or interest), held for sale by the concessionaire, which goods are not accounted for in Borrower's inventory system but the proceeds of sale thereof are collected through Borrower's deposit account arrangements. 1.11 "Credit Card Agreements" shall mean all agreements now or hereafter entered into by Borrower or GCRC with any Credit Card Issuer or Credit Card Processor, with the exception of Borrower, as the same may now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.12 "Credit Card Issuer" shall mean any person (excluding the Borrower with respect to its private label credit card program) who issues or whose members issue credit cards used by customers of the Borrower to purchase goods, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards, and American Express, Discover, Diners Club, Carte Blanche, and other non-bank credit or debit cards. 1.13 "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who facilities, services, processes or manages the credit authorization, billing transfer and/or payment from a Credit Card Issuer or Credit Card Processor and other procedures with respect to any sales transactions of the Borrower involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer, but excluding the Borrower with respect to its private label credit card program. 1.14 "Credit Card Receivables" shall mean all Accounts consisting of the present and future rights of Borrower, but excluding GCRC Receivables, to payment by Credit Card Issuers or Credit Card Processors for merchandise sold and delivered to customers of Borrower who have purchased such goods using a credit card or a debit card issued by a Credit Card Issuer. 1.15 "Distribution Facility" means Borrower's distribution facility at 2900 Airport Drive, Madera, California 93637. 1.16 "Eligible Domestic In-Transit Inventory" shall mean those items of Inventory which are not located at one of the Borrower's retail stores or at Borrower's Distribution Facility but: (i) are currently in-transit from a location within the continental United States of America to one of Borrower's retail stores or to Borrower's Distribution Facility via a third party carrier, (ii) are insured against type of loss, damage, hazards, and risks, and in amounts, satisfactory to Lender, (iii) title to which items has been transferred to Borrower, (iv) documentation and monitoring regarding such items are acceptable to Lender, (v) such items strictly comply with all of Borrower's representations and warranties to Lender, including, but not limited to, Lender's first priority security interest in such Inventory, and (vi) if such items have been acquired pursuant to a Letter of Credit Accommodation, the Letter of Credit Accommodation must have been drawn upon. 1.17 "Eligible Inventory" shall mean Inventory consisting of finished goods held for resale in the ordinary course of the business of Borrower which are located either at one of Borrower's retail stores or at Borrower's Distribution Facility, or which qualify as Eligible Domestic In-Transit Inventory, and which are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) raw materials, (b) work-in-process as defined by GAAP; (c) components which are not part of finished goods; (d) spare parts for equipment; (e) packaging and shipping materials; (f) supplies used or consumed in Borrower's business; (g) Inventory at premises not owned or controlled by Borrower, except if Lender shall have received an agreement in writing from the person in possession of such Inventory and/or the owner or operator of such premises in form and substance satisfactory to Lender acknowledging Lender's first priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral; (h) Inventory in transit except for Eligible Domestic In-Transit Inventory; (i) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (j) unserviceable Inventory; (k) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (l) damaged and/or defective Inventory; (m) Inventory held for return to vendors; (n) Inventory returned by customers and not held for resale; (o) Inventory consisting of samples; (p) display Inventory (currently designated at Location 80); (q) that portion of the Value of Inventory attributable to markdowns not posted to the Inventory retail system due to month-end cut-off, or to unearned discounts; (r) that portion of the Value of Inventory attributable to capitalized warehousing, packing and freight cost from the Distribution Facility to one of the Borrower's retail stores (UNICAP); and (s) Inventory purchased or sold on consignment. General criteria for Eligible Inventory may be established and revised from time to time by Lender in its reasonable credit judgment. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.18 "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to Borrower's business and facilities (whether or not owned by it), including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or hazardous, toxic or dangerous substances, materials or wastes. 1.19 "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.20 "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.21 "ERISA Affiliate" shall mean any person required to be aggregated with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 1.22 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof. 1.23 "Eurodollar Rate" shall mean with respect to the Interest Period for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic average of the rate of interest per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one percent (1%)) at which Reference Bank is offered deposits of United States dollars in the London interbank market (or other Eurodollar Rate market selected by Borrower and approved by Lender) on or about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement of such Interest Period in amounts substantially equal to the principal amount of the Eurodollar Rate Loans requested by and available to Borrower in accordance with this Agreement, with a maturity of comparable duration to the Interest Period selected by Borrower. 1.24 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. 1.25 "Excess Availability" shall mean the amount, as determined by Lender, calculated at any time, equal to: (a) the lesser of (i) the amount of the Revolving Loans available to Borrower as of such time (based on the applicable advance rate set forth in Section 2.1(a)(i) hereof multiplied by the Value, Retail Sales Price or Appraised Value of Eligible Inventory, as applicable, as determined by Lender), subject to the sublimits and Availability Reserves from time to time established by Lender hereunder and (ii) the Maximum Credit, minus (b) the sum of: (i)( the amount of all then outstanding and unpaid Obligations, (ii) the aggregate amount of all trade payables of Borrower which are more than sixty (60) days past due as of such time and which are not disputed in good faith, and (iii) the aggregate amount of Borrower's book overdrafts. 1.26 "Financing Agreements" shall mean, colle- ctively, this Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.27 "Fixed Base Certificates" shall mean, collectively, (i) the $40,000,000 7.35% Fixed Base Class A-1 Credit Card Certificates, Series 1994-1, and (ii) the $6,000,000 6.79% Fixed Base Class A-1 Credit Card Certificates, Series 1996-1, issued by the Gottschalks Credit Card Master Trust pursuant to the Securitization Facility. 1.28 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Section 9.14 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.29 "GCRC" shall mean Gottschalks Credit Receivables Corp., a Delaware corporation, and a wholly owned subsidiary of the Borrower. 1.30 "GCRC Receivables" shall mean those Accounts and other indebtedness owed to Borrower arising under Borrower's private label credit card program and sold by Borrower to GCRC pursuant to the Receivables Purchase Agreement. 1.31 "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.32 "Information Certificate" shall mean the Information Certificate of Borrower constituting Exhibit A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.33 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of approximately one (1), two (2) or three (3) months duration as Borrower may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided, that, Borrower may not elect an Interest Period which will end after the last day of the then-current term of this Agreement. 1.34 "Interest Rate" shall mean, as to Prime Rate Loans, a rate of one quarter of one (.25) percentage point per annum in excess of the Prime Rate and, as to Eurodollar Rate Loans, a rate of two and one-half (2.50) percentage points per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by Borrower as in effect three (3) Business Days after the date of receipt by Lender of the request of Borrower for such Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is higher or lower than any rate previously quoted to Borrower); provided, however, that in the event Borrower's pretax income for any given fiscal year (excluding extraordinary gains and non-cash losses) exceeds Two Million Dollars ($2,000,000), the applicable Interest Rate provided for in the preceding clause of this Section 1.34 shall be reduced by one-quarter of one (.25) percentage point, such reduction in the applicable Interest Rate to be effective as of the first day of the month immediately following the date of receipt by Lender of Borrower's audited annual financial statements, as provided by Borrower to Lender pursuant to Section 9.6(a)(iii) hereof, indicating the required pretax income; and provided further, however, that in the event Borrower's pretax income for its fiscal year immediately following the fiscal year for which the Interest Rate has been reduced, as provided for in the first proviso of this Section 1.34, again exceeds Two Million Dollars ($2,000,000) excluding extraordinary gains and non-cash losses, then the applicable Interest Rate shall be further reduced by an additional one-quarter of one (.25) percentage point, such reduction in the applicable Interest Rate to be effective as of the first day of the month immediately following the date of receipt by Lender of Borrower's audited annual financial statements, as provided by Borrower to Lender pursuant to Section 9.6(a)(iii) hereof, indicating the required pretax income; and provided further, however, the Interest Rate shall mean the rate of two and one-quarter (2.25) percentage points per annum in excess of the Prime Rate as to Prime Rate Loans and the rate of four and one-half (4.50) percentage points percent per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Lender's option, without notice, (a) for the period on and after the date of termination or non-renewal hereof, or the date of the occurrence of any Event of Default or event which with notice or passage of time or both would constitute an Event of Default, and for so long as such Event of Default or other event is continuing as determined by Lender and until such time as all Obligations are indefeasibly paid in full (notwithstanding entry of any judgment against Borrower) and (b) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es) arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default). 1.35 "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.36 "Inventory Advance Rate" shall mean the advance rate applicable to Eligible Inventory as determined in accordance with subsections 2.1(a)(i). 1.37 "Letter of Credit Accommodations" shall mean the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Lender for the account of Borrower or any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by Borrower of its obligations to such issuer. 1.38 "Loans" shall mean the Revolving Loans. 1.39 "Maximum Credit" shall mean, with reference to the Revolving Loans and the Letter of Credit Accommodations, the amount of Eighty Million Dollars ($80,000,000). 1.40 "Obligations" shall mean any and all Revolving Loans, the Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.41 "Obligor" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. 1.42 "Participant" shall mean any person which at any time participates with Lender in respect of the Loans, the Letter of Credit Accommodations or other Obligations or any portion thereof. 1.43 "Payment Account" shall have the meaning set forth in Section 6.3 hereof. 1.44 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.45 "Pooling Agreement" shall mean that certain Pooling and Servicing Agreement, dated as of March 30, 1994, among GCRC, as depositor, Borrower, as servicer, and Bankers Trust Company, as trustee. 1.46 "Prime Rate" shall mean the rate from time to time publicly announced by CoreStates Bank, N.A., or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank. 1.47 "Prime Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof. 1.48 "Receivables Purchase Agreement" shall mean that certain Receivables Purchase Agreement for the purchase of GCRC Receivables, dated as of March 30, 1994, between Borrower, as seller, and GCRC, as purchaser. 1.49 "Records" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). 1.50 "Reference Bank" shall mean CoreStates Bank, N.A., or such other bank as Lender may from time to time designate. 1.51 "Renewal Date" shall have the meaning set forth in Section 12.1(a) hereof. 1.52 "Retail Sales Price" shall mean the current ticketed sales price in the Borrower's retail stores, net of markdowns from the original retail sales price with respect thereto, for the types, categories and styles of inventory included in the Eligible Inventory of Borrower. 1.54 "Revolving Loans" shall mean the loans now or hereafter made by Lender to or for the benefit of Borrower on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.55 "Seasonal Period" shall mean the period from September 1 through December 20 of each calendar year. 1.56 "Securitization Facility" shall mean (i) the securitization facility in effect as of the date hereof with respect to certain of Borrower's Accounts and other indebtedness owed to Borrower arising out of Borrower's private label credit card program, as evidenced by the Receivables Purchase Agreement, the Pooling Agreement, and all other agreements, documents and instruments executed in connection therewith, including all supplemental financings thereunder; and (ii) such other securitization facility with respect to the Accounts as may be acceptable to Lender in its reasonable credit judgment. 1.57 "Variable Base Certificates" shall mean the $15,000,000 Variable Base Class A-2 Credit Card Certificates, Series 1994-1 issued by the Gottschalks Credit Card Master Trust pursuant to the Securitization Facility. 1.58 "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost as determined by the retail method of accounting or (b) market value. SECTION 2. CREDIT FACILITIES 2.1 Revolving Loans. (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to: (i) the lesser of: (A) sixty-five percent (65%) (seventy percent (70%) during the Seasonal Period) of the Value of the Eligible Inventory, or (B) thirty-three percent (33%) (thirty-five percent (35%) during the Seasonal Period) of the Retail Sales Price of the Eligible Inventory; provided, however, that advances against Eligible Domestic In-Transit Inventory shall not, at any one time, exceed Five Million Dollars ($5,000,000); minus (ii) the then undrawn amounts of outstanding Letter of Credit Accommodations multiplied by the applicable percentages as provided for in Section 2.2(c) hereof; and minus (iii) any Availability Reserves. (b) Lender may, in its reasonable credit judgment, from time to time, upon not less than ten (10) days prior notice to Borrower, reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (A) the number of days of the turnover of such Inventory for any period has changed in any materially adverse respect or (B) the Appraised Value of the Eligible Inventory, or any category thereof, has decreased in any material respect, or (C) the nature and quality of the Inventory has deteriorated in any material respect. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Inventory or in establishing Availability Reserves. (c) Except in Lender's discretion, the aggregate amount of the Loans, the Letter of Credit Accommodations and other Obligations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans and Letter of Credit Accommodations or the aggregate amount of the outstanding Loans and Letter of Credit Accommodations exceeds the amounts available under the lending formulas set forth in Section 2.1(a) hereof, the sublimits for Letter of Credit Accommodations set forth in Section 2.2(c), or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. 2.2 Letter of Credit Accommodations. (a) Subject to, and upon the terms and conditions contained herein, at the request of Borrower, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrower containing terms and conditions acceptable to Lender in its reasonable credit judgment and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Revolving Loans to Borrower pursuant to this Section 2. (b) In addition to any normal, reasonable and customary charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrower shall pay to Lender a letter of credit fee at a rate equal to one percent (1%) per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month; provided, however, that such letter of credit fee shall be increased, at Lender's option without notice, to three percent (3%) per annum for the period on or after the date of termination or non-renewal of this Agreement, or the date of the occurrence of an Event of Default and during the continuation thereof. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrower to pay such fee shall survive the termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Revolving Loans available to Borrower (subject to the Maximum Credit and any Availability Reserves) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the sum of (A) the product of the Value of such Eligible Inventory multiplied by one minus the Inventory Advance Rate under Section 2.1(a)(i)(A) hereof, plus (B) freight, taxes, duty and other amounts which Lender estimates, in its reasonable credit judgment, must be paid in connection with such Inventory upon arrival and for delivery to one of Borrower's locations for Eligible Inventory within the United States of America and (ii) if the proposed Letter of Credit Accommodation is for standby letters of credit guaranteeing the purchase of Eligible Inventory or for any other purpose, an amount equal to one hundred percent (100%) of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodation, the amount of Revolving Loans which might otherwise be available to Borrower shall be reduced by the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii). (d) Except in Lender's discretion, the amount of all outstanding Letter of Credit Accommodations and all other commitments and obligations made or incurred by Lender in connection therewith shall not at any time exceed Twenty Million Dollars ($20,000,000). At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrower will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, the Revolving Loans otherwise available to Borrower shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (e) Borrower shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Borrower assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Borrower hereby releases and holds Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrower, by any issuer or correspondent or otherwise, unless caused by the gross negligence or willful misconduct of Lender, with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.2(e) shall survive the payment of Obligations and the termination or non-renewal of this Agreement. (f) Nothing contained herein shall be deemed or construed to grant Borrower any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrower shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrower. Lender shall have the sole and exclusive right and authority to, and Borrower shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in Borrower's name. (g) Any rights, remedies, duties or obligations granted or undertaken by Borrower to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Borrower to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Borrower to Lender and to apply in all respects to Borrower. SECTION 3. INTEREST AND FEES 3.1 Interest. (a) Borrower shall pay to Lender interest on the outstanding principal amount of the non-contingent Obligations at the Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination or non-renewal hereof shall be payable on demand. (b) Borrower may from time to time request that Prime Rate Loans be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans continue for an additional Interest Period. Such request from Borrower shall specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and conditions contained herein, three (3) Business Days after receipt by Lender of such a request from Borrower, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be, provided, that, (i) no Event of Default, or event of which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing, (ii) no party hereto shall have sent any notice of termination or non-renewal of this Agreement, (iii) Borrower shall have complied with such customary and reasonable procedures as are established by Lender and specified by Lender to Borrower from time to time for requests by Borrower for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof; (vi) the maximum amount of the Eurodollar Rate Loans at any time requested by Borrower shall not exceed the amount equal to ninety percent (90%) of the daily average of the principal amount of the Revolving Loans which it is anticipated will be outstanding during the applicable Interest Period, in each case as determined by Lender (but with no obligation of Lender to make such Revolving Loans) and (vii) Lender shall have determined that the Interest Period or Adjusted Eurodollar Rate is available to Lender through the Reference Bank and can be readily determined as of the date of the request for such Eurodollar Rate Loan by Borrower. Any request by Borrower to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Lender and Reference Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Lender and Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans. (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Lender has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by Lender to Borrower, convert to Prime Rate Loans in the event that (i) this Agreement shall terminate or not be renewed, or (ii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceed either (A) the aggregate principal amount of the Loans then outstanding, or (B) Revolving Loans then available to Borrower under Section 2 hereof. Borrower shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrower) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any actual loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (d) Interest shall be payable by Borrower to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on non-contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrower to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any such part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.2 Closing Fee. Borrower shall pay to Lender as a closing fee (inclusive of any commitment fees paid to Lender by Borrower) of Five Hundred Ninety Thousand Dollars ($590,000), which fee shall be fully earned as of and payable on the date hereof. The commitment fee of One Hundred Fifty Thousand Dollars ($150,000) previously paid by Borrower to Lender shall be applied to the closing fee. Lender shall pay the early termination fee charged by Fleet Business Credit, Inc. provided that such early termination fee does not exceed One Hundred Ninety Thousand Dollars ($190,000). 3.3 Loan Servicing and Audit Fee. Borrower shall pay to Lender monthly in advance a loan servicing and audit fee in an amount equal to Four Thousand Dollars ($4,000), plus out-of-pocket costs and expenses, in respect of Lender's services for each month (or part thereof) while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be fully earned as of and payable in advance on the date hereof and on the first day of each month hereafter. 3.4 Changes in Laws and Increased Costs of Loans. (a) Notwithstanding anything to the contrary contained herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to Prime Rate Loans in the event that (i) any change in applicable law or regulation (or the interpretation or administration thereof) shall either (A) make it unlawful for Lender, Reference Bank or any Participant to make or maintain Eurodollar Rate Loans or to comply with the terms hereof in connection with the Eurodollar Rate Loans, by an amount deemed by Lender to be material, or (B) shall result in the increase in the costs to Lender, Reference Bank or any Participant of making or maintaining any Eurodollar Rate Loans or (C) reduce the amounts received or receivable by Lender or any Participant in respect thereof, by an amount deemed by Lender to be material or (ii) the cost to Lender, Reference Bank or any Participant of making or maintaining any Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to be material. Borrower shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrower) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person as a result of the foregoing, including, without limitation, any such loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain the Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting forth the basis for the determination of such amount necessary to compensate Lender as aforesaid shall be delivered to Borrower and shall be conclusive, absent manifest error. (b) If any payments or prepayments in respect of the Eurodollar Rate Loans are received by Lender other than on the last day of the applicable Interest Period (whether pursuant to acceleration, upon maturity or otherwise), including any payments pursuant to the application of collections under Section 6.3 or any other payments made with the proceeds of Collateral, Borrower shall pay to Lender upon demand by Lender (or Lender may, at its option, charge any loan account of Borrower) any amounts required to compensate Lender, the Reference Bank or any Participant with Lender for any additional loss (including loss of anticipated profits), cost or expense incurred by such person as a result of such prepayment or payment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain such Eurodollar Rate Loans or any portion thereof. 3.5 Compensation Adjustment (a) If after the date of this Agreement the introduction of, or any change in, any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or compliance by Lender or any Participant therewith: (i) subjects Lender to any tax, duty, charge or withholding on or from payments due from Borrower (excluding franchise taxes imposed upon, and taxation of the overall net income of, Lender or any Participant), or changes the basis of taxation of payments, in either case in respect of amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve requirement or other reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender or any Participant, or (iii) imposes any other condition the result of which is to increase the cost to Lender or any Participant of making, funding or maintaining the Revolving Loans or Letter of Credit Accommodations or reduces any amount receivable by Lender or any Participant in connection with the Loans or Letter of Credit Accommodations, or requires Lender or any Participant to make payment calculated by references to the amount of loans held or interest received by it, by an amount deemed material by Lender or any Participant, or (iv) imposes or increases any capital requirement or affects the amount of capital required or expected to be maintained by Lender or any Participant or any corporation controlling Lender or any Participant, and Lender or any Participant determines that such imposition or increase in capital requirements or increase in the amount of capital expected to be maintained is based upon the existence of this Agreement or the Loans or Letter of Credit Accommodations hereunder, all of which may be determined by Lender's reasonable allocation of the aggregate of its impositions or increases in capital required or expected to be maintained, and the result of any of the foregoing is to increase the cost to Lender or any Participant of making, renewing or maintaining the Loans or Letter of Credit Accommodations, or to reduce the rate of return to Lender or any Participant on the Loans or Letter of Credit Accommodations, then upon demand by Lender, Borrower shall pay to Lender, and continue to make periodic payments to Lender or any Participant, such additional amounts as may be necessary to compensate Lender or any Participant for any such additional cost incurred or reduced rate of return realized. (b) A certificate of Lender claiming entitlement to compensation as set forth above will be conclusive in the absence of manifest error. Such certificate will set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid and the compensation and the method by which such amounts were determined. In determining any additional amounts due from Borrower under this Section 3.5, Lender shall act reasonably and in good faith and will, to the extent that the increased costs, reductions, or amounts received or receivable relate to the Lender's or a Participant's loans or commitments generally and are not specifically attributable to the Loans and commitments hereunder, use averaging and attribution methods which are reasonable and equitable and which cover all loans and commitments under this Agreement by the Lender or such Participant, as the case may be, whether or not the loan documentation for such other loans and commitments permits the Lender or such Participant to receive compensation costs of the type described in this Section 3.5. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions Precedent to Initial Loans and the Letter of Credit Accommodations. Each of the following is a condition precedent to Lender making the initial Loans and the initial Letter of Credit Accommodations hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by the existing lender or lenders to Borrower of their respective financing arrangements with Borrower and the termination and release by it or them, as the case may be, of any interest in and to any assets and properties of Borrower, duly authorized, executed and delivered by it or each of them, including, but not limited to, UCC termination statements for all UCC financing statements previously filed by it or any of them or their predecessors, as secured party and Borrower, as debtor in form acceptable for recording or filing in the appropriate government office, and Lender shall have satisfied itself that it has valid, perfected and first priority security interests in and liens upon the Collateral and any other property which is intended as security for the Obligations, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (b) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (c) no material adverse change shall have occurred in the assets, business or prospects of Borrower since the date of Lender's latest field examination and no change or event shall have occurred which would impair the ability of Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (d) Lender shall have completed a field review of the Records and such other information with respect to the Collateral as Lender may require to determine the amount of Revolving Loans available to Borrower, the results of which shall be satisfactory to Lender; and Lender shall have received current perpetual Inventory records and/or rollforwards of Inventory through the date hereof, together with all supporting documentation and such other documents and information as Lender shall request in its reasonable credit judgment to enable Lender to accurately identify and verify the Eligible Inventory at or before the date hereof in a manner satisfactory to Lender, including, but not limited to, Inventory in transit; (e) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, but subject to Borrower's best efforts to obtain such waivers for Borrower's retail locations, acknowledgements by lessors of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements by such persons permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral; provided, however, that the foregoing shall not limit the right of Lender to establish an Availability Reserve to cover two (2) months gross rent, in a manner consistent with the Availability Reserve established to cover rent as defined in Section 1.5 hereof, in the event Lender does not receive an acceptable waiver from the owner of any location at which the Borrower maintains Inventory. (f) all Credit Card Issuers and Credit Card Processors shall have been irrevocably directed by the parties to Credit Card Agreements, and such Credit Card Companies and Credit Card Processors shall agree, that all proceeds of Credit Card Receivables shall be remitted to the Blocked Account; (g) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (h) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrower with respect to the Financing Agreements and such other matters as Lender may request; (i) the Excess Availability as determined by Lender as of the date hereof, shall be not less than Ten Million Dollars ($10,000,000) after giving effect to the initial Loans made or to be made hereunder and the payment of all fees and expenses payable upon the consummation of the initial transactions contemplated by this Agreement; (j) Lender shall have received the negative pledge by Borrower of the issued and outstanding capital stock of GCRC, as additional collateral security for the Obligations, through the deposit by Borrower of such stock into an escrow arrangement for the sole benefit of Lender, in form and substance, and with an escrow holder, acceptable to Lender and its counsel; (k) Lender shall have received, in form and substance satisfactory to Lender and its counsel, an irrevocable payment instruction from Borrower and GCRC to Bankers Trust Company, as Trustee under the Pooling Agreement, directing that all amounts otherwise payable to Borrower or GCRC under the Pooling Agreement shall be paid to Lender, and such payment instruction shall have been acknowledged and agreed to by Bankers Trust Company; (l) Lender shall have received, in form and substance satisfactory to Lender and its counsel, the assignment of all of Borrower's rights in registered patents, trademarks, service marks and copyrights, as Collateral hereunder, on Lender's standard forms of Collateral Assignments; (m) Lender shall have received, each in form and substance satisfactory to Lender and its counsel, copies of all agreements in connection with the Securitization Facility, including the Receivables Purchase Agreement and the Pooling Agreement; (n) Lender shall have received, in form and substance satisfactory to Lender and its counsel, copies of all of Borrower's agreements with financial institutions regarding the collection of receipts from purchases made by customers on credit or charge cards other than Borrower's private label credit card; (o) each of the depository banks used by Borrower's retail store locations for the deposit of receipts from the sale of merchandise or for the deposit of other proceeds of Collateral and other property which is security for the Obligations shall have been notified of Lender's security interested therein and shall have been irrevocably authorized and directed to send all funds on deposit with such banks only to the Blocked Account or as Lender otherwise directs; (p) Lender shall have received, in form and substance satisfactory to Lender, an executed copy of a Blocked Account Agreement, pursuant to Section 6.3(ii) hereof, among Lender, Borrower and Wells Fargo Bank, N.A.; and (q) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender; 4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations. Each of the following is an additional condition precedent to Lender making Loans and/or providing Letter of Credit Accommodations to Borrower, including the initial Loans and Letter of Credit Accommodations and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Revolving Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; and (c) the Securitization Facility shall not have expired or been terminated, and no default or event of default with respect to the Securitization Facility, or under any agreements between Borrower and any other Person evidencing or relating to the Securitization Facility shall have occurred and be continuing. SECTION 5. GRANT OF SECURITY INTEREST To secure payment and performance of all Obligations, Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): 5.1 Accounts, Credit Card Receivables and other indebtedness owed to the Borrower; provided, however, that Lender's security interest in Accounts or other indebtedness owed to the Borrower arising out of Borrower's private label credit card program, and the collections and proceeds thereof in whatever form (including any related "instruments," "documents" and "chattel paper," each as defined in the California Uniform Commercial Code), all deposit accounts associated therewith, and all books and records related thereto, shall automatically terminate (but not Lender's security interest in the proceeds thereof consisting of any amounts paid to Borrower by GCRC pursuant to the Receivables Purchase Agreement) upon the sale of any such Accounts or other indebtedness owed to the Borrower by the Borrower to GCRC; 5.2 all present and future contract rights, general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment, real estate and fixtures), chattel paper, documents, instruments, securities, letters of credit, bankers' acceptances and guaranties; 5.3 all present and future monies, securities, credit balances, deposits, deposit accounts and other property of Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts, Credit Card Receivables, and other Collateral, including, without limitation, (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts, Credit Card Receivables, or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.4 Inventory; 5.5 Equipment; 5.6 Records; and 5.7 All products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. SECTION 6. COLLECTION AND ADMINISTRATION 6.1 Borrower's Loan Account. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans, all Letter of Credit Accommodations and all other Obligations and the Collateral, (b) all payments made by or on behalf of Borrower and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 Statements. Lender shall render to Borrower each month a statement setting forth the balance in the Borrower's loan account(s) maintained by Lender for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrower and conclusively binding upon Borrower as an account stated except to the extent that Lender receives a written notice from Borrower of any specific exceptions of Borrower thereto within sixty (60) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrower a written statement as provided above, the balance in Borrower's loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrower. 6.3 Collection of Accounts. (a) Borrower shall establish and maintain, at its expense, deposit account arrangements and merchant payment arrangements with the banks set forth on Schedule 6.3 and after prior written notice to Lender, such other banks as Borrower may hereafter select as are acceptable to Lender. The banks set forth on Schedule 6.3 constitute all of the banks with whom Borrower has deposit account arrangements and merchant payment arrangements as of the date hereof and identifies each of the deposit accounts at such banks to a retail store location of Borrower or otherwise describes the nature of the use of such deposit account by Borrower. (i) Borrower shall deposit all proceeds from sales of Inventory in every form (including, without limitation, cash, checks, credit card sales drafts, credit card sales or charge slip or receipts and other forms of daily store receipts, but excluding GCRC Receivables, and the collections and proceeds thereof in whatever form upon the sale of such Accounts by Borrower to GCRC, but including any amounts paid to Borrower by GCRC pursuant to the Receivables Purchase Agreement, from each retail store location of Borrower, and all other proceeds of Collateral, on each business day into the deposit accounts of Borrower used solely for such purpose and identified to each retail store location as set forth on Schedule 6.3. Borrower shall irrevocably authorize and direct in writing, in form and substance satisfactory to Lender, each of the banks into which proceeds from sales of Inventory from each retail store location of Borrower and any and all other proceeds of Collateral are at any time deposited as provided above to send by wire transfer on a daily basis all funds deposited in such account, and shall irrevocably authorize and direct in writing its account debtors, Credit Card Issuers and Credit Card Processors to directly remit payments on its Accounts, Credit Card Receivables and all other payments constituting proceeds of Inventory to the Blocked Accounts described in Section 6.3(a)(ii) below. Borrower shall irrevocably direct and shall also cause GCRC to irrevocably direct, in writing, Bankers Trust Company to directly remit to the Blocked Account, by same day wire transfer, any amounts payable to Borrower or GCRC under the Pooling Agreement. Such authorizations and directions shall not be rescinded, revoked or modified without the prior written consent of Lender. (ii) Borrower shall establish and maintain, at its expense, pursuant to an agreement described in the following sentence, a blocked account with such bank or banks as are acceptable to Lender (each a "Blocked Account" and collectively the "Blocked Accounts"). Each bank at which a Blocked Account is established shall enter into an agreement, in form and substance satisfactory to Lender, providing (unless otherwise agreed to by Lender) that all items received or deposited in such Blocked Account are the Collateral of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein, and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into such Blocked Account to such bank account of Lender as Lender may from time to time designate for such purpose (the "Payment Account"). Borrower agrees that all amounts deposited in the Blocked Account(s) or other funds received and collected by Lender, whether as proceeds of Inventory, the collection of Accounts or other Collateral or otherwise shall be the Collateral of Lender. (b) For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations (i) immediately upon receipt of immediately available funds by Lender in the Payment Account if such funds are received by Lender prior to 10 a.m. (Los Angeles time), or (ii) one (1) business day following the date of receipt of immediately available funds by Lender in the Payment Account if such funds are received by Lender on or after 10 a.m. (Los Angeles time), or (iii) three (3) business days following the date of receipt of funds that are not immediately available to Lender in the Payment Account, as applicable. For purposes of calculating the amount of the Revolving Loans available to Borrower such payments will be applied (conditional upon final collection) to the Obligations on the business day of receipt by Lender in the Payment Account, if such payments are received within sufficient time (in accordance with Lender's usual and customary practices as in effect from time to time) to credit Borrower's loan account on such day, and if not, then on the next business day. (c) Borrower and all of its affiliates, subsidiaries, partners, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any cash, checks, credit card sales drafts, credit card sales or charge slips or receipts, notes, drafts and all forms of daily store receipts or any other payment relating to and/or proceeds from sales of Inventory or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender, [with the exception of Accounts arising out of Borrower's private label credit card program, including the collections and proceeds thereof in whatever form, if and when such Accounts are sold by Borrower to GCRC, but including any amounts paid to Borrower by GCRC pursuant to the Receivables Purchase Agreement]. In no event shall any such monies, checks, credit card sales drafts, credit card sales or charge slips or receipts, notes, drafts or other payments be commingled with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person, unless such payment or indemnification obligation of Lender was a result of Lender's gross negligence or wilful misconduct. The obligation of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4 Payments. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrower or for the account of Borrower (including, without limitation, the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrower. Borrower shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 6.5 Authorization to Make Loans. Lender is authorized to make the Loans and provide Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be an officer of Borrower or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans or Letter of Credit Accommodations hereunder shall specify the date on which the requested advance is to be made or Letter of Credit Accommodations established (which day shall be a business day) and the amount of the requested Loan. Requests received after 10:30 a.m. (Los Angeles time) on any day shall be deemed to have been made as of the opening of business on the immediately following business day. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrower when deposited to the credit of Borrower or otherwise disbursed or established in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 6.6 Use of Proceeds. Borrower shall use the initial proceeds of the Loans provided by Lender to Borrower hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrower to Lender on or about the date hereof and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrower pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System, as amended. SECTION 7. COLLATERAL REPORTING AND COVENANTS 7.1 Collateral Reporting. Borrower shall provide Lender with the following documents in a form satisfactory to Lender: (a) on Tuesday of each week for the immediately preceding week ending on the close of business on Saturday of that week, or more frequently as Lender may request, (i) a schedule of Inventory at Borrower's retail stores and Distribution Center, setting forth the aggregate cost and Retail Sales Price of such Inventory (including markdowns from the original sales price or ticketed sales price with respect thereto); (ii) a report of the amount of Eligible Domestic In-Transit Inventory, and such additional details Lender may reasonably require, (iii) a summary of Borrower's deposits into the Blocked Account, and (iv) a summary of Borrower's sales of Concession Inventory; (b) once each fiscal month, on or before the twentieth (20th) Business Day of each such fiscal month for the immediately preceding fiscal month or more frequently as Lender may request, (i) a summary of Borrower's sales of Concession Inventory, and evidence, in such manner as Lender shall reasonably request, demonstrating that Borrower has remitted the net sales revenue to concessionaires for the immediately preceding fiscal month and that no amounts are due concessionaires for any period with the exception of sales of Concession Inventory made during the current fiscal month; (ii) the Monthly Servicing Report prepared by Borrower, as Servicer, under the Pooling Agreement, (iii) the aggregate amount of all sales of Inventory for all Borrower's retail stores, and (iv) a schedule of Inventory at Borrower's retail stores and Distribution Center (by division) setting forth the aggregate cost and Retail Sales Price of such Inventory (including markdowns from the original sales price or ticketed sales price with respect thereto), (c) once each fiscal quarter, on or before the twentieth (20th) Business Day of such fiscal quarter for the immediately preceding fiscal quarter or more frequently as Lender may request, (i) a merchandise accounts payable trial balance and a summary of lease payables and other payables, (ii) a schedule of Accounts, Credit Card Receivables, GCRC Receivables, and other indebtedness owed to Borrower, (iii) a report of Inventory to be sold by each department (the Gross Margin Report by department), (iv) a schedule of Inventory located at the Distribution Facility and Eligible Domestic In-Transit Inventory, and (v) a certificate from an authorized officer of Borrower representing that Borrower has made payment of sales and use taxes during such quarter, or at Lender's request, other evidence of such payment, and (d) such other reports as to the Collateral and other property which is security for the Obligations as Lender shall reasonably request from time to time. If any of Borrower's or any other Obligor's records or reports of the Collateral or other property which is security for the Obligations are prepared or maintained by an accounting service, contractor, shipper or agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 Accounts Covenants. (a) So long as no Event of Default exists or has occurred and is continuing, Borrower shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances other than with respect to GCRC Receivables. (b) In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (c) With respect to each Account, Credit Card Receivable and GCRC Receivable: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments made pursuant to the terms of this Agreement, (iii) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement or as provided herein, (iv) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations, all documentation will be legally enforceable in accordance with its terms, and (v) there shall be compliance with the provisions of Section 4.1(f) hereof as to each Credit Card Issuer obligated on any Credit Card Receivables. (d) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account, Credit Card Receivable, or other Collateral or property which is security for the Obligations, by mail, telephone facsimile transmission or otherwise. (e) Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrower, all chattel paper and instruments which Borrower now owns or may at any time acquire immediately upon Borrower's receipt thereof, except as Lender may otherwise agree. (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts, Credit Card Receivables and other obligations included in the Collateral have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors to make payment of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts, Credit Card Receivables or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts, Credit Card Receivables or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts, Credit Card Receivables and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrower shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Borrower's cost therefor, the Retail Sales Price thereof (including markdowns with respect thereto) and daily withdrawals therefrom and additions thereto; (b) Borrower shall conduct a complete physical count of the Inventory at a minimum of once every twelve (12) months but at any time as Lender may request upon the occurrence and during the continuance an Event of Default, and promptly following such physical count shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) Borrower shall not remove any Inventory from the locations set forth or permitted herein in excess of Two Hundred Fifty Thousand Dollars ($250,000) during any twelve month period, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request upon the occurrence and during the continuance of an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender by Gordon Brothers Partners, Inc. or by any other appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely (with the understanding that Lender may revise the definition of "Eligible Inventory" hereunder or establish Availability Reserves as Lender may deem advisable in its sole discretion based upon the results of such updated appraisals); (e) Borrower shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) Borrower shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate Borrower to repurchase such Inventory with the exception of Inventory sold in the ordinary course of Borrower's business subject to Borrower's normal and customary return policy; (h) Borrower shall keep the Inventory in good and marketable condition; and (i) Borrower shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval except as set forth on Schedule 7.3(i) hereto. 7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's request, Borrower shall, at its expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports as to the Equipment in form, scope and methodology acceptable to Lender; (b) Borrower shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrower's business and not for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrower or to move Equipment directly from one such location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrower shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) Borrower assumes all responsibility and liability arising from the use of the Equipment. 7.5 Power of Attorney. Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a) at any time an Event of Default exists (i) demand payment on Accounts or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts, Credit Card Receivables or other obligations included in the Collateral by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Account, Credit Card Receivables or other proceeds of Inventory or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, Credit Card Receivables or other obligations included in the Collateral, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time, subject to the terms of the agreement(s) relating to the Blocked Account(s), to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or Credit Card Receivables or any goods pertaining thereto or any other Collateral, (v) sign Borrower's name on any verification of Accounts or Credit Card Receivables and notices thereof to account debtors and (vi) execute in Borrower's name and file any UCC financing statements or amendments thereto. Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or wilful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction. 7.6 Right to Cure. Lender may, at its option, (a) cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's reasonable judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrower's account therefor, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.7 Access to Premises. From time to time as requested by Lender, at the cost and expense of Borrower, (a) Lender or its designee shall have access to Borrower's premises during normal business hours and after notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including, without limitation, the Records, and (b) Borrower shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans and the providing of Letter of Credit Accommodations by Lender to Borrower: 8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on Borrower's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all within Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which Borrower is a party or by which Borrower or its property are bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. Borrower does not have any subsidiaries except as set forth on the Information Certificate. 8.2 Financial Statements; No Material Adverse Change. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operations of Borrower as at the dates and for the periods set forth therein, except that unaudited financial statements do not have all GAAP required footnotes and are subject to accruals and other year-end adjustments. Except as disclosed in any interim financial statements furnished by Borrower to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabi- lities, properties and condition, financial or otherwise, of Borrower, since the date of the most recent audited financial statements furnished by Borrower to Lender prior to the date of this Agreement. 8.3 Chief Executive Office; Collateral Locations. The chief executive office of Borrower and Borrower's Records concerning Accounts are located only at the address set forth below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrower to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Borrower and sets forth the owners and/or operators thereof. 8.4 Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to the liens indicated on Schedule 8.4 hereto and the other liens permitted under Section 9.8 hereof. Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 8.4 hereto or permitted under Section 9.8 hereof. 8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 Litigation. Except as set forth on the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Borrower's knowledge threatened, against or affecting Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrower's knowledge threatened, against Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrower would result in any material adverse change in the assets, business or prospects of Borrower or would impair the ability of Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.7 Compliance with Other Agreements and Applicable Laws. Borrower is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 8.8 Environmental Compliance. (a) Except as set forth on Schedule 8.8 hereto, Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrower complies in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.8 hereto, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower has transported, stored or disposed of any Hazardous Materials. (c) Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 8.9 Employee Benefits. (a) Borrower has not engaged in any transaction in connection with which Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.9(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee pension benefit plan, including any penalty or tax described in Section 8.9(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (d) The current value of all vested accrued benefits under all employee pension benefit plans maintained by Borrower that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.9(a) hereof and any accumulated funding deficiency described in Section 8.9(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrower nor any of its ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.10 Accuracy and Completeness of Information. All information furnished by or on behalf of Borrower in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including, without limitation, all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of Borrower, which has not been fully and accurately disclosed to Lender in writing. 8.11 Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 9.1 Maintenance of Existence. Borrower shall at all times preserve, renew and keep in full force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, trade names, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and Borrower shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of Borrower as soon as it is available. 9.2 New Collateral Locations. Borrower may open any new location within the continental United States provided Borrower (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location, and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including, without limitation, UCC financing statements and, if Borrower leases such new location, provides a favorable landlord waiver or subordination, or, in the alternative, Lender may apply an Availability Reserve in an amount equal to two (2) months gross rent in a manner consistent with the Availability Reserve established to cover tent as defined in Section 1.5 hereof. 9.3 Compliance with Laws, Regulations, Etc. (a) Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including, without limitation, the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, all of the Environmental Laws. (b) Borrower shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall report to Lender on such response. (c) Borrower shall give both oral and written notice to Lender immediately upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower transported, stored or disposed of any Hazardous Materials. (d) Borrower shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of Borrower and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrower agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrower such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5 Insurance. Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrower shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrower fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrower. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrower in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrower shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrower shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Borrower or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 Financial Statements and Other Information. (a) Borrower shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrower and its subsidiaries (if any) in accordance with GAAP and Borrower shall furnish or cause to be furnished to Lender: (i) within twenty (20) days after the end of each fiscal month, monthly unaudited consolidated financial statements, (including a balance sheet, statement of income or loss and statement of stockholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its subsidiaries as of and through such fiscal month, (ii) within twenty (20) days after the end of each fiscal quarter, a store-by-store profitability report for each of Borrower's retail stores, (iii) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements for the Borrower and within one hundred and twenty (120) days after the end of each fiscal year, audited financial statements for GCRC, (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of stockholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of operations of Borrower and its subsidiaries as of the end of and for such fiscal year, together with the opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrower and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrower and its subsidiaries as of the end of and for the fiscal year then ended. (b) Borrower shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all financial reports which Borrower sends to its stockholders generally and copies of all reports and registration statements which Borrower files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information in respect of the Collateral and the business of Borrower, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrower to any court or other government agency or to any participant or assignee or prospective participant or assignee. Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrower's expense, copies of the financial statements of Borrower and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and to disclose to Lender such information as they may have regarding the business of Borrower. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrower to Lender in writing. (e) Borrower shall promptly, after sending such reports to Bankers Trust Company, furnish or cause to be furnished to Lender copies of the Monthly Servicer's Certificate and Distributions Date Sheet, the Annual Report and such other monthly, quarterly or annual reports provided to Bankers Trust Company by the Borrower as Servicer under the Pooling Agreements; and, if requested by Lender, Borrower shall promptly provide Lender copies of the Daily Servicer's Report prepared by it pursuant to the Pooling Agreement. 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business, (ii) the sale or other disposition of Equipment in the event of a store closure, (iii) the sale of Accounts arising out of Borrower's private label credit card program to GCRC in accordance with the procedures set forth in the documentation evidencing the Securitization Facility, and (iv) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of Borrower so long as (A) if an Event of Default exists or has occurred and is continuing, any net proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of Two Hundred Fifty Thousand Dollars ($250,000) for all such Equipment disposed of in any fiscal year of Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. 9.8 Encumbrances. Borrower shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including, without limitation, the Collateral, except: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) security deposits in the ordinary course of business; (d) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrower's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer (subject to applicable deductibles) or being contested in good faith by appropriate proceedings diligently pursued and available to Borrower, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (e) liens in favor of Credit Card Processors with respect to Credit Card Receivables processed by them; (f) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of Borrower as presently conducted thereon or materially impair the value of the real property which may be subject thereto; (g) purchase money security interests in Equipment (including operating and capital leases) and purchase money mortgages on real estate so long as such security interests and mortgages do not apply to any property of Borrower other than the Equipment or real estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; (h) the security interests and liens set forth on Schedule 8.4 hereto; and (i) liens granted pursuant to the Securitization Facility. 9.9 Indebtedness. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or indebtedness, except: (a) the Obligations; (b) trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) with respect to the Securitization Facility; (d) costs and expenses of opening new stores in compliance with Section 9.2; and (e) obligations or indebtedness set forth on the Information Certificate; provided, that, (i) Borrower may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) except as otherwise permitted under this Agreement, redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall furnish to Lender all notices or demands in connection with such indebtedness either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.10 Revolving Loans, Investments, Guarantees, Etc. Borrower shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing in an amount, whether contingent or non-contingent, in excess of One Hundred Fifty Thousand Dollars ($150,000) during any twelve month period, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in: (i) short-term direct obligations of the United States Government, (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of the Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1; provided, that, as to any of the foregoing, unless waived in writing by Lender, Borrower shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; and (c) the guarantees set forth in the Information Certificate. 9.11 Dividends and Redemptions. Borrower shall not, without the prior written consent of Lender, directly or indirectly, declare or pay any dividends on account of any shares of any class of capital stock of Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing. 9.12 Transactions with Affiliates. Borrower shall not enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person. 9.13 Compliance with ERISA. Borrower shall not with respect to any "employee pension benefit plans" maintained by Borrower or any of its ERISA Affiliates: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such employee pension benefit plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation or (vi) incur any withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.13, the term "employee pension benefit plans," "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. 9.14 Adjusted Net Worth. Borrower shall, at all times, maintain Adjusted Worth of not less than Seventy Million Dollars ($70,000,000); provided, however, Lender will only test for Borrower's compliance with this financial covenant on a monthly basis and then only in the event that Borrower's Excess Availability is less than Five Million Dollars ($5,000,000). 9.15 Costs and Expenses. Borrower shall pay to Lender, and, to the extent covered, in a manner consistent with Lender's proposed letter to Borrower of October 31, 1996, on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including, but not limited to: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) costs and expenses and fees for title insurance and other insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) costs and expenses of preserving and protecting the Collateral; (f) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including, without limitation, preparations for and consultations concerning any such matters); (g) all out-of-pocket expenses and costs incurred by Lender's examiners in the conduct of their periodic field examinations of the Collateral and Borrower's operations; and (h) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 9.16 Securitization Facility. So long as there are any Loans or Letter of Credit Accommodations outstanding, Borrower, as the sole shareholder of GCRC shall cause GCRC, subject to customary corporate procedures, to cause GCRC to pay (including the purchase of receivables) or distribute to Borrower, by payment directly to the Blocked Account, all amounts available (after application of all reserves required or anticipated under the Securitization Facility) for the purchase of Receivables under and as defined in the Receivables Purchase Agreement, including amounts available due to the collection of the Receivables and GCRC's utilization of the maximum financing under the Securitization Facility. 9.17 Amendment of Securitization Facility. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender outstanding, Borrower shall not unless otherwise consented to by Lender in writing, amend or consent to any amendment of or modification to any of the terms of the Securitization Facility or the agreements related thereto. 9.18 Renewal of Securitization Facility. Within ninety (90) days prior to any expiration of the Securitization Facility or prior to any repayment of principal under the Fixed Base Certificates, Borrower shall provide Lender with satisfactory evidence that either (i) the Securitization Facility has been renewed or (ii) GCRC has obtained a replacement facility on terms that are no less favorable to GCRC or Lender and on terms otherwise acceptable to Lender, with a replacement lender acceptable to Lender, and subject to intercreditor arrangements acceptable to Lender. 9.19 No Defaults. No default, event of default or Early Amortization Event (as defined in the Pooling Agreement) has occurred under or with respect to the Securitization Facility or any of the Borrower's or GCRC's agreements related thereto. 9.20 Use of Private Label Card. At Lender's direction, Borrower shall cease making any sales of merchandise to its customers that purchase such merchandise with Borrower's private label credit card(s) (a) upon the occurrence of an Event of Default that is continuing or (b) if the percentage of the face amount of GCRC Receivables which is advanced or paid to Borrower by GCRC pursuant to the Receivables Purchase Agreement is at any time less than eighty-four percent (84%). 9.21 GCRC Receivables Collections. Unless otherwise provided in the Pooling Agreement or the Receivables Purchase Agreement, Borrower shall cause GCRC to promptly remit to Borrower all amounts, however denominated, received by GCRC from the trustee for the Gottschalks Credit Card Master Trust. 9.22 Purchase Price for GCRC Receivables. Borrower shall cause GCRC to purchase GCRC Receivables in accordance with the terms of the Receivables Purchase Agreement, including, without limitation, Section 2.01(e) thereof. To the extent that the consideration for the purchase of GCRC Receivables consists of a capital contribution of the type described in Section 2.01(e)(ii) of the Receivables Purchase Agreement, Borrower shall, as soon as practicable thereafter, cause GCRC to distribute cash in redemption of the capital contribution to Borrower as shareholder of GCRC in the maximum amount permitted by law. 9.23 Further Assurances. At the request of Lender at any time and from time to time, Borrower shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrower representing on behalf of the Borrower that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans or provide any further Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default": (a) any Borrower shall fail (i) to pay when due any of the Obligations within two (2) Business Days of the due date thereof or (ii) to observe or perform any of the other terms, covenants, conditions or provisions contained in this Agreement or the other Financing Agreements other than as described in Section 10.1(a)(i) above and such failure shall continue for fifteen (15) consecutive days (with the exception of the failure to observe or perform any covenants or provisions with respect to Collateral under this Agreement or any of the other Financing Agreements including, but not limited to, Section 7.1 hereof for which the time period shall be five (5) days); provided, that, such fifteen (15) day period (or five (5) day period as the case may be) shall not apply in the case of: (A) any failure to observe any such term, covenant, condition or provision which is not capable of being cured at all or within such fifteen (15) day period (or five (5) day period as the case may be) or which has been the subject of a prior failure within a six (6) month period or (B) an intentional breach by Borrower of any such term, covenant, condition or provision; (b) any representation, warranty or statement of fact made by Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender; (d) any judgment for the payment of money is rendered against Borrower in excess of Two Hundred Fifty Thousand Dollars ($250,000) in any one case or in excess of Five Hundred Thousand Dollars ($500,000) in the aggregate (in each case in excess of any insurance coverage which Lender has determined in its reasonable credit judgment adequately and fully covers any such liability) and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any material judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligor or any of their assets; (e) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or Borrower or any Obligor, which is a partnership, limited liability company, or corporation, dissolves or suspends or discontinues doing business; (f) Borrower or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by Borrower or for all or any part of its property; or (i) any default by Borrower or any Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000), which default continues for more than the applicable cure period, if any, with respect thereto, or any default by Borrower under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (j) any change in the controlling ownership of Borrower; (k) the indictment of Borrower or any Obligor under any criminal statute, or the commencement of criminal or civil proceedings by a governmental entity against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower or such Obligor; (l) there shall be a material adverse change in the business, assets or prospects of Borrower or any Obligor after the date hereof; (m) any event of default shall occur under, or Borrower or GCRC shall default in the performance or observance of any covenant, condition, term, provision, warranty, representation or agreement evidencing the Securitization Facility, or under the notes and agreements evidencing or related to the Securitization Facility, and such default shall continue beyond any applicable grace or cure period provided therefor; (n) an Early Amortization Event (as defined in the Pooling Agreement) shall have occurred; (o) the Securitization Facility is terminated for any reason, or Borrower fails to renew the Securitization Facility or provide Lender, within ninety (90) days prior to the scheduled expiration of the same; with satisfactory evidence that Borrower has obtained a replacement facility (i) on terms that are no less favorable to Borrower or Lender and on terms otherwise acceptable to Lender, (ii) with a replacement lender acceptable to Lender, and (iii) that shall be subject to intercreditor arrangements acceptable to Lender; or (p) there shall be an event of default under any of the other Financing Agreements. 10.2 Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrower of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against Borrower to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, provided that no action taken by Lender shall constitute a breach of the peace, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, provided that no action taken by Lender shall constitute a breach of the peace, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or arranging Letter of Credit Accommodations or reduce the lending formulas or amounts of Loans and Letter of Credit Accommodations available to Borrower and/or (ii) terminate any provision of this Agreement providing for any future Loans or Letter of Credit Accommodations to be made by Lender to Borrower. SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). (b) Borrower and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the state courts of the County of Los Angeles, State of California and of the United States District Court for the Central District of California and waive any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrower shall appear in answer to such process, failing which Borrower shall be deemed in default and judgment may be entered by Lender against Borrower for the amount of the claim and other relief requested. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether in tort, contract, equity or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 11.2 Waiver of Notices. Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Lender may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 11.3 Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4 Waiver of Counterclaims. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 Indemnification. Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the fees and expenses of counsel, except that nothing herein shall be considered to obligate Borrower to indemnify Lender for gross negligence or wilful misconduct on the part of Lender and its directors, agents, employees and counsel. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 12.1 Term. (a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on March 31, 2000 (the "Renewal Date"), and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Unless sooner terminated, all other Financing Agreements shall be terminated simultaneously with this Agreement. Lender or Borrower may terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving to the other party at least sixty (60) days prior written notice. Borrower may terminate this Agreement prior to the end of the then current term, including any renewal term, for any reason upon thirty (30) days prior written notice to Lender, and in such case Borrower agrees to pay Lender the applicable early termination fee provided for in Section 12.1(c) hereof. Regardless of the timing of termination, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective date of termination or non-renewal of the Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrower for such purpose. Interest shall be due until and including the next business day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 10:30 a.m., Los Angeles time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) Except as otherwise provided in this Agreement, if for any reason this Agreement is terminated prior to the end of the then current term or a renewal term, if any, of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: Amount Period (i) 2% of the Maximum Credit from the date of this Agreement to and including the day preceding the first anniversary of this Agreement; (ii) 1% of the Maximum Credit from the first anniversary of this Agreement to and including the day preceding the second anniversary of this Agreement; (iii) 0.5% of the Maximum Credit from the second anniversary of this Agreement to and including the Renewal Date; and (iv) 0.25% of the Maximum Credit if the Renewal Date is extended as provided in Section 12.1(a), at any time during a renewal term, if any. Notwithstanding the foregoing, in the event that all Obligations under this Agreement are refinanced and this Agreement terminated in conjunction with either (i) a secondary offering of the capital stock of the Borrower, or (ii) the sale of in excess of fifty percent (50%) of the shares of the issued and outstanding capital stock of the Borrower, or (iii) the sale by the Company of in excess of fifty percent (50%) of its assets to an unrelated third party, then the above-referenced applicable termination fee shall be reduced by fifty percent (50%). Additionally, in the event, at any time after the first anniversary of this Agreement, all Obligations are fully repaid through the refinancing thereof by CoreStates Bank, N.A., the then applicable termination fee shall be waived by Lender. Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. Notwithstanding the foregoing, in the event that Lender, either establishes additional Availability Reserves, or revises the criteria for Eligible Inventory, or reduces the lending formulas under Section 2.1(a)(i), other than based upon an updated Inventory appraisal, or specific events adversely affecting the Collateral or Lender's security interest therein, and the effect of any such action by Lender is to reduce Borrower's borrowing availability by greater than ten percent (10%) under Section 2.1(a), provided that no Event of Default shall have occurred and be continuing hereunder other than as a result of any such reduction in availability, Borrower may, at any time during a period ninety (90) days following the date of such action taken by Lender, fully refinance the Obligations hereunder with another lender willing to provide Borrower with Inventory financing at lending formulas equal to or better than those in effect hereunder immediately prior to the reduction and on other terms, conditions and funding levels substantially similar to or better than those provided by Lender, and Borrower fully repays the Obligations by the end of such ninety (90) day period and terminates this Agreement as provided in Section 12.1(a) hereof; then, in such event, Borrower shall have no obligation to pay the early termination fee otherwise provided for in this Section 12.1(c). 12.2 Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrower at its chief executive office set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.3 Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.4 Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrower and their respective successors and assigns, except that Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrower, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Loans, the Letter of Credit Accommodations or any other interest herein to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. 12.5 Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. 12.6 Publicity. Borrower consents to Lender publishing a tombstone or similar advertising material relating to the financing transaction contemplated by this Agreement. IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly executed as of the day and year first above written. LENDER CONGRESS FINANCIAL CORPORATION (WESTERN) \s\ Donald A. McLeod By: Donald A. McLeod Title: Senior Vice President Address: 225 South Lake Avenue Suite 1000 Pasadena, California 91101 BORROWER GOTTSCHALKS INC. \s\ Alan A. Weinstein By: Alan A. Weinstein Title: Senior Vice President and Chief Financial Officer Chief Executive Office: 7 River Park Place East Fresno, California 93720 EX-10.32 3 AGREEMENT This Agreement (Agreement) is made this 14th day of March, 1997, by and between Gottschalks Inc., a Delaware Corporation (Company) and James R. Famalette an individual (Employee). 1. EMPLOYMENT Company agrees to hire Employee as President and C.O.O. The initial term of this employment shall be for two years with automatic one-year extensions thereafter. Company may terminate upon the last day of the initial term or thereafter, provided one year notice is given the other party in writing. Employee shall also be a member of the Board of Directors of the Company during his term of employment. The initial term shall begin upon Employee reporting to Corporate Headquarters in Fresno California, ready to assume his duties. Should Employee fail to report by April 15, 1997, this Agreement for employment shall become null and void. 2. COMPENSATION As compensation for performance in the position of President and C.O.O. and as Director, Employee's base compensation for year one shall be three hundred twenty five thousand dollars ($325,000), payable bi-weekly. Base compensation for year two (2) shall be three hundred and fifty thousand dollars ($350,000), payable bi-weekly. Employee shall receive as bonus compensation, one hundred thousand dollars ($100,000) in May 1998. For purposes of this Agreement, "base compensation" means Employee's annual base salary only, and excludes all other income heretofore received by Employee, such as, but not limited to, bonuses, incentive compensation, fringe benefits, commissions, overtime, retainers, fees under contracts, income arising from the exercise of stock options or expense allowances granted by Company. 3. STOCK OPTION Employee shall be granted the option to purchase 20,000 shares of common stock in the Company on the date of employment, under the Company's stock option plan, whereby one quarter of the option becomes vested each anniversary of Employee's employment date. The option price shall be the market price effective on the date of employment. 4. BONUS PLAN Employee shall be eligible to participate in Company's Bonus Plan, which is effective for 1997. This participation is separate and apart from the $100,000 bonus discussed above in Article 2, Compensation. 5. CAR ALLOWANCE Employee shall receive a monthly car allowance of $1,000, but in no event shall such amount paid as a car allowance exceed that which is allowed as a tax deduction by the Company for a car allowance. Should an excise tax or other penalty be imposed upon the Company due to the amount of the car allowance, then Company shall be allowed to deduct a portion of the amount of the car allowance paid, to avoid such tax or penalty. 6. TEMPORARY EXPENSES & CLOSING COSTS Employee shall be entitled to receive up to six months temporary housing allowance. Upon the close of escrow on a permanent residence, the temporary housing allowance shall terminate. However all closing costs on the purchase of the permanent residence shall be paid by Company. Employee shall be entitled to one round trip per month to Hawaii during the temporary time period. 7. MOVING EXPENSES Employee shall receive reimbursement for all properly documented moving expenses, including the transportation by boat of two vehicles from Hawaii to Fresno, CA. 8. OTHER BENEFITS: Employee shall be entitled to three weeks vacation during his first year of employment, and each year thereafter, until he has completed five years of employment, at which time he shall be entitled to four weeks yearly vacation. He shall be eligible to participate in the Company's 401K plan beginning upon his first day of employment. He shall also be eligible to participate in the Company's health insurance benefits, life insurance, and disability insurance beginning upon his date of employment. All other company benefits shall be made available to Employee beginning upon his first day of employment. 9. TERMINATION WITHOUT COMPENSATION Notwithstanding anything to the contrary contained in this Agreement, Employee shall not be entitled to continued compensation in any form if employee terminates his employment from the Company, including without limitation, (i) through retirement, disability or death of Employee; (ii) Company sells all or part of its business (or otherwise merges, divides, consolidates or reorganizes), and Employee has the opportunity to continue employment with the buyer (or with one of the resulting entities in the event of a merger, division, consolidation or reorganization), at or above the employee's base compensation, regardless of whether the other terms and conditions of Employee's employment after such sale, division, consolidation or reorganization are the same or different from the terms and conditions of Employee's employment with Company; or (iii) Employee is terminated for "cause", which includes, without limitation , a good faith determination by Company that Employee (1) has committed a material breach of his duties and responsibilities, (2) refused to perform required duties and responsibilities or performed them incompetently, (3) breached or violated any fiduciary duty owed to Company or (4) is or has been personally dishonest, or has willfully or negligently violated any law, rule or regulation or has been convicted of a felony or misdemeanor (other than minor traffic violations and similar offenses). 10. INTERPRETATION, ASSIGNMENT, INTEGRATION, AMENDMENT This Agreement shall be governed by the laws of the State of California. This Agreement may be amended only by a subsequent written agreement signed by Employee and an authorized representative of Company following approval by the Board of Directors of Company. This Agreement is personal to Employee and is not assignable by Employee. This Agreement shall inure to the benefit of and be binding upon Company and its successors and assigns and any such successor or assignee shall be deemed substituted for Company under the terms of this Agreement for all purposes. As used herein, "successor" and "assignee" shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the stock of Company or to which Company assigns this Agreement by operation of law or otherwise. This instrument constitutes and contains the entire agreement and understanding concerning the subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof. This is an integrated document. 11. ARBITRATION, ATTORNEY FEES Any dispute, controversy or claim arising out of or in connection with this Agreement or any other aspect of Employee's employment with Company, shall be resolved exclusively through binding arbitration to be held in Fresno County, California in accordance with California Civil Procedure Code ss 1282-1284.2. In the event either party institutes arbitration under this Agreement, the party prevailing in any such arbitration shall be entitled, in addition to all other relief, to reasonable attorneys' fees relating to such arbitration. The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, etc. IN WITNESS WHEREOF, Company has caused to be executed and delivered, and Employee has executed and delivered this Agreement as of the day and year first above set forth. GOTTSCHALKS INC. By:_\s\Joe Levy__________________________ Title: CHAIRMAN & CEO Employee:______________________ By: \s\James Famalette EX-23 4 INDEPENDENT AUDITORS' REPORT We consent to the incorporation by reference in Registration Statements No. 33-54783 and No. 33-54789 of Gottschalks Inc. on form S-8 of our report dated February 27, 1997 (March 13, 1997 as to Paragraph 4 of Note 3), appearing in this Annual Report on Form 10-K of Gottschalks Inc. for the year ended February 1, 1997. \s\ Deloitte & Touche LLP Fresno, California April 9, 1997 EX-27 5
5 THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T AND INCLUDES SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED FEBRUARY 1, 1997. 1,000 12-MOS FEB-01-1997 FEB-04-1996 FEB-01-1997 4,764 0 26,908 1,402 89,472 134,231 127,258 39,888 233,193 64,000 60,241 104 0 0 80,034 233,193 422,159 435,444 287,164 287,164 6,922 3,387 11,675 3,092 1,258 1,834 0 0 0 1,834 0.18 0.18
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