-----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, VPXH5Cm343Jb6Taj6LXRPkiBvPpzomb59VPtYMbYtd11WxWbiR6GL9VJipOwYf1g 9XYI/qKLax98KAf19DwBGw== 0000790414-98-000003.txt : 19980326 0000790414-98-000003.hdr.sgml : 19980326 ACCESSION NUMBER: 0000790414-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980325 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: SEC FILE NUMBER: 001-09100 FILM NUMBER: 98572388 BUSINESS ADDRESS: STREET 1: 7 RIVER PARK PL E STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 BUSINESS PHONE: 2094348000 MAIL ADDRESS: STREET 1: 7 RIVER PARK PLACE EAST STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For The Fiscal Year Ended January 31, 1998 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 February 28, 1998: Common Stock, $.01 par value: $57,736,429 On February 28, 1998 the Registrant had outstanding 10,478,415 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 25, 1998, 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-seven "Gottschalks" department stores and twenty-two "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 $448.2 million for the year ended January 31, 1998 (referred to herein as fiscal 1997), 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 moderate to better brand-name and private-label merchandise, including men's, women's, junior's and children's apparel; cosmetics and accessories; shoes and fine jewelry; home furnishings including china, housewares, electronics (in fourteen locations); and small electric appliances and other consumer goods. Village East specialty stores offer apparel for larger women. 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. Brand-name merchandise carried in the Company's home divisions include Sony, Mitsubishi, Lenox, Krups, Calphalon, Royal Velvet, KitchenAid and Samsonite. The Company's stores also carry private-label merchandise and a mix of higher and budget priced merchandise. 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 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 93 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-nine of its thirty-seven Gottschalks stores, opened twenty of its twenty-two 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, together with Gottschalks, the "Company"),which was formed in 1994 in connection with a receivables securitization program. (See Notes 2 and 3 to the Consolidated Financial Statements and 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. 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, and a mix of higher and budget priced merchandise. 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:
1997 1996 1995 1994 1993 Softlines: Cosmetics & Accessories.. 17.8% 17.5% 17.2% 16.6% 16.5% Women's Clothing.......... 16.8 15.9 15.5 16.1 16.5 Men's Clothing............ 14.0 14.4 14.3 13.9 13.6 Women's Dresses, Coats & Lingerie.............. 7.9 7.9 7.8 7.9 7.8 Shoes & Other Leased Departments............. 7.8 7.8 7.4 7.1 7.4 Junior's Clothing......... 5.2 5.5 6.0 6.3 7.0 Children's Clothing....... 5.3 5.3 4.9 4.9 4.9 Village East.............. 2.5 2.5 2.6 2.6 2.7 Total Softlines......... 77.3 76.8 75.7 75.4 76.4 Hardlines: Housewares & Stationery . 10.6 10.4 11.0 10.9 10.7 Domestics & Luggage....... 8.1 7.9 8.1 8.1 7.1 Electronics & Furniture... 4.0 4.9 5.2 5.6 5.8 Total Hardlines......... 22.7 23.2 24.3 24.6 23.6 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, 2 Vice President/Divisional Merchandise Managers, 4 Divisional Merchandise Managers, 51 buyers and 28 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. The Company's buying and merchandise planning and allocation divisions meet frequently with store management to ensure that the Company's merchandising programs are 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 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 seeks to continuously refine its merchandise mix with the goals of increasing sales of higher gross margin items, inventory turnover and sales per selling square foot, thus increasing its gross margins. The Company has also continued to reallocate selling floor space to higher profit margin items and narrow and focus its merchandise assortments. For example, the Company has continued to reduce the number of stores that carry electronics, a traditionally lower gross margin line of business, and reduce the number of stores with restaurants. The Company also 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 provides it with the ability to obtain better prices by purchasing a larger volume of merchandise along with all of the members of the organization. The Company also purchases its private-label merchandise through Frederick Atkins. In fiscal 1997, the Company purchased approximately 4.75% 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 1997 were Estee Lauder, Inc., Liz Claiborne, Inc., Levi Strauss & Co., Cosmair, Inc. (Lancome), Koret of California, Calvin Klein Cosmetics, Haggar Apparel, All-That-Jazz, Alfred Dunner and Bugle Boy Industries. Purchases from those vendors accounted for approximately 20.5% of the Company's total purchases in fiscal 1997. Management believes that alternative sources of supply are available for each category of merchandise it purchases. Sales 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 sales promotion 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. Management has continued to focus on enhancing its information systems in order to increase the effectiveness of its sales promotion strategy. The Company uses direct marketing techniques to access niche markets by generating specific lists of customers who may be most responsive to specific promotional mailings and sending mailings only to those specific credit card holders. 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. In early fiscal 1998, management expects to complete the installation of a new targeted marketing system through which the Company will be able to better target specific promotions to the Company's credit card holders. The new program will also enable the Company to better analyze the purchasing patterns of third party bank card users and, for the first time, enable the Company to direct targeted marketing activities at those customers. (See Part I, Item I, "Business--Private-Label Credit Card" and "Business--Information Systems and Technology.") In addition to targeted advertising efforts, the Company also uses a variety of other marketing formats as part of its sales promotion strategy. One of the Company's most significant recent sales promotion projects is the inception of "Emil's Market", named after the Company's founder, Emil Gottschalk, which is being introduced to thirty-four of the Company's stores in fiscal 1998. Emil's Market is a complete marketing strategy for the Company's housewares division and is intended to present houseware products in a specialty store format within the main department store. The Emil's Market marketing strategy includes a consistent theme with visual presentation, advertising and packaging, and a large portion of the funding for the project will be received from participating vendors. In early fiscal 1998, the Company also launched its new "KidZone" program, which offers additional discounts and special services to its members. The program is designed to offer additional value to customers with children, improve customer loyalty and increase sales in this potentially underdeveloped line of business. The Company offers selected merchandise and general corporate information on the World Wide Web at http://www.gottschalks.com, and in fiscal 1997, the Company linked its complete Bridal Registry service to its web site. The Company is also continuing efforts to develop its mail order service. In addition to the previously described marketing efforts, the Company also has a wide variety of credit-related programs aimed at improving sales, including the new "Gottschalks Rewards" program, launched in fiscal 1997. (See Part I, Item I, "Business--Private-Label Credit Card.") 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 moderate to better 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 stores are generally anchor tenants of regional shopping malls. Other anchor tenants in the malls generally complement the Company's goods with a mixture of competing and noncompeting merchandise, and serve to increase customer "foot traffic" within the mall. 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. As part of its growth strategy, the Company may also pursue selective strategic acquisitions. 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. During fiscal 1997, the Company launched a five-year store renovation program designed to update the appearance of certain of the Company's aging stores. The store renovation program is aimed at updating decor, improving in-store lighting, improving fixturing and wall merchandising and improving signage throughout those stores. 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: 1997 1996 1995 1994 1993 Gottschalks (1) 37 35 34 29 27 Village East 22 (2) 24 (2) 26 24 23 TOTAL 59 59 60 53 50 Gross store square footage (in thousands) 3,485 3,276 2,984 2,425 2,202
(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 both fiscal 1997 and 1996, reducing the total number of free-standing Village East stores open to twenty-two and twenty-four as of the end of fiscal 1997 and 1996, respectively. 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-nine of its thirty-seven 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-two Village East specialty stores. Gross store square footage added during this period was approximately 2.7 million square feet, resulting in approximately 3.5 million total Company gross square feet. As of the end of fiscal 1997, the Company's operations included thirty-three 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 two new stores in California located in Sonora (August 1997) and Santa Rosa (September 1997). The Company intends to open one new store in Redding, California in the second half of 1998; however, there can be no assurance that the opening will not be delayed, subject to a variety of conditions precedent or other factors. 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 a high level 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-seven 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. 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. Currently, most merchandise arriving at the distribution center is inspected, recorded by computer into inventory and tagged with a bar-coded price label. Approximately 25% of the Company's merchandise is currently received using technology that enables the Company to "cross-dock" merchandise. Cross docking partners provide the Company with an advanced shipping notice ("ASN"), which is an electronic document transmitted by a vendor that details the contents of each carton en route to the distribution center, and ship only "floor-ready" merchandise which requires that the merchandise be placed on approved hangers and pre-tagged with universal product code ("UPC") tickets, a bar coded price label containing retail prices. Merchandise purchased from vendors that have UPC capabilities arrives at the Company's distribution center already tagged with a bar-coded UPC price label that can be electronically translated by the Company's inventory systems, thus ready for immediate distribution to stores. During fiscal 1997, the Company established formal guidelines for vendors with respect to shipping, receiving and invoicing for merchandise under its new "Partners in Technology" program. Vendors that do not comply with the guidelines for shipping merchandise using ASN's and in floor-ready status are charged specified fees depending upon the violation. Such fees are intended to offset higher costs associated with the processing of such merchandise. Although the Company has been cross-docking merchandise for several years, until fiscal 1997 many of the related processes were still manual and labor-intensive. During fiscal 1997, the Company began the implementation of a more sophisticated logistical system, the same system that many of the Company's larger competitors have also put into place. The primary benefit of the upgraded logistical system is the ability to minimize the manual processing of incoming merchandise and speed the shipments to the stores by cross-docking the merchandise in minutes and hours as compared to several days under the more manual cross-docking system previously in place. Management believes the technology enhancements will also improve accuracy by scanning shipment information from bar-coded labels and transmitting the information electronically into the Company's inventory systems rather than having it input manually. Certain aspects of the new system were operational in fiscal 1997, with the system expected to be fully operational during the first quarter of fiscal 1998. (See Part I, Item I, "Business--Information Systems and 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 45.2%, 44.7%, 44.7%, 43.0% and 38.4% in fiscal 1997, 1996, 1995, 1994 and 1993. Service charge revenues associated with the Company's customer credit cards were $11.6 million, $10.5 million, $10.9 million, $8.9 million and $8.1 million in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. The Company had approximately 460,000 active credit accounts as of February 28, 1998. Active credit accounts are defined as accounts with charges within the previous nine months. 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 sells all of its customer credit card receivables on an ongoing basis in connection with an asset-backed securitization program. The Company has, however, 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 implemented the "Gottschalks Rewards" program which offers an annual rebate certificate for up to 5% of annual credit purchases on the Company's credit card (up to a maximum of $10,000 of annual purchases) which can be applied towards future purchases of merchandise. The Company also has an ongoing credit card reactivation program designed 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 Part I, Item I, "Business--Sales 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 occurrence. 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, which was upgraded in late fiscal 1997. The primary benefits of the upgraded mainframe computer include the ability to process information more quickly, combined with expected cost savings to result from the more efficient use of power and a reduction in required maintenance. The new mainframe computer will also enable the Company to test its existing programs for year 2000 compliance, a process which could not be performed under the Company's previous mainframe computer. (See Part I, Item I, "Business--Year 2000 Conversion"). 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, accounts payable, payroll and financial reporting systems. The Company has installed approximately 2,000 computer terminals throughout its stores, corporate offices and distribution center. Every store processes each sales transaction through point-of-sale ("POS") terminals that connect on-line with the Company's mainframe computer located at its corporate offices in Fresno, California. This system provides detailed reports on a real-time basis of current sales, gross margin and inventory levels by store, department, vendor, class, style, color, and size. Management 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 Company's inventory shrinkage remaining unchanged at 1.1% of net sales in fiscal 1997 and 1996, after achieving reductions from 1.3%, 1.4% and 2.1% fiscal 1995, 1994 and 1993, 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 is in process of enhancing certain aspects of the MMS system and expects such enhancements to be fully complete during the first half of fiscal 1998. 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. In addition to the previously described systems, the Company is in the process of installing an enhanced logistical system at the Company's distribution center. This new logistical 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. (See Part I, Item I, "Business--Distribution of Merchandise.") The new system is also expected to result in reducing certain distribution center payroll and related overhead costs. During fiscal 1997, the Company completed the installation of a workflow and imaging system, designed to automate certain aspects of its merchandise and general expense payables systems and enable the Company's payables departments to become essentially "paperless". Management expects this system to improve efficiency and reduce certain costs associated with the payment for merchandise. The Company also intends to utilize the imaging technology to reduce operating costs and improve efficiencies in other areas of the Company, including the credit department and human resources department. In fiscal 1998, the Company also expects to install a new Bridal Registry system which will allow for the scanning of selected merchandise and the automatic updating of registry information. The new Bridal Registry system will also be accessible through the Company's Web site (see Part I, Item I, "Business--Sales Promotion Strategy".) 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". Year 2000 Conversion. The Company has established a task force to coordinate the identification, evaluation and implementation of changes to computer systems and applications necessary to achieve a Year 2000 date conversion with no disruption to business operations. These actions are necessary to ensure that the systems and applications will recognize and process data in the year 2000 and beyond. Major areas of potential business impact have been identified and are being dimensioned, and initial conversion efforts are underway. The Company is also communicating with suppliers, dealers, financial institutions and others with which it does business to coordinate the year 2000 conversion. The total cost of the conversion is currently estimated to be $350,000 and is not expected to materially affect the Company's results of operations during the fiscal 1998-1999 conversion period. Such costs are expected to consist primarily of external consulting fees and costs in excess of normal software upgrades and replacements and will be incurred throughout fiscal 1999. The year 2000 issue affects virtually all companies and organizations. 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 specialty stores, general merchandise stores, discount and off-price 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 93 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%, 7.8%, 7.4%, 7.1% and 7.4% in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. Gross margin applicable to the leased departments was 14.6%, 14.6%, 14.4%, 14.1% and 13.8% in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. Employees. As of January 31, 1998, the Company had 5,661 employees, of whom 1,478 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 makes quarterly and annual contributions depending upon the profitability of the Company; and 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 performance-based incentive pay programs 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-seven 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 $4.73, $5.38, $5.58, $5.61 and $5.57 per gross square foot in lease expense in fiscal 1997, 1996, 1995, 1994 and 1993, 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-two of the Company's thirty-seven Gottschalks stores and all but two of its twenty-two 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 1997:
Expiration Gross(1) Selling Date of Square Square Date Current Feet Feet Opened Lease Renewal Options GOTTSCHALKS Antioch............. 80,000 71,875 1989 N/A (2) N/A Aptos............... 11,200 10,397 1988 2004 None Auburn.............. 40,000 36,764 1995 2005 1 five yr. opt. Bakersfield: East Hills........ 74,900 70,857 1988 2009 6 five yr. opt. Valley Plaza...... 90,000 70,376 1987 2017 2 five yr. opt. Capitola............105,000 90,580 1990 2015 4 five yr. opt. Carson City, Nevada. 68,000 58,480 1995 2005 2 five yr. opt. Chico............... 85,000 77,059 1988 2017 3 ten yr. opt. Clovis..............101,400 100,792 1988 2018 None Eureka.............. 96,900 69,878 1989 N/A (2) N/A Fresno: Fashion Fair......163,000 126,635 1970 2016 4 five yr. opt. Fig Garden........ 36,000 32,689 1983 2005 None Manchester........175,600 125,394 1979 2009 1 ten yr. opt. Hanford............. 98,800 75,303 1993 N/A (2) N/A Klamath Falls, Oregon............ 65,400 53,084 1992 2007 2 ten yr. opt. Merced.............. 60,000 53,008 1983 2013 None Modesto: Vintage Faire.....161,500 121,779 1977 2007 1 eight yr. opt. and 5 five yr. opt. Century Center.... 65,000 62,250 1984 2013 1 ten yr. opt. and 1 four yr. opt. Oakhurst............ 25,600 22,075 1994 2005 4 five yr. opt. and 1 six yr. opt. Palmdale............114,900 93,268 1990 N/A (2) N/A Palm Springs........ 68,100 55,670 1991 2011 4 five yr. opt. Redding............. 7,800 5,135 1993 60 days(3) None Reno, Nevada........138,000 108,718 1996 2016 2 ten yr. opt. Sacramento..........194,400 145,351 1994 2014 5 five yr. opt. San Bernardino......204,000 161,119 1995 2017 4 five yr. opt. San Luis Obispo..... 99,300 89,477 1986 N/A (2) N/A Santa Maria.........114,000 97,377 1976 2006 4 five yr. opt. Santa Rosa..........127,000 100,529 1997 2017(4) 1 ten yr. opt. and 1 four year opt. Scotts Valley....... 11,200 8,642 1988 2001 2 five yr. opt. Sonora.............. 55,000 46,054 1997 2017(4) 2 five yr. opt. Stockton............ 90,800 74,449 1987 2009 6 five yr. opt. Tacoma, Washington..119,300 92,745 1992 2012 4 five yr. opt. Tracy...............113,000 90,012 1995 2015 4 five yr. opt. Visalia.............150,000 133,116 1995 2014 3 five yr. opt. Watsonville......... 75,000 66,170 1995 2006 4 five yr. opt. Woodland............ 55,300 52,684 1987 2017 2 ten yr. opt. Yuba City........... 80,000 68,307 1989 N/A(2) N/A Total Gottschalks Square Footage..3,420,400 2,818,098 VILLAGE EAST Antioch............. 2,100 1,472 1989 1999 None Bakersfield: East Hills........ 3,350 2,847 1988 1998(5) 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(5) None Eureka.............. 2,820 2,397 1989 2004 None Fresno: 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 Modesto: 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(6) 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.... 64,155 54,480 Total Square Footage........3,484,555 2,872,578 __________________________ (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 4 to the Consolidated Financial Statements.) (3) This lease is automatically renewed every 60 days. Either party can terminate the lease upon 60 days' notice. The Company intends to terminate this lease during the second half of 1998 upon completion of a new 90,000 square foot Gottschalks store at a nearby location. (See Part I, Item I, "Business--Store Location and Growth Strategy"). (4) Represents new leases entered into during fiscal 1997. (5) The Company has notified the respective landlords that these leases will be terminated upon their expiration in fiscal 1998 unless the landlord revises certain aspects of the lease agreements. In the event the leases are terminated in fiscal 1998, the Company would incorporate these locations into the nearby Gottschalks stores as separate departments. (6) This lease will become renewable on a month-to-month basis upon its expiration in fiscal 1998. 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:
1997 1996 Fiscal Quarters High Low High Low 1st Quarter...... .6 1/2 5 1/8 7 3/8 5 5/8 2nd Quarter....... 9 5 1/2 7 1/4 5 3/4 3rd Quarter....... 9 7/8 7 11/16 6 1/2 5 1/8 4th Quarter....... 9 1/8 6 3/4 7 5 1/8
On February 28, 1998, the Company had 946 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 February 28, 1998 was $8 3/16 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 1997. Item 6. SELECTED FINANCIAL DATA The Company reports on a 52/53 week fiscal year ending on the Saturday nearest to January 31. The fiscal years ended January 31, 1998, February 1, 1997, February 3, 1996, January 28, 1995 and January 29, 1994 are referred to herein as fiscal 1997, 1996, 1995, 1994 and 1993, 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: 1997 1996 1995 1994 1993 (In thousands, except per share data) Net sales(1)........... $448,192 $422,159 $401,041 $363,603 $342,417 Net credit revenues(2). 6,385 4,198 4,896 4,210 5,911 454,577 426,357 405,937 367,813 348,328 Costs and expenses: Cost of sales(3)..... 304,558 287,164 278,827 247,423 233,715 Selling, general and administrative expenses........... 130,922 123,860 120,637 101,516 101,486 Depreciation and amortization(4).... 6,667 6,922 8,092 5,860 5,877 442,147 417,946 407,556 354,799 341,078 Operating income (loss) 12,430 8,411 (1,619) 13,014 7,250 Other (income) expense: Interest expense...... 7,325 8,111 7,718 7,599 8,524 Miscellaneous income.. (1,955) (2,792) (726) (755) (838) Acquisition related expenses(5).......... 673 Unusual items(6)...... 3,833 3,427 6,043 5,319 6,992 10,677 11,113 Income (loss) before income tax expense (benefit)............. 6,387 3,092 (8,611) 2,337 (3,863) Income tax expense (benefit)............ 2,657 1,258 (2,972) 821 (1,190) Net income (loss)...... $ 3,730 $ 1,834 $ (5,639) $ 1,516 $ (2,673) Net income (loss) per common share - basic and diluted(7). $ .36 $ .18 $ (.54) $ .15 $ (.26) Weighted-average number of common shares outstanding.... 10,474 10,461 10,416 10,413 10,377
SELECTED BALANCE SHEET DATA: 1997 1996 1995 1994 1993 (In thousands of dollars) Retained interest in receivables sold, net(8) $15,813 $20,871 $25,892 $25,745 $ --- Receivables, net(9)...... 3,085 1,818 1,575 1,566 21,460 Merchandise inventories(10)......... 99,544 89,472 87,507 80,678 60,465 Property and equipment, net(11)...... 99,057 87,370 89,250 93,809 96,396 Total assets............. 242,311 232,400 239,041 233,353 248,330 Working capital (12)..... 67,579 70,231 42,904 37,900 32,147 Long-term obligations, less current portion(12) 62,420 60,241 34,872 33,672 31,493 Stockholders' equity..... 83,905 80,139 77,917 83,577 82,118
SELECTED OPERATING DATA: 1997 1996 1995 1994 1993 Sales growth: Total store sales(13)... 6.2% 5.3% 10.3% 6.2% 3.4% Comparable store sales... 3.3% 1.4% (3.1%) 3.3% 1.3% Average net sales per square foot of selling space(14): Gottschalks........... $160 $170 $181 $196 $198 Village East.......... 157 163 161 164 176 Gross margin percent: Owned sales........... 33.5% 33.4% 31.8% 33.3% 33.2% Leased sales.......... 14.6% 14.6% 14.4% 14.1% 13.8% Credit sales as a % of total sales........ 45.2% 44.7% 44.7% 43.0% 38.4%
SELECTED FINANCIAL DATA: 1997 1996 1995 1994 1993 Capital expenditures, net of reimbursements.. . $14,976 $6,845 $12,773 $4,539 $5,456 Current ratio.............. 2.11:1 2.10:1 1.45:1 1.43:1 1.30:1 Inventory turnover ratio(15)................. 2.6 2.6 2.7 2.9 2.9 Days credit sales in receivables(16)........ 128.1 132.9 136.8 157.3 170.8 __________________
(1) Includes net sales from leased departments of $35.2 million, $32.8 million, $29.8 million, $26.0 million and $25.3 million in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. (See Part I, Item 1, "Business--Leased Departments.") (2) Net credit revenues in fiscal 1997 includes a $1.1 million credit recognized in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 125. (See Note 2 to the Consolidated Financial Statements.) Net credit revenues were higher in fiscal 1993 than in fiscals 1994 - 1996 as there was no reduction for interest expense related to securitized receivables in that year. (See note (8) below.) (3) Includes cost of sales attributable to leased departments of $30.0 million, $28.0 million, $25.5 million, $22.3 million and $21.8 million in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. (See Part I, Item 1, "Business--Leased Departments.") (4) Includes the amortization of new store pre-opening costs of $589,000, $1.3 million, $2.5 million, $438,000 and $429,000 in fiscal 1997, 1996, 1995, 1994 and 1993, respectively. (5) See Note 8 to the Consolidated Financial Statements. (6) As described more fully in the Company's 1995 Annual Report on Form 10-K, the provision for unusual items in fiscal 1994 totaling $3.8 million, includes a provision of $3.5 million representing costs incurred in connection with an agreement reached to settle the stockholder litigation previously pending against the Company and related legal fees and other costs. The provision for unusual items in fiscal 1993, totaling $3.4 million, includes interest expense, legal and accounting fees and other costs incurred primarily in connection with the settlement of all pending federal civil matters related to an income tax deduction taken on the Company's 1985 federal tax return. (7) The Company adopted the provisions of SFAS No. 128, "Earnings per Share" in fiscal 1997 and in accordance with the statement has restated all prior period earnings per share amounts presented. There were no differences between previously reported earnings (loss) per share amounts and restated amounts. (See Note 1 to the Consolidated Financial Statements.) (8) The retained interest does not include receivables sold totaling $53.7 million as of the end of fiscal 1997, $46.0 million as of the end of fiscal 1996 and $40.0 million as of the end of both fiscal 1995 and 1994. The Company did not securitize its receivables prior to fiscal 1994. (See Notes 1, 2 and 3 to the Consolidated Financial Statements and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for additional information related to receivables securitization program.) (9) Receivables as of the end of fiscal 1994 - 1997 consist of customer credit card receivables that do not meet certain eligibility requirements of the securitization program, net of an allowance for doubtful accounts. Receivables as of the end of fiscal 1993 are presented net of $40.0 million of receivables held for securitization and sale as of that date. (10) 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.) (11) The increase in property and equipment from fiscal 1996 to 1997 is primarily related to new store openings and the refurbishing of certain existing store locations, information system enhancements, and additional assets acquired under capital lease obligations. The decreases in property and equipment from fiscal 1993 through fiscal 1996 are primarily due to various sale and leaseback financings and, in fiscal 1996, to the write-off of assets under terminated capital leases. (See Note 5 to the Consolidated Financial Statements.) (12) The increase in working capital and long-term obligations from fiscal 1995 to 1996 is primarily due to the classification of certain debt as long-term that was classified as current in the previous year. (13) See Part I, Item I, "Business--Store Location and Growth Strategy", for table of number of stores open at each fiscal year-end. (14) 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 for comparable store sales only. 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. The Company has added larger stores, some of which have generated lower sales per square foot, over the past several years. (15) The inventory turnover ratio excludes certain inventory received at year-end if held for stores opened early in the subsequent fiscal year. (16) Days credit sales in receivables include receivables sold ($53.7 million as of the end of fiscal 1997, $46.0 million as of the end of 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 retained interest in receivables sold, and other receivables. The Company services and administers all receivables, including receivables sold, 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:
1997 1996 1995 Net sales........................ 100.0% 100.0% 100.0% Net credit revenues.............. 1.4 1.0 1.2 101.4 101.0 101.2 Costs and expenses: Cost of sales................. 68.0 68.0 69.5 Selling, general and administrative expenses..... 29.2 29.3 30.1 Depreciation and amortization. 1.5 1.7 2.0 98.7 99.0 101.6 Operating income (loss).......... 2.7 2.0 (0.4) Other (income) expense: Interest expense.............. 1.6 1.9 1.9 Miscellaneous income.......... (0.4) (0.6) (0.2) Acquisition related expenses.. 0.1 1.3 1.3 1.7 Income (loss) before income tax expense (benefit)............. 1.4 0.7 (2.1) Income tax expense (benefit)..... 0.6 0.3 (0.7) Net income (loss)................ 0.8% 0.4% (1.4)%
Fiscal 1997 Compared to Fiscal 1996 Net Sales Net sales increased by approximately $26.0 million to $448.2 million in fiscal 1997 as compared to $422.2 million in fiscal 1996, an increase of 6.2%. This increase resulted from a 3.3% increase in comparable store sales, combined with additional sales volume generated by new store openings in fiscal 1997 and 1996. Fiscal 1997 new store openings included one new store in Sonora, California, opened in August 1997, and one additional store in Santa Rosa, California, opened in September 1997, increasing the total number of Gottschalks stores to thirty-seven as of the end of fiscal 1997 as compared to thirty-five as of the end of fiscal 1996. Stores operating in fiscal 1997 which were not open for the entire year in fiscal 1996 include one new store in Reno, Nevada (March 1996) and two larger replacement stores in Modesto and Fresno, California (March and April 1996). The Company has entered into an agreement to open one additional store in Redding, California in fiscal 1998. While this store is expected to open in the second half of fiscal 1998, there can be no assurance that such opening will not be delayed, subject to a variety of conditions precedent or other factors. Net Credit Revenues Net credit revenues associated with the Company's private label credit card increased by approximately $2.2 million to $6.4 million in fiscal 1997 as compared to $4.2 million in fiscal 1996, an increase of 52.1%. As a percent of net sales, net credit revenues increased to 1.4% in fiscal 1997 as compared to 1.0% in fiscal 1996. This increase is primarily due a gain of $1.1 million recognized in connection with the adoption of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in addition to a $1.1 million increase in service charges associated with the Company's customer credit cards. The gain on sale of receivables of $1.1 million includes a non-recurring credit of $898,000 resulting from a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. (See Notes 1, 2 and 3 to the Consolidated Financial Statements.) Service charges increased by approximately $1.1 million to $11.6 million in fiscal 1997 as compared to $10.5 million in fiscal 1996, an increase of 10.7%. The increase in service charges is primarily due to an increase in credit sales as a percent of total sales (45.2% in fiscal 1997 as compared to 44.7% in fiscal 1996), combined with additional income generated as a result of modifications made to credit terms in selected states initiated in late fiscal 1996. The increase in credit sales is primarily due to the Company's new "Gottschalks Rewards" program, introduced during early fiscal 1997, which offers a rebate of up to 5% of annual credit purchases on the Company's credit card which can be applied towards future purchases of merchandise. As described more fully in Note 1 to the Consolidated Financial Statements, service charges are presented net of the following amounts: (1) interest expense related to securitized receivables, which remained unchanged at $3.6 million in fiscal 1997 and fiscal 1996; and (2) charge-offs related to receivables sold and the provision for credit losses related to receivables which were ineligible for sale, which remained unchanged at $2.7 million in fiscal 1997 and fiscal 1996. Management does not expect the impact of SFAS No. 125 to be material to the Company's results of operations in fiscal 1998. Cost of Sales Cost of sales increased by approximately $17.4 million to $304.6 million in fiscal 1997 as compared to $287.2 million in fiscal 1996, an increase of 6.1%. As a percentage of sales, cost of sales remained unchanged at 68.0% in fiscal 1997 and 1996 and the Company's gross margin percentage also remained unchanged at 32.0% in fiscal 1997 and 1996. Inventory shrinkage remained unchanged at 1.1% of net sales in fiscal 1997 and 1996. Due to additional promotional activity, markdowns as a percentage of net sales increased in fiscal 1997 as compared to 1996. This increase was offset by lower costs related to the buying and distribution of merchandise in fiscal 1997, primarily driven by improved technology implemented at the Company's distribution center during the year. (See Part I, Item 1, "Business--Distribution of Merchandise.") Excluding the effect of indirect costs related to the buying and distribution of merchandise which are reclassified to cost of sales by the Company for financial reporting purposes, the gross margin percentage decreased to 36.5% in fiscal 1997 as compared to 36.8% in fiscal 1996. (See Note 1 to the Consolidated Financial Statements.) 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. Management also intends to intensify its private-label merchandise programs, traditionally higher gross margin merchandise, in fiscal 1998 as a means to improve gross margins. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $7.0 million to $130.9 million in fiscal 1997 as compared to $123.9 million in fiscal 1996, an increase of 5.7%. Due to the increase in sales volume, selling, general and administrative expenses as a percent of net sales decreased to 29.2% in fiscal 1997 as compared to 29.3% in fiscal 1996. Including the effects of certain indirect costs related to the buying and distribution of merchandise which are reclassified to cost of sales for financial reporting purposes, selling, general and administrative costs as a percent of sales decreased to 33.8% in fiscal 1997 as compared to 34.0% in fiscal 1996. (See Note 1 to the Consolidated Financial Statements.) The Company's sales have continued to increase at a faster rate than its selling, general and administrative costs, primarily due to ongoing Company-wide expense control measures. Charge-offs related to receivables sold and the provision for credit losses related to receivables which were ineligible for sale in fiscal 1997, are reflected in "net credit revenues" and not in selling, general and administrative costs. Depreciation and Amortization Depreciation and amortization expense, which includes the amortization of new store pre-opening costs, decreased by approximately $200,000 to $6.7 million in fiscal 1997 as compared to $6.9 million in fiscal 1996, a decrease of 3.7%. As a percent of net sales, depreciation and amortization expense decreased to 1.5% in fiscal 1997 as compared to 1.7% in fiscal 1996. The decrease (in dollars) is primarily due to the amortization of new store pre-opening costs, which decreased by $748,000 as compared to the prior year, due to the full amortization of fiscal 1996 new store pre-opening costs early in fiscal 1997. This decrease was partially offset by additional depreciation related to capital expenditures for new stores opened and capital lease obligations entered into during the year. Excluding the amortization of new store pre-opening costs, depreciation and amortization expense as a percent of net sales increased to 1.4% in fiscal 1997 as compared to 1.3% in fiscal 1996. Interest Expense Interest expense, which includes the amortization of deferred financing costs, decreased by approximately $800,000 to $7.3 million in fiscal 1997 as compared to $8.1 million in fiscal 1996, a decrease of 9.7%. Due to the increase in sales volume, interest expense as a percent of net sales decreased to 1.6% in fiscal 1997 as compared to 1.9% in fiscal 1996. The decrease (in dollars) is primarily due to a decrease in the weighted-average interest rate charged on outstanding borrowings under the Company's line of credit and the Variable Base Certificate (8.16% in fiscal 1997 as compared to 8.62% in fiscal 1996), due to a lower interest rate applicable to the Company's new line of credit agreement with Congress Financial Corporation ("Congress"), and lower average outstanding borrowings under those facilities in fiscal 1997 as compared to fiscal 1996. This decrease was partially offset by higher interest expense associated with additional long-term financing arrangements entered into during late fiscal 1996, including the issuance of the $6.0 million Fixed Base Certificate and the $6.0 million mortgage loan with Heller Financial, Inc. ("Heller"). (See "Liquidity and Capital Resources".) As previously described in the "Net Credit Revenues" portion of this section, pursuant to SFAS No. 125, interest expense related to securitized receivables is presented as a reduction to net credit revenues. Such interest remained unchanged at $3.6 million in fiscal 1997 and 1996. Miscellaneous Income Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense items, decreased by approximately $800,000 to $2.0 million in fiscal 1997 as compared to $2.8 million in fiscal 1996. Other income in fiscal 1997 includes a credit of $400,000 to a deferred lease incentive resulting from the revision of certain terms of the related lease. Other income in fiscal 1996 included a pre-tax gain of $1.3 million resulting from the termination of two leases previously accounted for as capital leases by the Company. (See Note 5 to Consolidated Financial Statements.) Acquisition Related Expenses Acquisition related expenses of $673,000 were incurred in connection with the proposed acquisition of The Harris Company ("Harris"). Such costs, consisting primarily of investment banking, legal and accounting fees, were recognized by the Company after the parties were unable to agree on the terms of the transaction and discontinued negotiations in October 1997. (See Note 9 to the Consolidated Financial Statements.) Income Taxes The Company's effective tax rate was 41.6% in fiscal 1997 as compared to 40.7% in fiscal 1996. (See Note 6 to the Consolidated Financial Statements.) Net Income As a result of the foregoing, the Company's net income improved by approximately $1.9 million to $3.7 million in fiscal 1997 as compared to $1.8 million in fiscal 1996. On a per share basis (basic and diluted), net income improved by $.18 per share to $.36 per share in fiscal 1997 as compared to $.18 per share in fiscal 1996. (See Note 1 to the Consolidated Financial Statements.) Net income in fiscal 1997 includes a pre-tax credit of $1.1 million resulting from the adoption of SFAS No. 125 and a pre-tax charge of $673,000 for expenses incurred in connection with the previously described proposed acquisition of Harris. Net income in fiscal 1996 includes a pre-tax gain of $1.3 million resulting from the termination of two capital leases. Excluding these non-recurring items, net income increased by $2.4 million, or $.23 per share, to $3.5 million, or $.34 per share in fiscal 1997 as compared to $1.1 million, or $.11 per share, in fiscal 1996. 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). Net Credit Revenues Net credit revenues decreased by approximately $700,000 to $4.2 million in fiscal 1996 as compared to $4.9 million in fiscal 1995, a decrease of 14.3%. As a percent of net sales, net credit revenues decreased to 1.0% in fiscal 1996 as compared to 1.2% 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 decrease in service charges (in dollars) 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 as a result of modifications made to credit terms in selected states initiated in late fiscal 1996. Interest expense associated with securitized receivables remained unchanged at $3.6 million in fiscal 1996 and 1995. The provision for credit losses increased by approximately $300,000 to $2.7 million in fiscal 1996 as compared to $2.4 million in fiscal 1995, primarily due to higher bankruptcies during the period. 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%. Cost of sales as a percentage of sales decreased to 68.0% in fiscal 1996 as compared to 69.5% in fiscal 1995, resulting in an increase to the Company's gross margin percent to 32.0% in fiscal 1996 as compared to 30.5% in fiscal 1995. Excluding the effect of indirect costs related to the buying and distribution of merchandise 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 35.6% in fiscal 1995. 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. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $3.3 million to $123.9 million in fiscal 1996 as compared to $120.6 million in fiscal 1995, an increase of 2.7%. As a percent of net sales, selling, general and administrative expenses decreased to 29.3% in fiscal 1996 as compared to 30.1% in fiscal 1995. Including the effect of indirect costs related to the buying and distribution of merchandise which are reclassified to cost of sales for financial reporting purposes, selling, general and administrative costs as a percent of net sales decreased to 34.0% in fiscal 1996 as compared to 35.1% in fiscal 1995. 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. As previously described in the fiscal 1997 "Net Credit Revenues" portion of this statement, the provision for credit losses is presented as a reduction to net credit revenues in the accompanying financial statements. The provision for credit losses increased to $2.7 million in fiscal 1996 as compared to $2.5 million in fiscal 1995, primarily due to higher bankrupcies during the period. 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 14.5%. This decrease (in dollars) is primarily due to the amortization of new store pre-opening costs, which decreased by $1.2 million as compared to the prior year 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 decreased to 1.3% in fiscal 1996 as compared to 1.4% in fiscal 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 5 to the Consolidated Financial Statements). Interest Expense Interest expense increased by $400,000 to $8.1 million in fiscal 1996 as compared to $7.7 million in fiscal 1995, an increase of 5.1%. Due to the increase in sales volume, interest expense as a percent of net sales remained unchanged at 1.9% 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 loan fees 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 line of credit and Variable Base Certificate (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 Variable Base Certificate with Bank Hapoalim and the securitization program; and (iii) a lower interest rate applicable to the new line of credit agreement with Congress, entered into in December 1996, which replaced the Fleet facility. (See "Liquidity and Capital Resources.") As previously described in the fiscal 1997 "Net Credit Revenues" portion of this section, interest expense related to securitized receivables is presented as a reduction of net credit revenues in the accompanying financial statements. Such interest remained unchanged at $3.6 million in fiscal 1996 and 1995. Miscellaneous Income Miscellaneous 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 gain of $1.3 million resulting from the termination of two leases and income related to the amortization of a lease incentive (see Note 5 to the Consolidated Financial Statements). Other income in fiscal 1995 was reduced by certain general claim and valuation reserves. 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 6 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 (basic and diluted), 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. Net income in fiscal 1996 includes a non-recurring pre-tax gain of $1.3 million resulting from the termination of two capital leases. Excluding this amount, net income in fiscal 1996 was $1.1 million, or $.11 per share. 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, short-term trade credit, and by borrowings under its revolving line of credit and its receivables securitization program. Revolving Line of Credit and Working Capital Facility. The Company has a revolving line of credit arrangement with Congress which 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% (8.34% at January 31, 1998), with no interest charged on the unused portion of the line of credit. For fiscal 1998, the interest rate applicable to the line of credit has been reduced by 1/4% to approximately LIBOR plus 2.25%. The maximum amount available for borrowings under the line of credit with Congress was $56.9 million as of January 31, 1998, of which $30.8 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 January 31, 1998. In addition to the Congress facility, the Company also has up to $15.0 million of additional working capital financing available under the Variable Base Certificate, issued to Bank Hapoalim. The Company can borrow against the Variable Base Certificate on a revolving basis, similar to a line of credit arrangement. Borrowings against the Variable Base Certificate are limited to a percentage of the outstanding balance of receivables underlying the certificate, and therefore, the Company's borrowing capacity under the facility is subject to seasonal variations that may affect the outstanding balance of such receivables. Interest on outstanding borrowings on the facility is charged at a rate of approximately LIBOR plus 1.0% (6.56% at January 31, 1998). At January 31, 1998, $7.7 million was outstanding under the line of credit with Bank Hapoalim, which was the maximum amount available for borrowings as of that date. Under the provisions of SFAS No. 125, effective fiscal 1997, borrowings against the Variable Base Certificate are treated as "off-balance sheet" borrowings for financial reporting purposes and are excluded from amounts reported in the accompanying fiscal 1997 financial statements. Prior to the adoption of SFAS No. 125 in fiscal 1997, transfers of receivables underlying the Variable Base Certificate were accounted for as secured borrowings for financial statement purposes. Accordingly, outstanding borrowings against the Variable Base Certificate as of February 1, 1997, totaling $7,600,000, are included in amounts reported in the Company's fiscal 1996 financial statements. 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 allocable to the Variable Base Certificate, and thus has reduced the Company's borrowing capacity under the facility. Other Financings. As described more fully in Note 4 to the Consolidated Financial Statements, the Company has four fifteen-year mortgage loans with Midland Commercial Funding ("Midland") with outstanding balances totaling $19.5 million at January 31, 1998. 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 January 31, 1998: (i) a 10.45% mortgage loan payable with Heller Financial, Inc. ("Heller") due 2002, with an outstanding loan balance of $3.8 million; an additional 9.97% mortgage loan payable with Heller, due March 2004, with an outstanding loan balance of $5.3 million; (iii) two 10.0% notes payable to Federated Department Stores, Inc., due 2001, with outstanding balances totaling $1.9 million; and (iv) other long-term obligations with outstanding balances totaling $2.2 million. Certain of the Company's long-term debt and lease arrangements contain various restrictive covenants. The Company was in compliance with all such restrictive covenants as of January 31, 1998. 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. Since 1994, the Company has issued $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates (the "1994 Fixed Base Certificates") and a $6.0 million principal amount 6.79% Fixed Base Certificate (the "1996 Fixed Base Certificate") under the program. Proceeds from the issuances of the 1994 and 1996 Fixed Base Certificates (collectively, the "Fixed Base Certificates") were used to reduce or repay previously outstanding higher interest bearing debt obligations of the Company and pay certain costs associated with the transaction. Interest is earned by the certificateholders 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. Management currently intends to refinance the Fixed Base Certificates as they mature with newly issued certificates under the program. The issuances of the Fixed Base Certificates were 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. The Company also issued a Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate") in 1994 in the principal amount of up to $15.0 million to Bank Hapoalim. The Company can borrow against the Variable Base Certificate on a revolving basis, similar to a revolving line of credit arrangement. Management also intends to refinance the Variable Base Certificate upon its maturity in September 1998. 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. However, other than refinancing the previously issued certificates upon their maturity, management does not currently anticipate any additional certificate issuances in fiscal 1998. 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 1998. 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 decreased by $2.6 million to $67.6 million in fiscal 1997 as compared to $70.2 million in fiscal 1996. The Company's ratio of current assets to current liabilities decreased to 2.01:1 as of the end of fiscal 1997 as compared to 2.11:1 as of the end of fiscal 1996. This decrease is primarily due to an increase in the current portion of long-term obligations related to new financing arrangements entered into or finalized in fiscal 1997, in addition to an increase in trade payables and the related cash management liability resulting from the timing of the payment for, and the clearing of, certain payables at year end. 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 decreased by $6.7 million to $3.6 million in fiscal 1997 as compared to $10.3 million in fiscal 1996. This decrease is primarily due to the additional investment in merchandise inventories required for new stores, partially offset by cash received from the return of certain previously outstanding deposits and an increase in amounts due from GCC Trust, resulting from the adoption of SFAS No. 125 in fiscal 1997 (see Note 1 to the Consolidated Financial Statements). The decrease is also due to additional cash flows received in fiscal 1996 resulting from 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, and from the receipt of $3.4 million in connection with the filing of certain amended income tax returns. Net cash used in investing activities increased by $4.6 million to ($9.3) million in fiscal 1997 as compared to ($4.7) million in fiscal 1996. The Company spent $9.8 million more on capital expenditures, net of reimbursements received, in fiscal 1997 as compared to fiscal 1996. The cash used in fiscal 1997 for capital expenditures was partially offset by cash provided under the securitization program of $5.1 million in fiscal 1997. The Company's 1997 expansion program included the completion and opening of one new department store in Sonora, California in August 1997 and one new department store in Santa Rosa, California in September 1997. The Company also completed the first phase of the 23,000 square foot expansion and remodel of its existing store located in the Valley Plaza Mall in Bakersfield, California and certain other store remodel projects. These projects were funded primarily with cash generated by operations, proceeds from previously described long-term financing arrangements entered into in late fiscal 1996 and with borrowings under the Company's working capital facilities. The Company also continued to invest in the enhancement of various management information systems in fiscal 1997. The Company also opened two new department stores in fiscal 1996. Cash required to open a particular new store, however, may vary significantly depending upon various factors, including whether the store was fully constructed, the size, age and condition of an existing store location if assumed from another party, and the extent of construction allowances to be received. Capital expenditures in fiscal 1997 and 1996 were partially offset by reimbursements received from certain of the mall owners, in addition to proceeds from various sale and sale/leaseback arrangements entered into during those periods. The Company adopted the provisions of SFAS No. 125 in fiscal 1997, which requires the presentation of purchases and maturities of securities under the Company's securitization program to be presented as investing activities in the statement of cash flows. Net cash provided by financing activities increased by $11.3 million to $5.8 million in fiscal 1997 as compared to net cash used in financing activities of ($5.5) million in fiscal 1996. This increase is primarily due to an increase in the cash management liability, which resulted from the timing of the payment for, and the clearing of, certain payables at year end, in addition to an increase in cash provided by GCC Trust, resulting from the adoption of SFAS No. 125 in fiscal 1997. Cash held by GCC Trust in fiscal 1996 and 1995, classified as financing activities for statement of cash flow purposes, were reflected as a receivable from GCC Trust pursuant to SFAS No. 125 in fiscal 1997 and classified as an operating activity in the fiscal 1997 statement of cash flows. (See Notes 1 and 2 to the Consolidated Financial Statements.) This increase was partially offset by a reduction in net borrowings under the Company's revolving line of credit and the Variable Base Certificate in fiscal 1997 as compared to fiscal 1996, primarily due to the application of the final $3.0 million proceeds received from the previously described mortgage loan with Heller. Net cash used in financing activities in fiscal 1996 include proceeds from the $6.0 1996 Fixed Base Certificate and $3.0 million received from the previously described Heller loan. Such proceeds, however, were more than fully offset by principal payments made on various short-term and long-term obligations during the year. The Company has entered into an agreement to open one new department store in the second half of fiscal 1998 and is in process of remodeling certain existing store locations. The estimated cost of such projects is $15.5 million. Such costs are expected to be provided for from existing financial resources and from additional long-term financing. Such projects are expected to be fully complete in fiscal 1998, 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. Proposed Acquisition of The Harris Company. On July 3, 1997, the Company entered into a non-binding letter of intent with El Corte Ingles ("ECI"), of Spain, and The Harris Company ("Harris"). The letter of intent contemplated the purchase of all of the common stock of Harris, a wholly-owned subsidiary of ECI, which currently operates nine department stores located throughout Southern California. The two parties were unable to agree on the terms of the transaction and terminated negotiations in October 1997. The Company incurred non-recurring costs totaling $673,000 in connection with the proposed acquisition, consisting primarily of investment banking, legal and accounting fees. Year 2000 Conversion The Company has established a task force to coordinate the identification, evaluation and implementation of changes to computer systems and applications necessary to achieve a year 2000 date conversion with no disruption to business operations. These actions are necessary to ensure that the systems and applications will recognize and process the year 2000 and beyond. Major areas of potential business impact have been identified and are being dimensioned, and initial conversion efforts are underway. The Company is also communicating with suppliers, dealers, financial institutions and others with which it does business to coordinate the year 2000 conversion. The total cost of the conversion is currently estimated to be $350,000 and is not expected to materially affect the Company's results of operations during the fiscal 1998-1999 conversion period. Such costs are expected to consist primarily of external consulting fees and costs in excess of normal software upgrades and replacements and will be incurred throughout fiscal 1999. The year 2000 issue affects virtually all companies and organizations. 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 increases by adjusting its selling prices or by modifying its operations. The Company's ability to adjust selling prices is limited by competitive pressures in its market areas. The Company accounts for its merchandise inventories on the retail method using last-in, first-out (LIFO) cost 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 1997 and 1996 (in thousands, except per share data). (See Note 11 to the Consolidated Financial Statements.)
1997 Quarter Ended May 3 August 2 November 1 January 31 Net sales $90,506 $99,997 $101,466 $156,223 Gross profit 28,510 32,279 32,871 49,974 Income (loss) before income tax expense (benefit) (1,673) ( 422) (2,516) 10,998 Net income (loss) ( 987) ( 248) (1,485) 6,450 Net income (loss) per common share (.09) (.02) (.14) .62
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
Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" was recently issued and establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The new rules are effective for fiscal years beginning after December 15, 1997 (fiscal 1998), with earlier application permitted. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", changes the manner in which operating segments are defined and reported externally to be consistent with the basis on which they are defined and reported on internally. The new rules are also effective for periods beginning after December 15, 1997, with earlier application permitted. The application of SFAS No. 130 and 131 will not impact the Company's financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The Company does not anticipate adoption of these standards prior to their effective dates. 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", "seeks", "may", "will and "estimates". The forward-looking statements are qualified by important factors that could cause actual results to differ materially from those identified in such forward-looking statements, including, without limitation, the following: (i) the ability of the Company to gauge fashion trends and preferences of its customers; (ii) the level of demand for the merchandise offered by the Company; (iii) the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, and hire and train employees; (iv) the ability of management to manage the planned expansion; (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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Disclosures under Item 305 of Regulation S-K are effective for annual financial statements for fiscal years ending after June 15, 1998 and will be required to be included in the Company's 1998 Annual Report on Form 10-K. 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 those portions of the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 25, 1998, to be filed pursuant to Regulation 14A (the "1998 Proxy") under the headings "Nominees for Election as Director" and "Section 16(a) Beneficial Ownership Reporting Compliance." The following table lists the executive officers of the Company: Name Age(1) Position Joe W. Levy 66 Chairman and Chief Executive Officer James R. Famalette 45 President and Chief Operating Officer Gary L. Gladding 58 Executive Vice President/ General Merchandise Manager Alan A. Weinstein 53 Senior Vice President and Chief Financial Officer Michael J. Schmidt 56 Senior Vice President/ Director of Stores __________________________ (1) As of February 28, 1998 Joe 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 serves on the Board of Directors of the National Retail Federation and the Executive Committee of Frederick Atkins. He was formerly Chairman of the California Transportation Commission and served on the Board of Directors of Community Hospitals of Central California and of Air 21, a regional airline based in Fresno, California, which was liquidated under federal bankruptcy laws in fiscal 1997. Mr. Levy 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 those portions of the Company's 1998 Proxy under the headings "Executive Compensation" and "Director Compensation For Fiscal Year 1997." Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the portion of the Company's 1998 Proxy under the headings "Security Ownership of Certain Beneficial Owners and Management." Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the portion of the Company's 1998 Proxy under the heading "Certain Relationships and Related Transactions." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Gottschalks Inc. and Subsidiary are included in Item 8: Consolidated balance sheets -- January 31, 1998 and February 1, 1997 Consolidated statements of operations -- Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 Consolidated statements of stockholders' equity -- Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 Consolidated statements of cash flows -- Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 Notes to consolidated financial statements -- Three years ended January 31, 1998 Independent auditors' report (a)(2) The following financial statement schedule of Gottschalks Inc. and Subsidiary is included in Item 14(d): Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the consolidated financial statements, are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The following exhibits are required by Item 601 of 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, 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.(15) 10.31 Loan and Security Agreement dated December 29, 1996, by and between Gottschalks Inc. and Congress Financial Corporation. (16) 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. Independent Auditors' Consent. 27. Financial Data Schedule. _______________________ (1) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100), and incorporated herein by reference. (2) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 1-09100), and incorporated herein by reference. (3) Filed as an exhibit to Registration Statement on Form S-1, (File No. 33-3949), and incorporated herein by reference. (4) Management contract, compensatory plan or arrangement. (5) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 1, 1992 (File No. 1-09100), and incorporated herein by reference. (6) Filed as an exhibit to the Current Report on Form 8-K dated March 30, 1994 (File No. 1-09100), and incorporated herein by reference. (7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended October 29, 1994 (File No. 1-09100), and incorporated herein by reference. (8) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended April 30, 1994 (File No. 1-09100), and incorporated herein by reference. (9) Filed as exhibits to Registration Statements on Form S-8, (Files #33-54783 and #33-54789), and incorporated herein by reference. (10) Filed as an exhibit to the 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 as an exhibit to the Registration Statement on Form S-8 (File #33-00061), and incorporated herein by reference. (16) Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 1, 1997 (File No. 1-09100), and incorporated by 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 1997. (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 JANUARY 31, 1998 GOTTSCHALKS INC. AND SUBSIDIARY FRESNO, CALIFORNIA INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Gottschalks Inc. Fresno, California We have audited the accompanying consolidated balance sheets of Gottschalks Inc. and Subsidiary as of January 31, 1998 and February 1, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiary as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, the Company changed its method of accounting for securitized receivables in fiscal 1997 to conform with Statement of Financial Accounting Standard No. 125. DELOITTE & TOUCHE LLP /s/Deloitte & Touche LLP Fresno, California February 24, 1998
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 31, February 1, ASSETS 1998 1997 CURRENT ASSETS: Cash $ 1,601 $ 1,496 Cash held by GCC Trust 5,163 Retained interest in receivables sold (Notes 2 and 3) 15,813 20,871 Receivables: Receivables, less allowances of $437 in 1997 and $1,322 in 1996 (Notes 2 and 3) 3,085 1,818 Vendor claims, less allowances of $80 in 1997 and 1996 3,475 2,818 6,560 4,636 Merchandise inventories 99,294 89,472 Other 11,444 11,800 Total current assets 134,712 133,438 PROPERTY AND EQUIPMENT (Note 5): Land and land improvements 15,101 15,074 Buildings and leasehold improvements 52,339 46,925 Furniture, fixtures and equipment 64,993 57,648 Buildings and equipment under capital leases 10,875 7,302 Construction in progress 1,858 309 145,166 127,258 Less accumulated depreciation and amortization 46,109 39,888 99,057 87,370 OTHER ASSETS: Goodwill, less accumulated amortization of $1,263 in 1997 and $1,146 in 1996 1,136 1,252 Other 7,406 10,340 8,542 11,592 $242,311 $232,400
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 31, February 1, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 CURRENT LIABILITIES: Revolving lines of credit (Note 4) $ 5,767 $ 13,904 Cash management liability 10,141 1,540 Trade accounts payable 20,950 19,077 Accrued expenses 8,110 10,714 Taxes, other than income taxes 8,698 8,202 Accrued payroll and related liabilities 5,734 5,208 Current portion of long-term obligations (Notes 4 and 5) 3,950 2,408 Deferred income taxes (Note 6) 3,783 2,154 Total current liabilities 67,133 63,207 LONG-TERM OBLIGATIONS, less current portion (Notes 4 and 5): Line of credit 25,000 25,000 Notes and mortgage loans payable 30,083 29,861 Capitalized lease obligations 7,337 5,380 62,420 60,241 DEFERRED INCOME (Note 5) 18,408 19,580 DEFERRED LEASE PAYMENTS AND OTHER (Note 5) 6,653 6,369 DEFERRED INCOME TAXES (Note 6) 3,792 2,864 COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 10) 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; 10,478,415 and 10,472,915 issued Common stock 105 105 Additional paid-in capital 56,368 56,332 Retained earnings 27,434 23,704 83,907 80,141 Less common stock in treasury at cost, 338 shares (2) (2) 83,905 80,139 $242,311 $232,400
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) 1997 1996 1995 Net sales $448,192 $422,159 $401,041 Net credit revenues 6,385 4,198 4,896 454,577 426,357 405,937 Costs and expenses: Cost of sales 304,558 287,164 278,827 Selling, general and administrative expenses 130,922 123,860 120,637 Depreciation and amortization 6,667 6,922 8,092 442,147 417,946 407,556 Operating income (loss) 12,430 8,411 (1,619) Other (income) expense: Interest expense 7,325 8,111 7,718 Miscellaneous income (1,955) (2,792) (726) Acquisition related expenses 673 6,043 5,319 6,992 Income (loss) before income tax expense(benefit) 6,387 3,092 (8,611) Income tax expense(benefit) 2,657 1,258 (2,972) Net income (loss) $ 3,730 $ 1,834 $ (5,639) Net income (loss) per common share - basic and diluted $ .36 $ .18 $ (.54)
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY 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 29, 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 Net income 3,730 3,730 Shares issued under stock option plan 5,500 36 36 BALANCE, JANUARY 31, 1998 10,478,415 $105 $56,368 $27,434 $ (2) $83,905
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1997 1996 1995 OPERATING ACTIVITIES: Net income (loss) $ 3,730 $ 1,834 $ (5,639) Adjustments: Depreciation and amortization 6,667 6,922 8,096 Deferred income taxes 2,557 419 (1,296) Deferred lease payments and other 284 467 870 Deferred income (1,172) (767) (609) Net benefit related to stock option plan (170) Provision for credit losses 470 2,724 2,754 Equity in the income of limited partnership (120) (133) (64) Net gain from sale of assets (72) (344) Net gain from termination of capital leases (Note 5) (1,344) (Gain) loss on securitization and sale of receivables (Note 2) (1,050) 20 Acquisition related expenses (Note 8) (673) Litigation settlements (Note 9) (2,400) (3,000) Lease incentive (Note 5) 4,000 Changes in operating assets and liabilities: Receivables (1,346) (9) (5,114) Retained interest in receivables sold (979) (147) Merchandise inventories (9,227) (1,370) (6,215) Trade accounts payable 1,873 2,570 (7,638) Other current and long-term assets 3,267 (6,518) (3,394) Other current and long-term liabilities (1,546) 8,821 (2,572) Net cash provided by (used in) operating activities 3,642 10,257 (20,482) INVESTING ACTIVITIES: Purchases of held-to-maturity securities (Note 3) (230,433) Maturities of held-to-maturity securities (Note 3) 235,491 Purchases of property and equipment, net of reimbursements received (14,976) (6,845) (12,773) Proceeds from sale/leaseback arrangements and other property and equipment sales 365 2,026 11,606 Distribution from limited partnership 229 112 86 Net cash used in investing activities ( 9,324) (4,707) (1,081) FINANCING ACTIVITIES: Net proceeds (repayments) under revolving line of credit and Variable Base Certificate (8,137) (6,260) 27,320 Proceeds from short-term and long-term obligations 3,214 3,878 23,993 Principal payments on short-term and long-term obligations (3,054) (4,850) (24,710) Proceeds from securitization and sale of receivables (Note 3) 6,000 Changes in cash management liability 8,601 (3,556) (4,757) Changes in cash held by GCC Trust 5,163 ( 748) 85 Payments to acquire treasury stock (94) Net cash provided by (used in) financing activities 5,787 (5,536) 21,837 INCREASE IN CASH 105 14 274 CASH AT BEGINNING OF YEAR 1,496 1,482 1,208 CASH AT END OF YEAR $ 1,601 $ 1,496 $ 1,482
See notes to consolidated financial statements. GOTTSCHALKS INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California, currently consisting of thirty-seven "Gottschalks" department stores and twenty-two "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 moderate and better brand-name and private-label merchandise, including men's, women's, junior's and children's apparel, cosmetics, shoes and accessories, home furnishings and other consumer goods. 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. Principles of Consolidation - The accompanying financial statements include the accounts of Gottschalks Inc., and its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"), (collectively, the "Company"). Prior to fiscal 1997, the Company's consolidated financial statements also included the accounts of GCC Trust, a qualified special purpose entity which is no longer consolidated as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". (See Notes 2 and 3.) All of GCC Trust's assets were transferred subsequent to December 31, 1996, the effective adoption date of SAS No. 125. 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 1997, 1996 and 1995 ended on January 31, 1998, February 1, 1997 and February 3, 1996, respectively. Fiscal years 1997 and 1996 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 of $5,163,000 at February 1, 1997 consists primarily of customer credit card payments collected through the Company's receivables securitization program and held for the payment of monthly interest to certificate holders and amounts designated under the prepayment option of the Variable Base Certificate. Cash held by GCC Trust in excess of amounts required for those purposes are remitted to the Company on a daily basis to be used for operating purposes. As previously described, effective fiscal 1997, GCC Trust is no longer consolidated into the Company's financial statements. Amounts due from GCC Trust, totaling $4,922,000 as of January 31, 1998 are included in other current assets. Retained Interest in Receivables Sold - The Company adopted the provisions of SFAS No. 125 effective fiscal 1997. As described more fully in Notes 2 and 3, the retained interest in receivables sold as of January 31, 1998 consists primarily of securities backed by receivables sold pursuant to the Company's receivable securitization program and various financial components which are retained and recorded as assets as a result of such sales. Such assets include the right to service the receivables sold, if any, which is based on a contractually specified servicing fee, and the retained rights to future interest income from the serviced assets in excess of the contractually specified servicing fee (interest-only strips). The retained interest in receivables sold is initially recorded at the date of the sale by allocating the previous carrying amount between the assets sold and the retained interest based on their relative fair values. The certificated retained interest is subsequently valued in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SAS No. 115, these investments are classified as held-to- maturity and, accordingly, are carried at amortized cost as the securities are not subject to substantial prepayment risk and the Company has the ability and intent to hold the securities to maturity. The servicing assets, if any, and the interest-only strips are amortized to operations over the period of estimated net servicing income. As of January 31, 1998, the estimated cost to service the assets was equal to the contractually specified servicing fee, resulting in no servicing asset or liability. The interest-only strip, net of accumulated amortization, totaled $211,000 as of January 31, 1998. As of February 1, 1997, the retained interest in receivables sold consisted only of securities backed by receivables sold under the Company's receivables securitization program. Receivables - Receivables consist primarily of customer credit card receivables that do not meet certain eligibility requirements of the Company's receivable securitization program. Such receivables are not certificated and 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. The Company maintains a reserve for possible credit losses on such receivables which is based on the expected collectibility of those receivables. Prior to the implementation of SFAS No. 125 in fiscal 1997, the Company maintained reserves for possible credit losses based on the expected collectibility of all receivables, including receivables sold or certificated. (See Note 2.) 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 January 31, 1998 and February 1, 1997. 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 $421,000 at January 31, 1998 and $136,000 at February 1, 1997 are included in other current assets. The amortization of new store pre-opening costs, totaling $589,000, $1,337,000 and $2,524,000 in 1997, 1996 and 1995, 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 generally computed by the straight-line method over the term of the lease or the estimated economic life of the asset, depending on which criteria was used to classify the lease, and such amortization 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 January 31, 1998 and February 1, 1997, the investment was $2,679,000 and $2,766,000, respectively, and prepaid rent, net of accumulated amortization, was $793,000 and $911,000, respectively. Such amounts are included in other long-term assets. The Company's equity in the income of the partnership, totaling $141,000 in 1997, $133,000 in 1996 and $64,000 in 1995 is included in miscellaneous 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. 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. 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 $35,179,000, $32,781,000 and $29,766,000 in 1997, 1996 and 1995, respectively. Cost of sales include related costs of $30,044,000, $28,006,000 and $25,494,000 in 1997, 1996 and 1995, respectively. Net Credit Revenues - The Company adopted the provisions of SFAS No. 125 in fiscal 1997, and has changed the presentation of net credit revenues related to the Company's customer credit card receivables for financial statement purposes. (See Note 2.) Net credit revenues in fiscal 1997 consist primarily of the gain on the sale of receivables during that period and the amortization of the interest-only strip. The amortization of the interest-only strip approximates service charge revenues related to receivables sold, net of interest expense related to securitized receivables and charge-offs related to receivables sold. Net credit revenues also include service charges related to the retained interest in receivables sold, net of a related provision for credit losses related to receivables which were ineligible for sale. Net credit revenues in fiscal 1996 and 1995 consist of services charges related to all customer credit card receivables, including receivables sold, net of interest expense related to securitized receivables and a provision for credit losses on all receivables, including receivables sold. The gain on sale of receivables totaled $1,050,000 in 1997, and includes a credit of $898,000 related to a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. Service charge revenues related to the Company's customer credit card receivables totaled $11,618,000 in 1997, $10,493,000 in 1996 and $10,937,000 in 1995. Interest expense related to securitized receivables totaled $3,579,000, $3,564,000 and $3,578,000 in 1997, 1996 and 1995. Charge-offs related to the receivables sold totaled $2,234,000 and the provision for credit losses related to receivables which were ineligible for sale totaled $470,000 in 1997, for a total of $2,704,000. The provision for credit losses related to receivables, including receivables sold, totaled $2,731,000 and $2,463,000 in 1996 and 1995. Income Taxes - Deferred tax assets and liabilities are generally recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns, determined based on the differences between the financial statement and tax basis of assets and liabilities and net operating loss and tax credit carryforwards, and by using enacted tax rates in effect when the differences are expected to reverse. Net Income (Loss) Per Common Share - The Company adopted the provisions of SFAS No. 128, "Earnings per Share", effective for interim periods and fiscal years ended after December 15, 1997. This statement replaces the presentation of primary and fully diluted earnings per share with a presentation of "basic" earnings per share, which is based on the weighted-average number of common shares outstanding during a period, and "diluted" earnings per share, which includes the effect of stock options and other potentially dilutive securities. In accordance with the provisions of the statement, all previously reported earnings per share amounts have been restated to reflect the provisions of the new standard. The adoption of the standard had no impact on previously reported earnings (loss) per share amounts. Basic earnings (loss) per common share is computed based on the weighted average number of common shares outstanding which were 10,473,682, 10,461,424 and 10,416,520 in 1997, 1996 and 1995, respectively. Diluted earnings (loss) per common share is equal to basic earnings (loss) per common share because the effect of potentially dilutive securities under the stock option plans were antidilutive, or insignificant, in 1997, 1996 and 1995, and therefore not included. Non-Cash Transactions - The Company acquired certain equipment under a capital lease obligation totaling $3,562,000 in 1997 and acquired fixtures and equipment under long-term debt obligations totaling $2,650,000 in 1996. The Company issued or contributed common stock to the Retirement Savings Plan with a value of $388,000 and $243,000 in 1996 and 1995, respectively. Fair Value of Financial Instruments - The carrying value of the Company's cash and cash management liability, retained interest in receivables sold, receivables, notes receivable, trade payables and other accrued expenses, revolving line of credit and stand-by letters of credit approximate their estimated fair values because of the short maturities or variable interest rates underlying those instruments. The 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 $32,724,000 and $31,933,000 at January 31, 1998 and February 1, 1997, respectively, are $34,241,000 and $32,024,000, respectively. Off-Balance Sheet Financial Instruments - The Company's off-balance sheet financial instruments consist primarily of the Fixed Base Certificates and, as of fiscal 1997, the Variable Base Certificate, and related borrowings associated with those securities. (See Notes 2 and 3.) 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 at both January 31, 1998 and February 1, 1997 are $44,408,000 and $44,249,000, respectively. The estimated fair value of the Variable Base Certificate approximates its reported value due to the short-term revolving nature of the credit card portfolio. 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 - The Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identified and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved. Based on such a review, the Company determined that no impairment loss need be recognized for fiscal years 1997 or 1996. Recently Issued Accounting Standards - SFAS No. 130, "Reporting Comprehensive Income" was recently issued and establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The new rules are effective for fiscal years beginning after December 15, 1997 (fiscal 1998), with earlier application permitted. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", changes the manner in which operating segments are defined and reported externally to be consistent with the basis on which they are defined and reported on internally. The new rules are also effective for periods beginning after December 15, 1997, with earlier application permitted. The application of SFAS No. 130 and 131 will not impact the Company's financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The Company does not anticipate adoption of these standards prior to their effective dates. Reclassifications - Certain amounts in the accompanying 1996 and 1995 consolidated financial statements have been reclassified to conform with the 1997 presentation. 2. ACCOUNTING CHANGE The Company adopted the provisions of SFAS No. 125 effective fiscal 1997. This statement changed the accounting for securitized receivables and provides consistent guidance for distinguishing transfers of financial assets (securitizations) that are sales from transfers that are secured borrowings. SFAS No. 125 requires the Company to recognize gains and losses on securitizations which qualify as sales and to recognize as assets certain financial components that are retained as a result of such sales. Such assets consist primarily of the retained interest in the receivables sold, the right to service the receivables sold, which is based on a contractually specified servicing fee, and the retained rights to future interest income from the serviced assets in excess of the contractually specified servicing fee (interest-only strips). The effect of this accounting change was to increase pre-tax net income by $1,050,000 for the year ended January 31, 1998. Such amount, which includes a credit of $898,000 related to a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale, is included in net credit revenues in the accompanying fiscal 1997 statement of operations. The provisions of the statement are not permitted to be applied retroactively to prior periods presented. The Company has, however, made certain reclassifications to amounts in the accompanying fiscal 1996 and 1995 statements of operations to more closely conform with the financial statement presentation required by this statement. 3. RECEIVABLES SECURITIZATION PROGRAM The Company's receivables securitization program provides the Company with a source of working capital financing that is generally more cost-effective than traditional debt financing. Under the program, the Company automatically sells all of its accounts receivable arising under its private label customer credit cards to a wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"), and those receivables are subsequently conveyed to a trust, Gottschalks Credit Card Master Trust ("GCC Trust"), to be used as collateral for securities issued to investors. GCC Trust is a qualified special purpose entity under SFAS No. 125. Accordingly, all transfers of receivables to GCC Trust under the Company's securitization program are accounted for as sales for financial reporting purposes. The Company retains an ownership interest in certain of the receivables sold under the program, represented by Subordinated and Exchangeable Certificates issued to GCRC by GCC Trust, and also retains an uncertificated ownership interest in receivables that do not meet certain eligibility requirements of the program. The Company services and administers the receivables in return for a monthly servicing fee. As of January 31, 1998, the following securities 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. 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 in 1996. Proceeds from the issuances of the 1994 and 1996 Fixed Base Certificates (collectively, the "Fixed Base Certificates") were used to reduce or repay previously outstanding higher interest bearing debt obligations of the Company and pay certain costs associated with the transaction. Interest on the Fixed Base 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. Management currently intends to refinance the Fixed Base Certificates as they mature with newly issued certificates under the program. The issuances of the Fixed Base Certificates were accounted for as sales for financial reporting purposes. Accordingly, the $46,000,000 of receivables underlying the Fixed Base Certificates as of January 31, 1998 and February 1, 1997 and the corresponding debt obligations have been excluded from amounts reported in the accompanying financial statements. Variable Base Certificate. A Variable Base Class A-2 Credit Card Certificate ("Variable Base Certificate") was also issued in 1994 in the principal amount of up to $15,000,000 to Bank Hapoalim. The Variable Base Certificate represents a fractional undivided ownership interest in certain receivables held by GCC Trust and functions similar to a revolving line of credit arrangement. Under the provisions of SFAS No. 125, effective fiscal 1997, the transfer of receivables under the Variable Base Certificate are treated as sales for financial reporting purposes. Accordingly, the retained interest in receivables sold pertaining to the Variable Base Certificate, totaling $7,700,000 as of January 31, 1998 and the corresponding outstanding borrowings against the Variable Base Certificate with Bank Hapoalim have been excluded from amounts reported in the accompanying financial statements. Prior to the adoption of SFAS No. 125 in fiscal 1997, transfers of receivables underlying the Variable Base Certificate were accounted for as secured borrowings in the accompanying fiscal 1996 financial statements and the outstanding balance of the Variable Base Certificate, totaling $7,600,000 at February 1, 1997, and the corresponding outstanding borrowings against the Variable Base Certificate with Bank Hapoalim are included in amounts reported in the accompanying fiscal 1996 financial statements. Other Program Requirements. 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 January 31, 1998. 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. While management intends to refinance the previously described outstanding certificates as they mature, management is not presently contemplating the issuance of any additional certificates in fiscal 1998. 4. DEBT OBLIGATIONS Revolving Lines of Credit. The Company has a revolving line of credit arrangement with Congress Financial Corporation ("Congress") which 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 on outstanding borrowings under the facility is charged at a rate of approximately LIBOR plus 2.5% (8.34% at January 31, 1998), with no interest charged on the unused portion of the line of credit. For fiscal 1998, the interst rate applicable to the line of credit has been reduced by 1/4% to approximately LIBOR plus 2.25%. The maximum amount available for borrowings under the line of credit was $56,920,000 as of January 31, 1998, of which $30,767,000 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 January 31, 1998. The Company also has up to $15,000,000 of additional working capital financing available under the Variable Base Certificate, issued to Bank Hapoalim (Note 3). Borrowings against the Variable Base Certificate 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 facility is subject to seasonal variations that may affect the outstanding principal balance of such receivables. Interest on outstanding borrowings on the facility is charged at a rate of approximately LIBOR plus 1.0%, not to exceed a maximum of 12.0% (6.56% at January 31, 1998). At January 31, 1998, $7,700,000 was outstanding under facility with Bank Hapoalim, which was the maximum amount available for borrowings as of that date. Under the provisions of SFAS No. 125, effective fiscal 1997, borrowings against the Variable Base Certificate with Bank Hapoalim are treated as "off-balance sheet" borrowings for financial reporting purposes and are excluded from amounts reported in the accompanying financial statements (see Notes 2 and 3). Because the provisions of SFAS No. 125 are not retroactively applied, outstanding borrowings against the Variable Base Certificate as of February 1, 1997, totaling $7,600,000, are reported in the Company's fiscal 1996 financial statements.
Long-Term Obligations. Notes and mortgage loans payable consist of the following: January 31, February 1, (In thousands of dollars) 1998 1997 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 $19,501 $19,738 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 3,800 4,750 Mortgage loan payable to financial institution, payable in monthly principal installments of $71 plus interest at 9.97%, principal due and payable April 1, 2004; collateralized by certain real property, assets and certain property and equipment 5,286 3,000 Notes payable to Federated Department Stores, Inc., payable in quarterly principal installments of $169 including interest at 10.0%, principal due and payable March and July 2001 1,892 2,351 Fixture loans and other 2,245 2,094 32,724 31,933 Less current portion 2,641 2,072 $30,083 $29,861
The mortgage loan payable to financial institution with an outstanding balance of $5,286,000 at January 31, 1998 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. 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 5). The scheduled annual principal maturities on notes payable and mortgage loans are $2,641,000, $2,790,000, $2,883,000, $2,510,000 and $1,395,000 for 1998 through 2002. Debt issuance costs related to the Company's various financing arrangements are included in other current and long-term assets and are deferred and charged to operations as additional interest expense on a straight-line basis over the life of the related indebtedness. Deferred debt issuance costs, net of accumulated amortization, amounted to $1,734,000 at January 31, 1998 and $2,260,000 at February 1, 1997. Interest paid, net of amounts capitalized, was $10,302,000, $11,059,000 and $10,927,000 in 1997, 1996 and 1995, respectively. Capitalized interest expense was $114,000, $37,000 and $278,000 in 1997, 1996 and 1995, respectively. The weighted-average interest rate charged on the Company's various revolving line of credit arrangements was 8.16% in 1997, 8.62% in 1996 and 8.75% in 1995. Certain of the Company's long-term financing arrangements include various restrictive covenants. The Company was in compliance with such covenants as of January 31, 1998. 5. LEASES The Company leases certain retail department stores under capital leases that expire in various years through 2020. The Company also leases certain retail department stores, specialty stores, land, furniture, fixtures and equipment under noncancellable operating leases that expire in various years through 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 $6,463,000 at January 31, 1998 and $6,157,000 at February 1, 1997. Future minimum lease payments, by year and in the aggregate, under capital leases and noncancellable operating leases with initial or remaining terms of one year or more consist of the following at January 31, 1998:
Capital Operating (In thousands of dollars) Leases Leases 1998 $ 2,070 $ 15,360 1999 2,070 16,567 2000 1,730 14,579 2001 752 14,023 2002 752 13,901 Thereafter 6,894 133,578 Total minimum lease payments 14,268 $208,008 Amount representing interest (5,622) Present value of minimum lease payments 8,646 Less current portion (1,309) $ 7,337
Rental expense consists of the following: (In thousands of dollars) 1997 1996 1995 Operating leases: Buildings: Minimum rentals $13,099 $11,897 $ 9,796 Contingent rentals 1,911 2,213 2,315 Fixtures and equipment 4,358 5,439 4,679 $19,368 $19,549 $16,790
One of the Company's lease agreements contains a restrictive covenant pertaining to the debt to tangible net worth ratio with which the Company was in compliance at January 31, 1998. In 1996, the Company entered into agreements with Broadway Stores, Inc. ("Broadway"), a wholly-owned subsidiary of Federated Department Stores, Inc., and the respective landlords, 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, and such gain is included in miscellaneous 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 $4,000,000 received was deferred for financial reporting purposes and is being amortized into operations over the ten-year minimum lease period. The deferred lease incentive, net of accumulated amortization, amounted to $3,130,000 at January 31, 1998 and $3,731,000 at February 1, 1997. 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. 6. INCOME TAXES
The components of income tax expense (benefit) are as follows: (In thousands of dollars) 1997 1996 1995 Current: Federal 92 $ 375 $(1,678) State 8 464 2 100 839 (1,676) Deferred: Federal 1,976 704 (857) State 581 (285) (439) 2,557 419 (1,296) $2,657 $1,258 $(2,972)
The principal components of deferred tax assets and liabilities (in thousands of dollars) are as follows:
January 31, February 1, 1998 1997 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Vacation accrual and employee vacation benefits $ 689 $ 467 Credit losses 572 566 Accrued employee benefits 353 257 State income taxes 332 124 LIFO inventory reserve $ (2,942) $ (2,841) Accelerated tax deduction for workers' compensation insurance premiums (574) 17 Supplies inventory (1,429) (951) Gain deferred for tax related to adoption Of SFAS No. 125 (450) Other items, net 803 (1,137) 875 (668) 2,749 (6,532) 2,306 (4,460) Long-Term: Net operating loss carryforwards 4,541 4,674 General business credits 2,034 1,985 Alternative minimum tax credits 777 510 Depreciation expense (8,503) (8,143) Accounting for leases 913 (3,408) 915 (3,433) Deferred income 1,699 (1,958) 1,988 (1,746) Other items, net 567 (454) 697 (311) 10,531 (14,323) 10,769 (13,633) $13,280 $(20,855) $13,075 $(18,093)
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:
1997 1996 1995 Statutory rate 35.0% 35.0% (35.0)% State income taxes, net of federal income tax benefit 5.9 5.7 (2.7) Amortization of goodwill .6 1.3 .5 General business credit (1.2) Nondeductible penalties .3 Other items, net 1.3 (1.3) 2.4 Effective rate 41.6% 40.7% (34.5)%
The Company received income tax refunds, net of payments, of $195,000 in 1997 and $3,399,000 in 1996. There were no income tax refunds receivable at January 31, 1998 or February 1, 1997. At January 31, 1998, the Company has, for federal tax purposes, net operating loss carryforwards of $11,400,000 which expire in the years 2009 through 2012, general business credits of $1,018,000 which expire in the years 2008 through 2011, and alternative minimum tax credits of $610,000 which may be used for an indefinite period. At January 31, 1998, the Company has, for state tax purposes, net operating loss carryforwards of $7,400,000 which expire in the years 1999 through 2002, enterprise zone credits of $1,015,000 which expire in the years 2005 through 2013, and alternative minimum tax credits of $166,000 which may be used for an indefinite period. These carryforwards are available to offset future taxable income and are expected to be fully utilized. 7. 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 became exercisable at a rate of 25% per year beginning on or one year after the grant date. The options were exercisable on a cumulative basis and expired no later than four or five years from the date of grant. Substantially all of the options under this plan were granted at a price below the fair market value of the stock on the date of the grant, however, such options had expired by the end of fiscal 1995. The Company recognized compensation benefit related to this plan of $170,000 in 1995. The benefit resulted from the reversal of previously recognized compensation expense upon the forfeiture or expiration of unexercised options. No compensation benefit or expense related to this plan was recognized in 1997 or 1996. No new grants may be make under either of the 1986 Plans. 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 28, 1995 (179,746 exercisable at a weighted- average price of $12.81) 643,746 $10.74 Granted (weighted-average fair value of $4.08) 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 $3.54) 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 Granted (weighted-average fair value of $4.26) 62,000 6.94 Exercised (5,500) 6.55 Canceled (78,500) 9.46 Outstanding, January 31, 1998 (283,500 exercisable at a weighted- average price of $9.72) 469,000 $9.06
Additional information regarding options outstanding as of January 31, 1998 is as follows:
Options Outstanding Options Exercisable Weighted-Avg. Remaining Range of Number Contractual Weighted-Avg. Number Exercise Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Price $5.38 to $10.87 469,000 6.8 yrs. $9.06 283,500 $9.72 At January 31, 1998, 45,500 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 the compensation benefit recognized in fiscal 1995 in connection with the Company's 1986 Plan, no compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS 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, 51.09% in 1997 and 49.74% in 1996 and 1995; risk-free interest rates, 5.41% in 1997 and 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. Pro-forma net income (loss) and earnings (loss) per share, had the computed fair values of the 1997, 1996 and 1995 awards been amortized to expense over the vesting period of the awards, would have been $3,693,000, or $.35 per share in 1997 and $1,816,000, or $.17 per share in 1996. There would have been no impact in 1995. The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro-forma calculation; accordingly, the 1997, 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. 8. 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 currently may elect to have up to 15% of their annual eligible compensation, subject to certain limitations, deferred and deposited with a qualified trustee. During fiscal 1997, the Company revised its discretionary contribution policy for the Plan such that contributions are now made on a quarterly basis of up to 3% of a participants' quarterly eligible compensation, with the ability to receive an additional contribution of up to 1% of annual eligible compensation, depending on the Company's quarterly and annual financial performance during those periods. Prior to fiscal 1997, the Company, at the discretion of the Board of Directors, could elect to make an annual discretionary contribution to the Plan of up to 2% of each participant's annual eligible compensation. 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 $749,000, $275,000 and $500,000 in expense representing the Company's annual contribution to the Plan in 1997, 1996 and 1995, respectively. The Company contributed cash to the Plan in fiscal 1997, with which the Plan subsequently purchased common stock of the Company to distribute to the participants. The Company contributed common stock of the Company directly to the Plan in 1996 and 1995. A Voluntary Employee Beneficiary Association ("VEBA") trust has been established by the Company for the purpose of funding employee vacation benefits. 9. ACQUISITION RELATED EXPENSES On July 3, 1997, the Company entered into a non-binding letter of intent with El Corte Ingles ("ECI"), of Spain, and The Harris Company ("Harris" ). The letter of intent contemplated the purchase of all of the common stock of Harris, a wholly-owned subsidiary of ECI, which currently operates nine department stores located throughout Southern California. The parties were unable to agree on the terms of the transaction and terminated negotiations in October 1997. The Company incurred various non-recurring costs in connection with the proposed acquisition, consisting primarily of investment banking, legal and accounting fees. Such costs, totaling $673,000, are classified as acquisition related expenses in the accompanying 1997 statement of operations. 10. COMMITMENTS AND CONTINGENCIES The Company received $3,300,000 in 1996 in connection with the filing of certain amended income tax returns. The Internal Revenue Service has preliminarily disallowed deductions taken on these returns. The Company intends to pursue the matter in court and contest the matter vigorously. While it is currently impossible to determine the final disposition of this matter, management does not believe that its ultimate resolution will have a material adverse effect on the financial position or results of operations of the Company. In addition to the matter 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 January 31, 1998, the Company had outstanding letters of credit amounting to $2,877,000. Management believes the likelihood of non-performance under such contracts is remote. The Company has entered into an agreement to open one new department store in the second half of fiscal 1998 and is in process of remodeling certain existing store locations. The estimated cost of such projects is $15,482,000. Such projects are expected to be fully complete in fiscal 1998, 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. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1997 and 1996 (in thousands, except per share data):
1997 Quarter Ended May 3 August 2 November 1 January 31 Net sales $90,506 $99,997 $101,466 $156,223 Gross profit 28,510 32,279 32,871 49,974 Income (loss) before income tax expense (benefit) (1,673) (422) (2,516) 10,998 Net income (loss) (987) (248) (1,485) 6,450 Net income (loss) per common share - basic and diluted (.09) (.02) (.14) .62
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 - basic and diluted (.13) (.07) (.15) .52
The Company's quarterly results of operations for the three month period ended January 31, 1998 includes a credit of $898,000 related to a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. (See Note 2.) The quarterly results of operations for the three month periods ended January 31, 1998 and February 1, 1997 also include adjustments to the inventory shrinkage reserve resulting in an increase to the gross margin of $637,000 and $795,000, respectively. **********
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS GOTTSCHALKS INC. AND SUBSIDIARY _______________________________________________________________________________ COL. A COL. B COL. C COL. D COL. E COL. F _______________________________________________________________________________ ADDITIONS Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of DESCRIPTION of Period Expenses Describe Describe Period Year ended January 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts.. $1,322,107 $2,704,104(1) $( 898,000)(2) $(2,691,032)(3) $ 437,179 Allowance for vendor claims receivable $ 80,000 $ $ 80,000 Allowance for notes receivable $ -0- $ $ -0- Year ended February 1, 1997: Deducted from asset accounts: Allowance for doubtful accounts. $1,261,983 $2,730,502 (1) $(2,670,378)(3) $1,322,107 Allowance for vendor claims receivable $ 90,000 $ (10,000)(5) $ 80,000 Allowance for notes receivable.$ 282,767 $ (282,767)(6) $ -0- Year ended February 3, 1996: Deducted from asset accounts: Allowance for doubtful accounts.. $1,297,231 $2,462,504 (1) $(2,497,752)(3) $1,261,983 Allowance for vendor claims receivable $ 98,000 $ (8,000)(5) $ 90,000 Allowance for notes receivable.$ 150,000 $ 132,767 (4) $ 282,767
Notes: (1) Provision for loss on credit sales. (2) Represents a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. (See Note 2 to the Consolidated Financial Statements.) This amount is included in net credit revenues in the fiscal 1997 statement of operations. (3) Uncollectible accounts written off, net of recoveries. (4) Provision for uncollectible portion of note receivable. (5) Reduction in provision for uncollectible vendor claims receivable. (6) 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: March 20, 1998 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) March 20, 1998 Joseph W. Levy Vice Chairman of \s\ Gerald H. Blum the Board March 20, 1998 Gerald H. Blum President and Chief \s\ James R. Famalette Operating Officer March 20, 1998 James R. Famalette Senior Vice President and Chief Financial \s\ Alan A. Weinstein Officer (principal Alan A. Weinstein finanical and accounting officer) March 20, 1998 \s\ O. James Woodward III Director March 20, 1998 O. James Woodward III \s\ Bret W. Levy Director March 20, 1998 Bret W. Levy \s\ Sharon Levy Director March 20, 1998 Sharon Levy \s\ Joseph J. Penbera Director March 20, 1998 Joseph J. Penbera \s\ Fred Ruiz Director March 20, 1998 Fred Ruiz \s\ Max Gutmann Director March 20, 1998 Max Gutmann EX-23 2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-54783 and No. 33-54789 of Gottschalks Inc. on Form S-8 of our report dated February 24, 1998, appearing in this Annual Report on Form 10-K of Gottschalks Inc. for the year ended January 31, 1998. DELOITTE & TOUCHE LLP/s/ Fresno, California March 18, 1998 EX-27 3
5 THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T AND INCLUDES SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1998. 12-MOS JAN-31-1998 JAN-31-1998 1,601 15,813 7,077 517 99,294 134,712 145,166 46,109 242,311 67,133 62,420 0 0 105 83,800 242,311 448,192 456,532 304,558 304,558 6,667 2,704 7,325 6,387 2,657 3,730 0 0 0 3,730 .36 .36
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