-----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, A59keqKGQBf3dQR5M0u9F0SKmOPIjBA7kufiywEXD5RItMV7qqUzxQeIc3D9PAl9 LY1XwAXDYNITM8u0rgltmg== 0000790414-99-000004.txt : 19990503 0000790414-99-000004.hdr.sgml : 19990503 ACCESSION NUMBER: 0000790414-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990430 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: 99607827 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 30, 1999 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) 434-4800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered Common Stock, $.01 par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 31, 1999: Common Stock, $.01 par value: $51,061,000 On March 31, 1999 the Registrant had outstanding 12,575,565 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 24, 1999, which will be filed pursuant to Regulation 14A, are incorporated by reference into Part III of this Form 10-K. INDEX PART I Page No. Item 1. Business........................ 1 Item 2. Properties...................... 24 Item 3. Legal Proceedings............... 28 Item 4. Submission of Matters to a Vote of Security Holders................ 28 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......................... 28 Item 6. Selected Financial Data......... 29 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition....................... 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 50 Item 8. Financial Statements and Supplementary Data.............. 50 Item 9. Changes in and Disagreements with Accountants on Auditing and Financial Disclosures........... 50 PART III Item 10. Directors and Executive Officers of the Registrant............... 51 Item 11. Executive Compensation.......... 53 Item 12. Security Ownership of Certain Beneficial Owners and Management. 53 Item 13. Certain Relationships and Related Transactions............ 53 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. 53 Signatures................................. 90 PART I Item 1. BUSINESS GENERAL Gottschalks Inc. is a regional department and specialty store chain based in Fresno, California. The Company currently operates forty full- line department stores, including thirty Gottschalks' stores located throughout California, and in Oregon, Washington and Nevada, and ten "Harris/Gottschalks" stores located in the Southern California area. The Company also operates twenty-two "Gottschalks" and "Village East" specialty stores which carry a limited selection of merchandise. On August 20, 1998, the Company acquired nine of the stores now operated under the "Harris/Gottschalks" nameplate (closing one of the acquired stores on January 31, 1999, as planned) from The Harris Company ("Harris") of San Bernardino, California. In fiscal 1998, the Company's sales, which include sales applicable to the Harris/Gottschalks locations after August 20, 1998, exceeded a half-a-billion dollars for the first time in the Company's history. Fiscal 1998 sales totaled $517.1 million, a 15.4% increase from fiscal 1997 sales of $448.2 million. Total department store sales comprised 96.5%, and specialty store sales comprised 3.5%, of fiscal 1998 sales. Gottschalks and Harris/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, shoes, fine jewelry and accessories; home furnishings including china, housewares, domestics, electronics (in ten locations) and small electric appliances; and other consumer goods. The Company's stores also carry private-label merchandise and a mix of higher and budget priced merchandise. The Company's department stores are generally anchor tenants of regional shopping malls. Village East specialty stores, which offer apparel for larger women, are located in the same mall in which a Company department store is located, or as a separate department within some of the Company's larger 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. The Company has operated continuously for over 94 years since it was founded by Emil Gottschalk in 1904. The Company did its initial public offering of stock in 1986, and most of its growth has occurred since then. Gottschalks Inc. includes the accounts of its wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"). GCRC is a qualified special purpose entity which was formed in 1994 in connection with a receivables securitization program. (See Note 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".) BUSINESS ACQUISITION On August 20, 1998, the Company acquired substantially all the assets and business of Harris, a wholly-owned subsidiary of El Corte Ingles ("ECI") of Spain. Harris operated nine full-line department stores located in the Southern California area. The assets acquired consisted primarily of merchandise inventories, customer credit card receivables, fixtures and equipment and certain intangibles. The Company also assumed certain liabilities relating to the business, including vendor payables, store leases and certain other contracts. The purchase price for the assets was 2,095,900 shares of common stock of the Company and a $22.2 million 8% Subordinated Note due August 20, 2003. As planned, the Company closed one of the acquired stores on January 31, 1999. Management believes the primary benefits of the acquisition are: (1) the addition of approximately $90.0 million of annual sales volume to further leverage Gottschalks' overhead; (2) the elimination of certain duplicative corporate and distribution functions of Harris; (3) increased purchasing power in areas such as merchandising, advertising, supplies and insurance; (4) the acquisition of a profitable shoe division operated by Harris; (5) the potential to more fully develop Harris' home divisions, which management believes are under-penetrated in the Company's market areas; and (6) the addition of more than 100,000 active proprietary credit card customers. 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, and to complement the branded merchandise with a mixture of private-label and other higher and budget priced merchandise. Brand-name apparel, shoe, cosmetic and accessory lines carried by the Company include Estee Lauder, Lancome, Clinique, Dooney & Bourke, Nine West, 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 for the home includes Sony, Mitsubuishi, Lenox, Krups, Calphalon, Royal Velvet, KitchenAid and Samsonite. Certain of the Company's stores also carry apparel lines desired by the Company's more affluent customers, including St. John Knits, Dana Buchman, Ellen Tracy and Ralph Lauren (Polo). In the Company's stores, brand-name merchandise is prominently displayed, in many cases with vendor supplied fixtures and signage. The Company's merchandising activities are conducted centrally from its corporate offices in Fresno, California. The Company's merchandising strategy also continues to focus on reallocating selling floor space to higher profit margin items, such as shoes, and shifting its merchandise mix to a higher proportion of better brands. For example, during fiscal 1998, the Company reduced the number of stores that carry electronics, traditionally a lower gross margin line of business, and intends to discontinue carrying electronics in its stores by the end of fiscal 1999. In fiscal 1999, the Company will assume the operation of its shoe division, which is currently operated by an outside company as a leased department (in Gottschalks locations). In fiscal 1999, the Company also plans to expand and remodel the shoe departments in certain of its stores. The Company's merchandising strategy also continues to focus on serving particular market segments experiencing increasing growth in its market areas, including the "55 Plus" age group and the Hispanic population. 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:
1998 1997 1996 1995 1994 Softlines: Cosmetics & Accessories... 18.2% 17.8% 17.5% 17.2% 16.6% Women's Clothing.......... 16.8 16.8 15.9 15.5 16.1 Men's Clothing............ 14.0 14.0 14.4 14.3 13.9 Women's Dresses, Coats & Lingerie.............. 7.7 7.9 7.9 7.8 7.9 Shoes, Fine Jewelry & Other Leased Departments (1).. 7.7 7.8 7.8 7.4 7.1 Junior's Clothing......... 4.6 5.2 5.5 6.0 6.3 Children's Clothing....... 5.5 5.3 5.3 4.9 4.9 Village East.............. 2.5 2.5 2.5 2.6 2.6 Shoes (2)................. 0.8 ---- ---- ---- ---- ---- Total Softlines........ 77.8 77.3 76.8 75.7 75.4 Hardlines: Housewares................ 10.7 10.6 10.4 11.0 10.9 Domestics & Luggage....... 7.8 8.1 7.9 8.1 8.1 Electronics & Furniture... 3.7 4.0 4.9 5.2 5.6 ---- ---- ---- ---- ---- Total Hardlines........ 22.2 22.7 23.2 24.3 24.6 ---- ---- ---- ---- ---- Total Sales (3)........... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== - --------------------- (1) The Company currently leases the fine jewelry, shoe (in thirty-one of its stores as of January 30, 1999) and maternity wear departments, custom drapery, restaurants and the beauty salons in its department stores. The shoe department lease has been terminated effective mid-fiscal 1999. (2) The Company currently operates the shoe departments in the Harris/Gottschalks locations. Upon terminating the shoe department lease in mid-fiscal 1999, the Company will operate the shoe department in all of its locations. (3) Fiscal 1998 amounts include sales applicable to the Harris/Gottschalks stores starting August 20, 1998. Fiscal 1997 and prior amounts presented reflect Gottschalks sales only and do not reflect amounts applicable to Harris. The Company is a member of Frederick Atkins, Inc. ("Frederick Atkins"), a national association of major retailers which provides its members with group purchasing opportunities. 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 other members of the organization. Substantially all of the Company's private-label merchandise is currently purchased through Frederick Atkins. The Company also purchases merchandise from numerous other suppliers, none of which accounted for more than 5% of the Company's net purchases in fiscal 1998. Store Location and Expansion Strategy. The Company's stores are located primarily in diverse, growing, non-major metropolitan areas in the western United States. 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 where there is a strong demand and fewer competitors offering such merchandise. The Company has historically avoided expansion into major metropolitan areas which are well served by the Company's larger competitors. Some of the Company's stores are located in agricultural areas and cater to mature customers with above average levels of disposable income. The Company's department stores are generally anchor tenants of regional shopping malls, with the majority of its stores ranging in size from 50,000 to 150,000 gross square feet. Other anchor tenants in the malls generally complement the Company's goods with a mixture of competing and non-competing merchandise, and serve to increase customer foot traffic within the mall. 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 expansion strategy, the Company may also pursue selective strategic acquisitions. The Company has continued to invest in the renovation and refixturing of its existing store locations in an attempt to maintain and improve market share in those market areas. Store renovation projects can range from updating decor and improving in-store lighting, fixturing, wall merchandising and signage, to more extensive remodeling and expansion projects. 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. 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. The following table presents selected data related to the Company's stores for the fiscal years indicated:
Stores open at year-end: 1998 1997 1996 1995 1994 Department stores 40 (1) 34 32 31 26 Specialty stores 22 (2) 25 27 29 27 -- -- -- -- -- TOTAL 62 59 59 60 53 == == == == == Gross store square footage (in thousands): Department stores 4,301 3,391 3,175 2,878 2,327 Specialty stores 83 94 101 106 98 == == === === == TOTAL 4,384 3,485 3,276 2,984 2,425
===== ===== ===== ===== ===== - --------------------------- (1) The Company acquired nine stores from Harris in August 1998, closing one of the stores acquired on January 31, 1999. Two of the stores acquired are located in malls with pre-existing Gottschalks locations. The Company combines separate locations within the same mall for the purpose of determining the total number of stores being operated, resulting in a net addition of six department stores in fiscal 1998. (2) The Company has continued to close certain free- standing Village East stores as their leases expire and incorporate those stores into nearby larger Company department stores as separate departments. Sales generated by these departments are combined with total specialty store sales for reporting purposes. As of the end of fiscal 1999, the Company operated thirty-six department stores in California, two in Nevada and one each in Oregon and Washington. The Company's stores range in size from 25,000 to over 200,000 gross square feet. Management believes the Company has a competitive advantage in being able to accommodate diverse locations into its operation that may not be desired by its larger competitors that adopt a more standardized approach to expansion. Following is a summary of the Company's department store locations, by store size:
# of stores open Larger than 200,000 gross square feet 3 150,000 - 199,000 gross square feet 7 100,000 - 149,999 gross square feet 8 50,000 - 99,000 gross square feet 19 25,000 - 49,000 gross square feet 3 -- TOTAL 40 ==
See Part I, Item 2, "Properties--Store Leases and Locations" for additional information related to the Company's store locations. 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'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 as a means to improve 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 customers. 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 fiscal 1998, the Company completed the installation of a new targeted marketing system through which the Company is now able to analyze the purchasing patterns of third party bank card users and, for the first time, direct targeted marketing activities at those customers. (See Part I, Item I, "Business--Private-Label Credit Card") In addition to targeted advertising efforts, the Company also uses a variety of other marketing formats in its sales promotion strategy. One of the Company's most significant recent marketing efforts is the inception of "Emil's Market", named after the Company's founder, Emil Gottschalk. Emil's Market, introduced in the Company's stores in fiscal 1998, is a complete marketing strategy for the Company's housewares division, intended to present houseware products in a specialty store format within the main department store using a consistent theme with visual presentation, advertising and packaging. A portion of the initial funding for the project and certain annual recurring costs are paid by participating vendors. In fiscal 1998, the Company also launched its new "KidZone" program for the children's division and the new "Get It" program for the junior's and young men's divisions, through which members receive additional discounts and special services. The primary objectives of these programs are to improve customer loyalty and increase sales in these divisions. The Company offers selected merchandise, a complete Bridal Registry service, and other general corporate information on the World Wide Web at http://www.gottschalks.com. The Company also sells merchandise through its mail order department. 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 "Gottschalks Rewards" program. (See Part I, Item I, "Business--Private-Label Credit Card.") Customer Service. Management believes one way the Company can differentiate itself from its competitors is to provide a consistently high level of customer service. The Company has a "Four Star" customer service program, designed to continually emphasize and reward high standards of customer service in the Company's stores. Sales associates are encouraged to keep notebooks of customers' names, clothing sizes, birthdays, and major purchases, to telephone customers about promotional sales and send thank-you notes and other greetings to their customers during their normal working hours. The "Four Star" customer service program also emphasizes sales associate and store management training. Product seminars and other training programs are frequently conducted in the Company's stores and its corporate headquarters to ensure that sales associates will be able to provide useful product information to customers. The Company also offers opportunities for management training and leadership classes for those associates identified for promotion within the Company. Various financial incentives are offered to the Company's sales associates to reward reaching sales performance goals. In addition to providing a high level of personal sales assistance, management believes that well-stocked stores, a liberal return and exchange policy, frequent sales promotions and a conveniently located and attractive shopping environment enhance the customer's shopping experience and increase customer loyalty. Management also believes that maintaining appropriate staffing levels in its stores, particularly at peak selling periods, is essential for providing a high level of customer service. In fiscal 1999, the Company expects to implement a new labor scheduling system, through which management believes it will be able to more efficiently match staffing levels to projected sales, thereby improving customer service and maximizing the return on its store payroll expenditures. Distribution of Merchandise. The Company's 420,000 square foot distribution center is centrally located in Madera, California and serves all of the Company's store locations, including its store locations outside California. Completed in 1989, the distribution center presently has the capacity to process merchandise for up to seventy-five department store locations, and the capacity may be expanded beyond that amount. The Company receives substantially all of its merchandise at the distribution center and makes daily distributions to the stores. The Company has continued to focus on the adoption of new technology and operational best practices at its distribution center with the goals of receiving, processing and distributing merchandise to stores at a faster rate and at a lower cost per unit. In fiscal 1998, the Company completed the implementation of a new logistical system at its distribution center, which is the same system that many of the Company's larger competitors have also put into place. The new system enables the Company to minimize the manual handling of a large percentage of incoming merchandise and provides for the processing of such merchandise through the distribution center and to the stores in minutes and hours as compared to several days in the past. Currently, approximately 50% of merchandise is purchased from vendors which 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. These vendors also ship only "floor-ready" merchandise which arrives on approved hangers pre-tagged with universal product code ("UPC") tickets, a bar coded price label containing retail prices that can be electronically translated into the Company's inventory systems. The Company also has formal guidelines for vendors with respect to shipping, receiving and invoicing for merchandise under its "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 instance of non-compliance. Such fees are intended to offset higher costs associated with the processing of such merchandise. Vendors can obtain the Company's shipping guidelines through the Company's Web site. 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. 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 its customer credit card receivables on an ongoing basis in connection with a receivables securitization program. The Company has continued to service and administer the receivables under the program. The following represents a summary of information related to the Company's credit card receivable portfolio for the fiscal years indicated:
1998 1997 1996 1995 1994 (In thousands of dollars, except selected data) Average credit card receivables serviced (1) $69,143 $64,612 $64,162 $62,492 $57,613 Service charge income 13,431 11,618 10,493 10,937 8,904 Credit sales as a % of total sales (2) 43.1% 43.7% 43.1% 43.6% 42.2% # of days credit sales in receivables (3) 115.6 119.3 123.7 127.5 146.2
_______________________ (1) Includes receivables sold, the retained interest in receivables sold, and other receivables, which are all serviced by the Company. (2) The decrease in credit sales as a percentage of total sales in fiscal 1998 is primarily due to the new Harris/Gottschalks locations, which generally have a lower credit sales volume than that of the rest of the Company. (3) Excludes receivables acquired from Harris on August 20, 1998. The Company has a variety of credit-related programs which management believes have improved customer service and have increased service charge revenues. Such programs include: - 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; - "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; - 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; and - Ongoing credit card reactivation programs designed to recapture credit cardholders who have not utilized their credit card for a specified period of time. The Company had approximately 589,000 active credit card holders as of February 28, 1999 as compared to 460,000 as of February 28, 1998. This increase is primarily due to the acquisition of approximately 100,000 credit card accounts from Harris in August 1998. 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 processes, and enhances the Company's ability to provide customer service. 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 credit management and advanced call management systems for direct marketing and 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. 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%, and 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 increase the profitability of the Company. The Company's information systems include IBM mainframe technology, supplemented by applications on client servers, mid-range and personal computers connected through a local area network. All of the Company's transaction processing and reporting activities are computerized, including its sales, inventory, credit, accounts payable, payroll and financial reporting systems. 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 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 gross margin improvement 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 decreasing from approximately 1.4% in fiscal 1994 and 1.3% in fiscal 1995 to approximately 1.1% of net sales in fiscal 1996, 1997 and 1998. 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 system, upgraded in fiscal 1998, has enhanced the Company's ability to allocate merchandise to stores more efficiently and make prompt reordering and pricing decisions. The system also provides merchandise-related information used by the Company's buying division in its analysis of market trends and specific item performance in stores. The Company has also implemented a variety of programs with its vendors, including an automatic replenishment inventory system for certain basic merchandise and an electronic data interchange ("EDI") system providing for on-line purchase order entry and electronic invoicing. Such systems have automated certain processes associated with the purchasing and payment for merchandise. Management is also focused on improving systems as a means to reduce operating costs and improve efficiencies throughout the Company. Recent system implementations include the previously described logistical system installed at the Company's distribution center, which has resulted in lower distribution center payroll and other overhead costs. A workflow and imaging system was also recently installed, which has created a "paperless" environment in the Company's accounts payables department and has automated certain tasks that were previously manual. Efficiencies gained through this system have enabled the department to process a significantly higher volume of invoices and payments without increasing staffing levels. 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 and human resources departments. In fiscal 1999, the Company expects to complete a strategic review of its information systems and formulate a long-term strategy for further system improvements. The Company's Year 2000 readiness is described more fully in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". Competition. The Company operates in a highly competitive environment, competing with national, regional, and local chain department and specialty stores, some of which are considerably larger and have substantially greater financial and other resources than the Company. 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. Increased use and acceptance of the internet and other home shopping formats, and the trend towards consolidation of competitors within the retail industry, have also created additional competition for the Company. 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 94 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. The Company encourages its store management and associates to actively participate in local charitable activities. Seasonality. 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 Easter and Back-to-School 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"). Employees. As of January 30, 1999, the Company had 6,600 employees, including 1,780 employees working part-time (less than 20 hours per 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 competitive cost to the employee and eligible beneficiaries and dependents. The Company has performance-based incentive pay programs for its officers and certain of its key employees and has stock option plans that provide for the grant of stock options to officers and key employees of the Company. The Company's stockholders have also approved a stock purchase plan, which is expected to be implemented in fiscal 1999. The Company also offers management training and leadership classes for those associates identified for promotion within 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. FORWARD-LOOKING STATEMENTS This Form 10-K contains certain "forward-looking statements" regarding activities, developments and conditions that the Company anticipates may occur or exist in the future relating to things such as: revenues and earnings; savings or synergies from acquisitions; future capital expenditures; its expansion strategy (including store and department openings); the impact of sales promotions and customer service programs on consumer spending; the utilization of consumer credit programs; its Year 2000 readiness. Such forward-looking statements can be identified by words such as: "believes", "anticipates", "expects", "intends", "seeks", "may", "will" and "estimates". The Company bases its forward-looking statements on its current views and assumptions. As a result, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those predicted. Some of the factors that could cause the Company's results to differ from those predicted include the following: RISK FACTORS General Economic and Market Conditions. The Company's stores are located primarily in non-major metropolitan and agricultural areas in the western United States. A substantial portion of the stores are located in California. The Company's success depends upon consumer spending, which may be materially and adversely affected by any of the following events or conditions: a downturn in the national economy or in the California economy; a downturn in the local economies where the stores are located; a decline in consumer confidence; an increase in interest rates; inflation or deflation; consumer credit availability; consumer debt levels; tax rates and policy; and unemployment trends. Seasonality and Weather. Seasonal influences affect the Company's sales and profits. The Company experiences its highest levels of sales and profits during the Christmas selling months of November and December, and to a lesser extent, during the Easter holiday and Back-to-School seasons. The Company also has increased working capital needs prior to the Christmas season to carry significantly higher inventory levels to meet anticipated demands. Any substantial decrease in sales during its traditional peak selling periods could materially adversely impact the Company's business, financial condition and results of operations. Factors that could cause results to vary include: the timing and level of sales promotions; the weather; fashion trends; local unemployment levels; and the overall health of the national and local economies. The Company depends on normal weather patterns across its markets. Historically, unusual weather patterns have significantly impacted its business. Consumer Trends. The Company's success partially depends on its ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. However, it is difficult to predict what merchandise consumers will demand, particularly merchandise that is trend driven. Failure to accurately predict constantly changing consumer tastes, preferences and spending patterns could adversely affect short and long term results. Expansion Strategy - Future Growth and Recent Acquisitions. The Company's expansion strategy involves remodeling and expanding existing stores and acquiring or opening new stores. Achieving such expansion plans (including any potential acquisitions) depends upon many factors, including the ability of the Company to: - identify, negotiate, finance, obtain, construct, lease or refurbish suitable store sites; - hire, train and retain qualified personnel; and - integrate new stores into existing information systems and operations. The Company also expects to achieve synergies from its recent acquisition of the Harris stores. Achieving such synergies depends upon many factors, including the ability of the Company to: - leverage the additional sales volume of the Harris stores over existing overhead; - increase the Company's purchasing power; - increase usage of the Company's credit card by the new Harris customers; and - successfully assume the operation of its shoe business. The Company cannot guarantee that it will achieve its targets for remodeling or expanding existing stores or for opening new stores, or that such stores will operate profitably when opened or acquired, or that it will achieve the expected synergies from the Harris acquisition. If the Company fails to effectively implement its expansion strategy, it could materially and adversely affect the Company's business, financial condition and results of operations. Competition. The retail business is highly competitive. The Company's primary competitors include: national, regional and local chain department and specialty stores, general merchandise stores, discount and off-price retailers and outlet malls. Increased use and acceptance of the internet and other home shopping formats also creates increased competition. Some of these competitors offer similar or better branded merchandise and are larger and have greater financial resources to purchase larger quantities of merchandise at lower prices. The Company's success in counteracting these competitive pressures depends on its ability to: - offer merchandise which reflects the different regional and local needs of its customers; - differentiate and market itself as a home-town, locally- oriented store (as opposed to its more nationally focused competitors); - continue to shift its merchandise mix to a higher proportion of better branded merchandise. - increase its buying power as a member of Fredrick Atkins; and - accept smaller or odd-sized orders of merchandise. Existing or new competitors, however, may begin to carry such brand-name merchandise or increase their offering of better quality merchandise which may negatively impact the Company's business, financial condition and results of operations. Vendor Relations. The Company believes its close relationship with its key vendors enhances its ability to purchase brand-name merchandise at competitive prices. If the Company loses key vendor support, is unable to participate in group purchasing activities or its vendors withdraw brand- name merchandise, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company cannot guarantee that it will be able to acquire brand-name merchandise at competitive prices or on competitive terms in the future. Leverage and Restrictive Covenants. Due to the level of the Company's indebtedness, any material adverse development affecting the Company could significantly limit its ability to withstand competitive pressures and adverse economic conditions, take advantage of expansion opportunities or to meet its obligations as they become due. The Company's existing debt imposes operating and financial restrictions that limit the Company's ability to make dividend payments and grant liens. Interest Rate Risk. The Company's borrowings under its revolving line of credit facility bear a variable interest rate. If interest rates increase, the Company's financial results could be materially adversely affected. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." Consumer Credit Risks. The Company's private-label credit card facilitates sales and generates additional revenue from credit card fees. Changes in credit card use, default rates or in the laws regulating the granting or servicing of credit (including late fees and finance charges applied to outstanding balances) could materially adversely affect the Company's business, financial condition and results of operations. In addition, the Company cannot guarantee that the credit card programs it has implemented will increase or maintain customer spending. Securitization of Accounts Receivable. The Company securitizes the receivables generated under its private-label credit card. Under the securitization program, the Company transfers such receivables to a special purpose entity which issues interests in the receivables to investors. The Company cannot guarantee that it will continue to generate receivables by credit card holders at the same rate, or that it will establish new credit card accounts at the rate it has in the past. Any material decline in the generation of receivables or in the rate of cardholder payments on accounts could have a material adverse effect on the Company's financial condition and results of operations. Year 2000 Readiness. If computer hardware, software or technology improperly function using dates after December 31, 1999, then the Company may be adversely affected. The Company estimated its costs and completion dates for its Year 2000 readiness based on assumptions of future events including: - the continued availability of internal and external resources, such as human resources and capital; - the ability of third parties doing business with the Company to timely modify their computer systems; and - the Company's contingency plans. The Company cannot guarantee that it or the third parties it does do business with will successfully complete the Year 2000 conversion on a timely basis. If either the Company or any third party with whom it does substantial business fails to complete its Year 2000 conversion on a timely basis, it may adversely affect the Company's business, financial condition and results of operations. Dependence on Key Personnel. The Company's success depends to a large extent on its executive management team. The loss of the services of any such executive could have a material adverse effect on the Company. The Company cannot guarantee that it will be able to retain such key personnel or attract additional qualified members to its management team in the future. Labor Conditions. The Company depends on attracting and retaining a large number of qualified employees to maintain and increase sales and to execute its customer service programs. Many of the employees are in entry level or part-time positions with historically high levels of turnover. The Company's ability to meet its employment needs is dependent on a number of factors, including the following factors which affect the Company's ability to hire or retain qualified employees: - unemployment levels; - minimum wage legislation; and - changing demographics in the local economies where stores are located. The foregoing list of important factors is not exclusive and the Company does not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the statement is made. 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% interest. 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, with six consecutive five-year renewal options. Store Leases and Locations. The Company owns six of its forty department stores, and leases the remaining thirty-four department stores and all of its twenty-two specialty stores. 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. Additional information pertaining to the Company's store leases is included in Note 6 to the Consolidated Financial Statements. The following table contains specific information about each of the Company's stores open as of the end of fiscal 1998:
Expiration Gross(1) Date of Square Date Current Feet Opened Lease Owned or Leased(2) DEPARTMENT STORES: Northern Region (17 Gottschalks locations): Antioch............. 80,000 1989 N/A (3) Own Auburn.............. 40,000 1995 2005 Lease Carson City, Nevada. 68,000 1995 2005 Lease Chico............... 85,000 1988 2017 Lease Eureka.............. 96,900 1989 N/A (3) Own Klamath Falls, Oregon............ 65,400 1992 2007 Lease Modesto: Vintage Faire.....161,500 1977 2007 Lease Century Center.... 65,000 1984 2013 Lease Reno, Nevada........138,000 1996 2016 Lease Sacramento..........194,400 1994 2014 Lease Santa Rosa..........131,300 1997 2017 Lease Sonora.............. 59,800 1997 2017 Lease Stockton............ 90,800 1987 2009 Lease Tacoma, Washington..119,300 1992 2012 Lease Tracy...............113,000 1995 2015 Lease Woodland............ 57,300 1987 2017 Lease Yuba City........... 80,000 1989 N/A(3) Own Central Region (13 Gottschalks locations): Bakersfield, Valley Plaza...... 90,000 1987 2017 Lease Capitola............105,000 1990 2015 Lease Clovis..............101,400 1988 2018 Lease Fresno: Fashion Fair......163,000 1970 2016 Lease Fig Garden........ 36,000 1983 2005 Lease Manchester........175,600 1979 2009 Lease Hanford............. 98,800 1993 N/A(3) Own Merced.............. 60,000 1983 2013 Lease Oakhurst............ 25,600 1994 2005 Lease San Luis Obispo..... 99,300 1986 N/A(3) Own Santa Maria.........114,000 1976 2006 Lease Visalia.............150,000 1995 2014 Lease Watsonville......... 75,000 1995 2006 Lease Southern Region (10 Harris/Gottschalks locations) (4): Bakersfield, East Hills: Women's, Shoes and Accessories.....105,000 1998 2008(5) Lease Men's, Children's and Home........ 92,900 1988 2009 Lease Hemet............... 51,000 1998 2005 Lease Indio............... 60,000 1998 2005 Lease Moreno Valley.......153,000 1998 2008(5) Lease Palmdale: Women's, Shoes and Accessories.....114,000 1998 2008(5) Lease Men's, Children's and Home.........114,900 1990 N/A(3) Own Palm Springs........ 82,000 1991 2015 Lease Redlands............106,000 1998 2007 Lease Riverside...........208,000 1998 2002 Lease San Bernardino......204,000 1995 2017 Lease Victorville......... 71,000 1998 2006 Lease Total Department Store Square Footage........ 4,301,200 SPECIALTY STORES: Gottschalks: Aptos............... 11,200 1988 2004 Lease Redding............. 7,800 1993 Automatically Lease renews every 60 days Scotts Valley....... 11,200 1988 2001 Lease Village East: Antioch............. 2,100 1989 1999(6) Lease Capitola............ 2,360 1991 2009 Lease Carson City, Nevada. 3,400 1995 2005 Lease Chico............... 2,300 1988 2000 Lease Clovis.............. 2,300 1988 2009 Lease Eureka.............. 2,820 1989 2004 Lease Fresno, Fig Garden.. 2,800 1986 30 days(7) Lease Hanford............. 2,800 1993 2008 Lease Modesto, Century Center.... 2,730 1986 2005 Lease Palmdale............ 2,716 1990 2000 Lease Sacramento.......... 2,700 1994 2004 Lease San Luis Obispo..... 2,500 1987 2011 Lease Santa Maria......... 3,000 1976 2001 Lease Stockton............ 1,799 1989 30 days(7) Lease Tacoma.............. 4,000 1992 2012 Lease Tracy............... 3,428 1995 2006 Lease Visalia............. 3,400 1975 1999(6) Lease Woodland............ 2,022 1987 1999(8) Lease Yuba City........... 3,200 1990 2000 Lease Total Specialty Store Square Footage.... 82,575 Total Square Footage.........4,383,775
__________________________ (1) Reflects total store square footage, including office space, storage, service and other support space that is not dedicated to direct merchandise sales. (2) Most of the Company's department store leases contain renewal options. Leases for specialty store locations generally do not contain renewal options. (3) These stores are Company owned and have been pledged as security for various debt obligations of the Company. (See Note 5 to the Consolidated Financial Statements.) (4) Locations opened in fiscal 1998 were acquired from Harris. Locations open prior to that date were original Gottschalks locations that are now operated under Harris/Gottschalks nameplates. (5) These leases are with ECI, an affiliate of the Company. (6) The Company expects to renegotiate these leases prior to their expiration. (7) These leases are renewable on a month-to-month basis. (8) The Company expects to close this location upon the expiration of its lease and incorporate it into the nearby department store location as a separate department. 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:
1998 1997 Fiscal Quarters High Low High Low 1st Quarter....... 9 1/4 6 13/16 6 1/2 5 1/8 2nd Quarter....... 8 7/8 7 3/4 9 5 1/2 3rd Quarter....... 8 3/4 6 9/16 9 7/8 7 11/16 4th Quarter....... 7 15/16 6 7/8 9 1/8 6 3/4
On March 31, 1999, the Company had 894 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. The sales price of the Company's common stock as reported by the NYSE on March 31, 1999 was $7 1/16 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. On August 20, 1998, in connection with completing the acquisition of substantially all of the assets and business of Harris, the Company issued 2,095,900 shares of its common stock and the Subordinated Note to Harris (see Note 2 to the Consolidated Financial Statements). The transaction was a private placement involving one offeree and one purchaser exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. 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 30, 1999, January 31, 1998, February 1, 1997, February 3, 1996 and January 28, 1995 are referred to herein as fiscal 1998, 1997, 1996, 1995 and 1994, 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. The Company completed the acquisition of nine stores from Harris on August 20, 1998, closing one of the acquired stores on January 31, 1999, as planned. The acquisition has affected the comparability of the Company's financial results. RESULTS OF OPERATIONS:
1998 1997 1996 1995 1994 (In thousands, except share data) Net sales........... $517,140 $448,192 $422,159 $401,041 $363,603 Net credit revenues.. 6,897 6,385 4,198 4,896 4,210 ------- ------- ------- ------- ------- 524,037 454,577 426,357 405,937 367,813 Costs and expenses: Cost of sales...... 347,531 304,558 287,164 278,827 247,423 Selling, general and administrative expenses......... 150,719 130,922 123,860 120,637 101,516 Depreciation and amortization(1)... 8,461 6,667 6,922 8,092 5,860 Acquisition related expenses........... 859 673 Unusual items(2)..... 3,833 ------- ------- ------- ------- ------- 507,570 442,820 417,946 407,556 358,632 ======= ======= ======= ======= ======= Operating income (loss) 16,467 11,757 8,411 (1,619) 9,181 Other (income) expense: Interest expense...... 9,470 7,325 8,111 7,718 7,599 Miscellaneous income.. (2,032) (1,955) (2,792) (726) (755) ------- ------- ------- ------- ------- 7,438 5,370 5,319 6,992 6,844 ======= ======= ======= ======= ======= Income (loss) before income tax expense (benefit)........... 9,029 6,387 3,092 (8,611) 2,337 Income tax expense (benefit)........... 3,747 2,657 1,258 (2,972) 821 ------- ------- ------ ------ ------ Net income (loss)..... $ 5,282 $ 3,730 $ 1,834 $(5,639) $ 1,516 ======= ======= ====== ====== ====== Net income (loss) per common share - basic and diluted.. $ 0.46 $ 0.36 $ 0.18 $ (0.54) $ 0.15 ======= ======= ====== ====== ====== Weighted-average number of common shares outstanding basic and diluted 11,418 10,474 10,461 10,416 10,413
SELECTED BALANCE SHEET DATA: 1998 1997 1996 1995 1994 (In thousands of dollars) Retained interest in receivables sold...$ 37,399 $ 15,813 $ 20,871 $ 25,892 $ 25,745 Receivables, net.... 16,136 3,085 1,818 1,575 1,566 Merchandise inventories........ 123,118 99,294 89,472 87,507 80,678 Property and equipment, net..... 113,645 99,057 87,370 89,250 93,809 Total assets........ 324,364 242,311 232,400 239,041 233,353 Working capital..... 96,231 67,579 70,231 42,904 37,900 Long-term obligations, less current portion.74,114 62,420 60,241 34,872 33,672 Subordinated note payable to affiliate.20,618 --- --- --- --- Stockholders' equity.103,468 83,905 80,139 77,917 83,577
OTHER SELECTED DATA:
1998 1997 1996 1995 1994 (In thousands of dollars, except other selected data) Sales growth: Total store sales.... 15.4% 6.2% 5.3% 10.3% 6.2% Comparable store sales. 2.1% 3.3% 1.4% (3.1%) 3.3% Comparable stores data: Sales per selling square foot $170 $160 $170 $181 $195 Selling square footage 2,621 2,642 2,161 1,892 1,747 Gross margin percent: Owned............. 34.3% 33.5% 33.4% 31.8% 33.3% Leased............. 14.8% 14.6% 14.6% 14.4% 14.1% EBITDA(3)...........$31,133 $24,631 $21,689 $10,777 $22,268 Capital expenditures... $16,801 $14,976 $ 6,845 $12,773 $ 4,539 Current ratio..... 1.98:1 2.01:1 2.10:1 1.45:1 1.43:1 Inventory turnover ratio............. 2.6 2.6 2.6 2.7 2.9
- ----------------------------------- (1) Includes the amortization of new store pre-opening costs of $421,000, $589,000, $1.3 million, $2.5 million and $438,000 in fiscal 1998, 1997, 1996, 1995 and 1994, respectively. This amount also includes the amortization of goodwill of $291,000 in fiscal 1998 and $116,000 in each of fiscal years 1997 through 1994. (2) Represents legal fees and other costs incurred to settle litigation against the Company. (See the Company's 1997 Annual Report on Form 10-K for additional information.) (3) "EBITDA" is defined as earnings before interest, income taxes, depreciation and amortization, and other unusual items. EBITDA also excludes interest expense on securitized receivables which is included in net credit revenues. EBITDA is not intended to represent cash flows from operations, to be an indicator of the Company's operating performance or to be a measure of its liquidity. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is management's discussion and analysis of significant factors which have affected the Company's financial position and its results of operations for the periods presented in the accompanying Consolidated Financial Statements. As described more fully in "Liquidity and Capital Resources", the Company completed the acquisition of nine stores from Harris on August 20, 1998, closing one of the acquired stores on January 31, 1999, as planned. The acquisition has affected the comparability of the Company's financial results. Results of Operations The following table sets forth for the periods indicated certain items from the Company's Consolidated Income Statements, expressed as a percent of net sales:
1998 1997 1996 Net sales........................ 100.0% 100.0% 100.0% Net credit revenues.............. 1.3 1.4 1.0 ----- ----- ----- 101.3 101.4 101.0 Costs and expenses: Cost of sales................. 67.2 68.0 68.0 Selling, general and administrative expenses..... 29.1 29.2 29.3 Depreciation and amortization. 1.6 1.5 1.7 Acquisition related expenses.. 0.2 0.1 ----- ----- ----- 98.1 98.8 99.0 ----- ----- ----- Operating income ................ 3.2 2.6 2.0 Other (income) expense: Interest expense.............. 1.8 1.6 1.9 Miscellaneous income.......... (0.3) (0.4) (0.6) ----- ----- ----- 1.5 1.2 1.3 ----- ----- ----- Income before income tax expense. 1.7 1.4 0.7 Income tax expense...... 0.7 0.6 0.3 ----- ----- ----- Net income ................. 1.0% 0.8% 0.4% ===== ===== =====
Fiscal 1998 Compared to Fiscal 1997 Net Sales In fiscal 1998, net sales exceeded a half-a-billion dollars for the first time in the Company's history. Net sales in fiscal 1998 increased by $68.9 million to $517.1 million as compared to $448.2 million in fiscal 1997, a 15.4% increase. This increase is primarily due to additional sales volume generated by the nine new Harris/Gottschalks locations, beginning August 20, 1998, and by two new stores not open for the entire year in fiscal 1997. As planned, the Company closed one of the stores acquired from Harris on January 31, 1999. Comparable store sales, which increased by 2.1% in fiscal 1998 as compared to the prior year, were negatively impacted by unseasonably cold and wet weather conditions caused by the El Nino weather system. Net Credit Revenues Net credit revenues related to the Company's credit card receivables portfolio consist of the following:
(In thousands of dollars) 1998 1997 Service charge revenues $13,431 $11,618 Gain (loss) on sale of receivables (45) 1,050 Interest expense on securitized receivables (3,314) (3,579) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (3,175) (2,704) ------ ------ $ 6,897 $ 6,385 ====== ======
Net credit revenues associated with the Company's private label credit card increased by $512,000, or 8.0%, in fiscal 1998 as compared to fiscal 1997. As a percent of net sales, net credit revenues was 1.3% of net sales in fiscal 1998 as compared to 1.4% in fiscal 1997. As described more fully in Note 3 to the Consolidated Financial Statements, the gain on sale of receivables in fiscal 1997 relates to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and includes a non-recurring credit of $898,000 related to a change in the estimate for the allowance for doubtful accounts for receivables which were ineligible for sale. SFAS No. 125 has not materially affected the Company's operating results since its initial implementation in fiscal 1997. Service charge revenues increased by approximately $1.8 million, or 15.6%, in fiscal 1998 as compared to fiscal 1997. This increase is primarily due to additional service charge revenues generated by customer credit card receivables acquired from Harris, combined with an increase in the volume of late charge fees collected on delinquent credit card balances. This increase was partially offset by lower revenues resulting from a decrease in credit sales as a percent of total sales (43.1% in fiscal 1998 as compared to 43.7% in fiscal 1997), partially due to lower credit sales volume in the Harris/Gottschalks locations than in the Gottschalks locations. Interest expense on securitized receivables decreased by $265,000, or 7.4%, in fiscal 1998 as compared to fiscal 1997. This decrease relates to lower outstanding borrowings against securitized receivables during the period. (See Note 3 to the Consolidated Financial Statements and "Liquidity and Capital Resources".) Charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale increased by $471,000, or 17.4%, in fiscal 1998 as compared to 1997. As a percent of sales, however, such amounts remained unchanged at 0.6% in fiscal 1998 and 1997. Cost of Sales Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $43.0 million to $347.5 million in fiscal 1998 as compared to $304.6 million in fiscal 1997, an increase of 14.1%. The Company's gross margin percentage increased to 32.8% in fiscal 1998 as compared to 32.0% in fiscal 1997, primarily due to increased sales of higher gross margin merchandise categories in certain of the Company's stores, combined with lower costs associated with the processing of merchandise at the Company's distribution center. Inventory shrinkage remained unchanged at 1.1% of net sales in fiscal 1998 and 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $19.8 million to $150.7 million in fiscal 1998 as compared to $130.9 million in fiscal 1997, an increase of 15.1%. As a percent of net sales, selling, general and administrative expenses decreased to 29.1% in fiscal 1998 as compared to 29.2% in fiscal 1997, primarily due to higher sales volume gained through the acquisition of the Harris stores. This decrease also reflects lower rental expense resulting from the modification of certain store lease agreements and from the refinancing and conversion of certain operating equipment leases into capital leases. This decrease was partially offset by increased payroll and payroll related costs in the Company's stores as a result of the mandatory minimum wage increase in California (from $5.15 to $5.75 per hour, an 11.7% increase) effective March 1, 1998, and other competitive wage adjustments. The Company also increased advertising and credit solicitation expenditures during the year in an attempt to improve sluggish apparel sales during the first half of the year and in connection with the integration of the Harris stores. Depreciation and Amortization Depreciation and amortization expense increased by approximately $1.8 million to $8.5 million in fiscal 1998 as compared to $6.7 million in fiscal 1997, an increase of 26.9%. As a percent of net sales, depreciation and amortization increased to 1.6% in fiscal 1998 as compared to 1.5% in fiscal 1997. These increases are primarily due to additional depreciation related to capital expenditures for new stores and for the renovation of existing stores, new capital lease obligations, and assets acquired from Harris. These increases are also due to the amortization of goodwill associated with the recent acquisition of the Harris stores. Acquisition Related Expenses Acquisition related expenses of $859,000 were incurred in fiscal 1998, consisting primarily of costs incurred prior to the elimination of certain duplicative operations of Harris, including certain merchandising, advertising, credit and distribution functions. As of the end of fiscal 1998, all duplicative operations of Harris have been eliminated. The Company had previously entered into negotiations for the acquisition of Harris in fiscal 1997. The parties were unable to agree on the terms of the transaction, however, and negotiations were discontinued. Fiscal 1997 results include $673,000 of costs related to the proposed transaction, consisting primarily of legal, accounting and investment banking fees. Interest Expense Interest expense, which includes the amortization of deferred financing costs, increased by approximately $2.1 million to $9.5 million in fiscal 1998 as compared to $7.3 million in fiscal 1997, an increase of 29.3%. As a percent of net sales, interest expense increased to 1.8% in fiscal 1998 as compared to 1.6% in fiscal 1997. These increases are primarily due to higher average outstanding borrowings under the Company's working capital facilities, and additional interest associated with the Subordinated Note issued to Harris (see Note 2 to the Consolidated Financial Statements). These increases were partially offset by a decrease in the weighted-average interest rate applicable to outstanding borrowings under the Company's working capital facilities (7.88% in fiscal 1998 as compared to 8.16% in fiscal 1997) resulting from interest rate reductions during the year. Interest expense related to securitized receivables is reflected as a reduction to net credit revenues and is not included in interest expense for financial reporting purposes. Miscellaneous Income Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, remained unchanged at approximately $2.0 million in fiscal 1998 and 1997. Income Taxes The Company's effective tax rate was 41.5% in fiscal 1998 as compared to 41.6% in fiscal 1997. (See Note 7 to the Consolidated Financial Statements.) Net Income As a result of the foregoing, the Company's net income increased by $1.6 million to $5.3 million in fiscal 1998 as compared to $3.7 million in fiscal 1997. On a per share basis (basic and diluted), net income per share increased to $0.46 per share in fiscal 1998 as compared to $0.36 per share in fiscal 1997. 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. The Company operated thirty-four department stores as of the end of fiscal 1997 as compared to thirty-two as of the end of fiscal 1996. Net Credit Revenues Net credit revenues consist of the following:
(In thousands of dollars) 1997 1996 Service charge revenues $11,618 $10,493 Gain on sale of receivables 1,050 Interest expense on securitized receivables (3,579) (3,564) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (2,704) (2,731) ------ ------ $ 6,385 $ 4,198 ====== ======
Net credit revenues increased by approximately $2.2 million, or 52.1%, in fiscal 1997 as compared to fiscal 1996. As a percent of net sales, net credit revenues increased to 1.4% in fiscal 1997 as compared to 1.0% in fiscal 1996. The gain on sale of receivables in fiscal 1997 includes a non- recurring credit of $898,000 related to a change in the estimate for the allowance for doubtful accounts for receivables which were ineligible for sale. Because the provisions of SFAS No. 125 were not permitted to be applied retroactively to prior periods presented, there was no gain or loss on receivables sold in fiscal 1996. (See Note 3 to the Consolidated Financial Statements.) Service charge revenues increased by approximately $1.1 million, or 10.7%, in fiscal 1997 as compared to fiscal 1996. This increase is primarily due to an increase in credit sales as a percent of total sales (43.7% in fiscal 1997 as compared to 43.1% in fiscal 1996), driven by the success of the Company's "Gottschalks Rewards" customer loyalty program, introduced in early fiscal 1997. This increase is also due to additional income generated by modifications made to credit terms in selected states, initiated in late fiscal 1996. Interest expense on securitized receivables remained unchanged at $3.6 million in fiscal 1997 and 1996, and charge-offs on receivables sold and the provision for credit losses on receivables ineligible for sale remained unchanged at $2.7 million in fiscal 1997 and 1996. 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 and the Company's gross margin percentage remained unchanged at 68.0% and 32.0% in fiscal 1997 and 1996, respectively. 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. Inventory shrinkage remained unchanged at 1.1% of net sales in fiscal 1997 and 1996. 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 and ongoing Company-wide expense control measures, 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. 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 a $748,000 decrease in the amortization of new store pre-opening costs as compared to the prior year, 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 working capital facilities (8.16% in fiscal 1997 as compared to 8.62% in fiscal 1996), resulting from interest rate reductions during the period, 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 1996-1 Series certificate and a $6.0 million mortgage loan. (See "Liquidity and Capital Resources".) 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 from a deferred lease incentive resulting from the revision of certain terms of the related lease. Other income in fiscal 1996 includes 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 6 to Consolidated Financial Statements.) Acquisition Related Expenses Acquisition related expenses of $673,000 were incurred in fiscal 1997 in connection with a proposed acquisition of Harris. Such costs, consisting primarily of legal, accounting and investment banking fees, were recognized by the Company after the parties were unable to agree on the terms of the transaction and discontinued negotiations. The companies resumed negotiations and successfully completed the acquisition in fiscal 1998. Income Taxes The Company's effective tax rate was 41.6% in fiscal 1997 as compared to 40.7% in fiscal 1996. (See Note 7 to the Consolidated Financial Statements.) Net Income As a result of the foregoing, the Company's net income increased 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 increased by $0.18 per share to $0.36 per share in fiscal 1997 as compared to $0.18 per share in fiscal 1996. Liquidity and Capital Resources 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. Working capital increased by $28.6 million to $96.2 million in fiscal 1998 as compared to $67.6 million in fiscal 1997. The Company's liquidity position and capital structure was enhanced in fiscal 1998 by a business acquisition through which the Company acquired net current assets that were readily convertible into cash, including merchandise inventories and customer credit card receivables and funded the acquisition of those assets through the issuance of long-term unsecured subordinated debt and equity. The increase is also due to a $15.0 million increase ($40.0 million as of the end of fiscal 1998 as compared to $25.0 million as of the end of fiscal 1997) in the amount of line of credit borrowings that are classified as long-term for financial reporting purposes. The Company's ratio of current assets to current liabilities decreased slightly to 1.98:1 as of the end of fiscal 1998 as compared to 2.01:1 as of the end of fiscal 1997. Business Acquisition. As described more fully in Note 2 to the Consolidated Financial Statements, the Company completed the acquisition of substantially all of the assets and business of Harris on August 20, 1998. The assets acquired consisted primarily of merchandise inventories, customer credit card receivables, fixtures and equipment and certain intangibles. The Company also assumed certain liabilities relating to the business, including vendor payables, store leases and certain other contracts. The purchase price for the assets was the issuance to Harris of 2,095,900 shares of common stock of the Company and the issuance of a $22.2 million 8% Subordinated Note due August 20, 2003. Interest on the Subordinated Note is payable semi-annually beginning in February 1999, with the principal portion due and payable upon its maturity date, unless such payment would result in the default on any of the Company's other credit facilities, in which case the maturity of the note would be extended by three years to August 2006. The Company also incurred additional costs related to the transaction, including professional fees and transaction costs, severance pay, costs related to the consolidation of duplicative distribution and administrative functions, and costs associated with the closure of the former Harris store located in San Bernardino on January 31, 1999. Revolving Line of Credit. The Company has a $110.0 million revolving line of credit facility with Congress through March 30, 2001. 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 (except for fiscal 1998, which was extended to February 28, 1999) to fund increased seasonal inventory requirements. Interest under the facility is charged at a rate of approximately LIBOR plus 2.25% (reduced to LIBOR plus 2.00% on March 1, 1999), with no interest charged on the unused portion of the line of credit. The maximum amount available for borrowings under the line of credit with Congress was $79.9 million as of January 30, 1999, of which $60.3 million was outstanding as of that date. As described below, such outstanding borrowings were reduced by $25.3 million on March 1, 1999 by proceeds from the issuance of a new certificate under the Company's receivables securitization program. Receivables Securitization Program. The Company's receivables securitization program provides the Company with an additional source of working capital and long-term financing that is generally more cost- effective than traditional debt financing. As of January 30, 1999, the Company had three outstanding series of certificates issued through private placements under the program, including $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates (the 1994-1 Series), a $6.0 million principal amount 6.79% Fixed Base Certificate (the "1996-1 Series") and a Variable Base Certificate in the principal amount of up to $15.0 million (the "Variable Series"). As described more fully in Note 3 to the Consolidated Financial Statements, the Company commenced the repayment of the outstanding principal balances of the 1994-1 and 1996-1 Series certificates on October 15, 1998, making total principal reductions of $15.8 million through January 30, 1999. The Company also reduced amounts outstanding against the Variable Series certificate to $700,000 from $7.7 million as of January 31, 1998. The outstanding principal balances of the certificates, totaling $30.9 million and $53.7 million as of January 30, 1999 and January 31, 1998, respectively, are off-balance sheet for financial reporting purposes. On March 1, 1999, the Company issued a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") to a single investor through a private placement. Proceeds from the issuance of the 1999-1 Series were used to repay the outstanding balances of the 1994-1, 1996-1 and Variable Series certificates, totaling $26.9 million as of that date, reduce outstanding borrowings under the Company's revolving line of credit by $25.3 million and pay certain costs associated with the transaction. Interest on the 1999-1 Series will be earned by the certificate holder on a monthly basis at a fixed interest rate of 7.66%, and the outstanding principal balance of the certificate will be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. Monthly cash flows generated by the Company's credit card portfolio, consisting of principal and interest collections, are first used to pay certain costs of the program, which include interest payable to the investor, and are then available to fund the working capital requirements of the Company. Subject to certain conditions, the Company may expand the securitization program to meet future receivables growth. Other Financings. As described more fully in Note 5 to the Consolidated Financial Statements, the Company has other long-term obligations with total outstanding balances of $30.2 million at January 30, 1999 ($32.7 million as of January 31, 1998). The loans mature at dates ranging from 2001 to 2010, bear interest at fixed rates ranging from 9.23% to 10.45%, and are collateralized by various properties and equipment of the Company. The scheduled annual principal maturities on the Company's various long-term obligations are $2.7 million, $2.8 million, $2.5 million, $1.4 million and $1.4 million for fiscal 1999 through fiscal 2003, with $19.4 million due thereafter. The Company's revolving line of credit agreement, and certain of its long-term debt and lease arrangements contain various restrictive covenants. The Company was in compliance with all such restrictive covenants as of January 30, 1999. The Company has entered into an agreement to open one new department store in the second half of fiscal 1999 and is in the process of remodeling certain existing store locations. The estimated cost of such projects, totaling $6.4 million, is expected to be provided for from existing financial resources. Such projects are expected to be fully complete in fiscal 1999. However, there can be no assurance that the completion of such projects will not be delayed subject to a variety of conditions precedent or other factors. Management believes the previously described sources of liquidity are adequate to meet the Company's working capital, capital expenditure and debt service requirements for fiscal 1999. 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 they are deemed to be advantageous. Year 2000 Readiness The year 2000 problem is pervasive, with almost every business, large and small, affected. The year 2000 problem impacts both information technology ("IT"), including hardware (mainframes, client/server systems and personal computers) and software (packaged software and custom designed), and impacts non-information technology ("non-IT"), including building security, climate control and telephone systems. The Company also exchanges data with certain trade suppliers and other third parties. Like many other companies, the year 2000 computer issue creates risks and uncertainties for the Company. If internal systems do not correctly recognize and process date information beyond the year 1999, there could be a material adverse impact on the Company's operations. To address year 2000 issues, the Company established a task force in fiscal 1997 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. Plans and progress against plans are reviewed by the year 2000 task force and are reported to the Company's senior executive officers and the Board of Directors on a regular basis. It is expected that activities related to the year 2000 issues will be continue through mid-fiscal 1999 with the goal of appropriately resolving all material internal systems and third party issues. The Company's State of Readiness. As of January 30, 1999, the Company's efforts towards becoming year 2000 compliant with respect to its IT systems are progressing on schedule with a projected completion date of mid-fiscal 1999. Based on testing to date, management believes its mainframe operating system environment and point-of-sale systems are already year 2000 compliant. Modifications to the Company's proprietary, or custom designed software, have been substantially completed and tested. Upgrades have been scheduled for certain purchased software packages and are expected to be complete by mid-fiscal 1999. The Company's operating system contains a testing environment specifically designed to test year 2000 compliance. IT systems acquired from Harris are limited to point-of-sale equipment, which has already been converted to Gottschalks technology and is year 2000 compliant. The Company has also completed the identification and evaluation of all of its non-IT systems, which include, among other things, store alarm and security systems, air conditioners and lighting, fire control, elevators and escalators. The Company has already communicated with its suppliers, dealers, financial institutions and other third parties with which it does business to determine that the supplier's operations and the products or services they provide are year 2000 compliant or to monitor their progress toward year 2000 compliance. Some providers are not yet year 2000 compliant and the Company is monitoring their progress on a continual basis. Costs Associated with Year 2000 Issues. The costs incurred to date related to the IT year 2000 conversion are approximately $316,000. The Company currently expects that the total remaining cost of these efforts, including both incremental spending and re- deployed resources, will be approximately $330,000. Such costs, which represent approximately 10.9% of the Company's fiscal 1999 IT budget, consist primarily of internal personnel costs, external consulting fees and costs in excess of normal hardware and software upgrades and replacements and do not include potential costs related to the cost of internal software and hardware replaced in the normal course of business. Management expects such costs will be funded with working capital. Purchased hardware and software are being capitalized in accordance with normal policy. Personnel and all other costs related to the year 2000 project are being expensed as incurred. In some instances, the installation schedule of new software and hardware in the normal course of business has been accelerated, or deferred, in order to resolve year 2000 compatibility issues. The acceleration, or delay of such projects, however, will not have a materiel adverse effect on the Company's financial position or results of operations. The cost of the project and the estimated completion dates for the year 2000 conversion are based on the Company's best estimates, which have been derived based on a number of assumptions of future events including the continued availability of internal and external resources, the timely completion of third party modifications and other factors. The ultimate cost of the project is subject to change as the project progresses. Actual results may differ from original estimates. The Company has not yet completed its assessment of costs that may be associated with non-IT year 2000 issues, as such determination will be dependant upon the results of communications with the related suppliers. Contingency Plans. Management believes its efforts towards year 2000 compliance will be completed on schedule in mid-fiscal 1999. In the event the Company is not able to progress according to schedule, however, the Company has developed contingency plans. The Company's year 2000 conversion schedule contains "trigger" dates to implement the contingency plan specifically designed for each system in the event the conversion has not progressed accordingly to schedule. If necessary, the Company has the ability to divert additional internal IT staff onto the year 2000 project. The Company also has additional sources of contract programming specialists who are familiar with the Company's operating environment. The Company also believes that it has alternate sources of suppliers for substantially all of its non-IT systems to replace suppliers that are unable to become year 2000 compliant within an appropriate time frame. Based on currently available information, management does not believe that the year 2000 matters discussed above related to internal systems will have a material adverse impact on the Company's financial condition or its results of operations; however, it is uncertain to what extent the Company may be affected by such matters and no assurance can be given. In addition, there can be no assurance that the failure to ensure year 2000 capability by a supplier or another third party would not have a material adverse effect on the Company. Inflation Although inflation has not been a material factor to the Company's operations during the past several years, the Company does experience 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 on 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 1998 and 1997 (in thousands, except per share data). (See Note 11 to the Consolidated Financial Statements.)
1998 Quarter Ended May 2 August 1 October 31 January 30 Net sales $95,468 $104,131 $123,118 $194,423 Gross profit 29,941 32,601 43,188 63,879 Income (loss) before income tax expense (benefit) (3,408) (2,310) 604 14,143 Net income (loss) (1,994) (1,352) 345 8,283 Net income (loss) per common share -basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66 Weighted-average number of common shares outstanding(1) 10,479 10,479 12,138 12,575
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 $ (0.09) $ (0.02) $ (0.14) $ 0.62 Weighted-average number of common shares outstanding 10,473 10,473 10,473 10,477
- ------------------------------ (1) The increase in the weighted-average number of common shares outstanding during fiscal 1998 is due to the issuance of 2,095,900 shares of common stock to Harris on August 20, 1998 in connection with a business acquisition (see Note 2 to the Consolidated Financial Statements.) Recently Issued Accounting Standards AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities" was recently issued and is effective for fiscal 1999. This statement requires start-up costs, such as new store pre-opening costs, to be expensed as incurred. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" was also issued and is effective for fiscal 1999. SOP 98-1 requires certain internal and external software development costs to be capitalized upon meeting certain criteria. The Company does not expect the adoption of these new accounting standards will have a material effect on its financial position or the results of its operations. _________________________________ Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks in the normal course of business, due to changes in interest rates on short-term borrowings under its revolving line of credit. As of January 30, 1999, line of credit borrowings subject to a variable interest rate represented 46.5% of the Company's total outstanding borrowings (both on and off-balance sheet). The Company does not engage in financial transactions for speculative or trading purposes, nor does the Company purchase or hold any derivative financial instruments. The interest payable on the Company's revolving line of credit is based on a variable interest rate and is therefore affected by changes in market interest rates. An increase of 51 basis points on existing line of credit borrowings (a 10% change from the Company's weighted-average interest rate as of January 30, 1999, less a scheduled interest rate reduction of 25 basis points on March 1, 1999) would reduce the Company's pre-tax net income and cash flow by approximately $375,000. This 51 basis point increase in interest rates would not materially affect the fair value of the Company's fixed rate financial instruments. (See Note 1 to the Consolidated Financial Statements.) 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 24, 1999, to be filed pursuant to Regulation 14A (the "1999 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 67 Chairman and Chief Executive Officer James R. Famalette 46 President and Chief Operating Officer Gary L. Gladding 59 Executive Vice President/ General Merchandise Manager Michael S. Geele 48 Senior Vice President and Chief Financial Officer Michael J. Schmidt 57 Senior Vice President/ Director of Stores
- --------------------------------- (1) As of March 31, 1999 Joe W. Levy became Chairman and Chief Executive Officer of the Company's predecessor and former subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk") in 1982 and of the Company in 1986. Mr. Levy was Executive Vice President from 1972 to 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. Mr. Levy has also served on numerous other state and local commissions and public service agencies. James R. Famalette became 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 1993 through 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 as 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 1987, and joined E. Gottschalk as Vice President/General Merchandise Manager in 1983. From 1980 to 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. Michael S. Geele became Senior Vice President and Chief Financial Officer of the Company on January 21, 1999. Prior to joining the Company, Mr. Geele was Chief Financial Officer of Southwest Supermarkets in Phoenix, Arizona from 1995 to 1998. From 1991 to 1995, Mr. Geele served as Vice President of Finance for Smitty's Super Valu in Phoenix, Arizona, and from 1981 to 1991 served in various financial positions with Smitty's, including Senior Director and Corporate Controller. Mr. Geele is a Certified Public Accountant. Michael J. Schmidt became Senior Vice President/Director of Stores of E. Gottschalk in 1985 and of the Company in 1986. From 1983 through 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 1981 to 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 1999 Proxy under the headings "Executive Compensation" and "Director Compensation For Fiscal Year 1998." 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 1999 Proxy under the heading "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 1999 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 as required by Item 8 are included in Part IV, Item 14 of this report: Consolidated balance sheets -- January 30, 1999 and January 31, 1998 Consolidated income statements -- Fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Consolidated statements of stockholders' equity -- Fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Consolidated statements of cash flows -- Fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Notes to consolidated financial statements -- Three years ended January 30, 1999 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): Incorporated by Reference From the Exhibit Following No. Description Document 3.1 Certificate of Incorporation Registration of the Registrant, as amended Statement on Form S-1 (File No. 33-3949) 3.2 By-Laws of the Registrant, Annual Report on as amended Form 10-K for the year ended January 28, 1995 (File No. 1-09100) 10.1 Agreement of Limited Partnership Annual Report on dated March 16, 1990, by and Form 10-K for the between River Park Properties I year ended February and Gottschalks Inc. relating to 2, 1991 (File No. the Company's corporate 1-09100) headquarters 10.2 Gottschalks Inc. Retirement Registration Savings Plan(*) Statement on Form S-1 (File No. 33-3949) 10.3 Participation Agreement dated Annual Report on as of December 1, 1988 among Form 10-K for the Gottschalks Inc., General Foods year ended January Credit Investors No. 2 Corporation 29, 1994 (File No. and Manufacturers Hanover Trust 1-09100) Company of California relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility 10.4 Lease Agreement dated December 1, Annual Report on 1988 by and between Manufacturers Form 10-K for the Hanover Trust Company of California year ended January and Gottschalks Inc. relating to 29, 1994 (File No. the sale-leaseback of department 1-09100) stores in Stockton and Bakersfield, California and the Madera distribution facility 10.5 Ground Lease dated December 1, Annual Report on 1988 by and between Gottschalks Form 10-K for the Inc. and Manufacturers Hanover year ended January Trust Company of California 29, 1994 (File No. relating to the sale-leaseback 1-09100) of the Bakersfield department store 10.6 Memorandum of Lease and Lease Annual Report on Supplement dated July 1, 1989 by Form 10-K for the and between Manufacturers Hanover year ended January Trust Company of California and 29, 1994 (File No. Gottschalks Inc. relating to the 1-09100) sale-leaseback of the Stockton department store 10.7 Ground Lease dated August 17, Annual Report on 1989 by and between Gottschalks Form 10-K for the Inc. and Manufacturers Hanover year ended January Trust Company of California 29, 1994 (File No. relating to the sale-leaseback of 1-09100) the Madera distribution facility 10.8 Lease Supplement dated as of Annual Report on August 17, 1989 by and between Form 10-K for the Manufacturers Hanover Trust year ended January Company of California and 29, 1994 (File No. Gottschalks Inc. relating to the 1-09100) sale-leaseback of the Madera distribution facility 10.9 Tax Indemnification Agreement Annual Report on dated as of August 1, 1989 by Form 10-K for the and between Gottschalks Inc. year ended January and General Foods Credit 29, 1994 (File No. Investors No. 2 Corporation 1-09100) relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility 10.10 Lease Agreement dated as of Annual Report on March 16, 1990 by and between Form 10-K for the Gottschalks Inc. and River year ended January Park Properties I relating to the 29, 1994 (File No. Company's corporate headquarters 1-09100) 10.11 Consulting Agreement dated Quarterly Report on June 1, 1994 by and between Form 10-Q for the Gottschalks Inc. and Gerald quarter ended April H. Blum(*) 30, 1994 (File No. 1-09100) 10.12 Form of Severance Agreement Annual Report on dated March 31, 1995 by and Form 10-K for the between Gottschalks Inc. and year ended January the following senior executives 28, 1995 (File No. of the Company: Joseph W. Levy, 1-09100) Gary L. Gladding and Michael J. Schmidt(*) 10.13 1994 Key Employee Incentive Registration Stock Option Plan(*) Statement on Form S-8 (File #33-54783) 10.14 1994 Director Nonqualified Registration Stock Option Plan(*) Statement on Form S-8 (File #33-54789) 10.15 Promissory Note and Security Annual Report on Agreement dated December 16, Form 10-K for the 1994 by and between year ended January Gottschalks Inc. and 28, 1995 (File No. Heller Financial, Inc. 1-09100) 10.16 Agreement of Sale dated June 27, Quarterly Report on 1995, by and between Gottschalks Form 10-Q for the Inc. and Jack Baskin relating to quarter ended July the sale and leaseback of the 29, 1995 (File No. Capitola, California property 1-09100) 10.17 Lease and Agreement dated June 27, Quarterly Report on 1995, by and between Jack Baskin Form 10-Q for the and Gottschalks Inc. relating to quarter ended July the sale and leaseback of the 29, 1995 (File No. Capitola, California property 1-09100) 10.18 Promissory Notes and Security Quarterly Report on Agreements dated October 4, 1995 Form 10-Q for the and October 10, 1995 by and quarter ended between Gottschalks Inc. and October 28, 1995 Midland Commercial Funding (File No. 1-09100) 10.19 Promissory Note and Security Annual Report on Agreement dated October 2, Form 10-K for the 1996, by and between Gottschalks year ended February Inc. and Heller Financial, Inc. 3, 1996 (File No. 1-09100) 10.20 Loan and Security Agreement dated Annual Report on December 29, 1996, by and between Form 10-K for the Gottschalks Inc. and Congress year ended February Financial Corporation 1, 1997 (File No. 1-09100) 10.21 Promissory Notes dated March 28, Annual Report on 1996 and September 11, 1996, Form 10-K for the by and between Gottschalks year ended February Inc. and Broadway Stores, 1, 1997 (File No. Inc., a wholly-owned division 1-09100) of Federated Department Stores, Inc. 10.22 Employment Agreement dated Annual Report on March 14, 1997 by and between Form 10-K for the Gottschalks Inc. and year ended February James R. Famalette(*) 1, 1997 (File No. 1-09100) 10.23 Gottschalks Inc. 1998 Stock Registration Option Plan(*) Statement on Form S-8 (File #33- 61471) 10.24 Gottschalks Inc. 1998 Registration Employee Stock Purchase Statement on Form Plan(*) S-8 (File #33- 61473) 10.25 Asset Purchase Agreement dated Current Report on as of July 21, 1998 among Form 8-K dated July Gottschalks Inc., The Harris 21, 1998 (File No. Company and El Corte Ingles, 1-09100) S. A. together with all Exhibits thereto 10.26 Non-Negotiable, Extendable, Current Report on Subordinated Note due Form 8-K dated August 20, 2003 issued to August 20, 1998 The Harris Company (File No. 1-09100) 10.27 Registration Rights Agreement Current Report on between The Harris Company and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.28 Employee Lease Agreement between Current Report on The Harris Company and Gottschalks Form 8-K dated Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.29 Tradename License Agreement Current Report on between The Harris Company and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.30 Stockholders' Agreement among Current Report on El Corte Ingles, S. A., Gottschalks Form 8-K dated Inc., Joseph Levy and Bret Levy August 20, 1998 dated August 20, 1998 (File No. 1-09100) 10.31 Standstill Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 (File No. 1-09100) 10.32 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: East Hills (File No. 1-09100) Mall, Bakersfield, California 10.33 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Moreno (File No. 1-09100) Valley Mall at Towngate, Moreno Valley, California 10.34 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Antelope (File No. 1-09100) Valley Mall at Palmdale, California 10.35 Store Lease Agreement between Current Report on El Corte Ingles, S. A., and Form 8-K dated Gottschalks Inc. dated August 20, 1998 August 20, 1998 re: Carousel (File No. 1-09100) Mall at San Bernardino, California 10.36 Waiver Agreement dated Quarterly Report on December 15, 1998 by and between Form 10-Q for the Gottschalks Inc. and Congress quarter ended Financial Corporation October 31, 1998 (File No. 1-09100) 10.37 Form of Severance Agreement Filed electronically dated January 21, 1999 by herewith and between Gottschalks Inc. and Michael S. Geele (*) 10.38 Receivables Purchase Filed electronically Agreement dated March 1, 1999 herewith By and between Gottschalks Credit Receivables Corporation and Gottschalks Inc. 10.39 Pooling and Servicing Filed electronically Agreement dated as of March 1, herewith 1999 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company 10.40 Series 1999-1 Supplement to Filed electronically Pooling and Servicing herewith Agreement dated March 1, 1999 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company 21. Subsidiary of the Registrant Annual Report on Form 10-K for the year ended January 28, 1995 (File No. 1-09100) 23. Independent Auditors' Consent Filed electronically herewith 27. Financial Data Schedule Filed electronically herewith (*) Management contract, compensatory plan or arrangement. - --------------------------------- (b) Reports on Form 8-K -- The Company filed the following Report on Form 8-K during the fourth quarter of fiscal 1998: -- Current Report on Form 8-K/A dated November 2, 1998, amending the Form 8-K which was filed on September 2, 1998, (for an event dated August 20, 1998) to provide the required financial information pursuant to Item 2, Acquisition or Disposition of Assets, for the acquisition of substantially all of the assets and business of The Harris Company. (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 JANUARY 30, 1999 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 30, 1999 and January 31, 1998, and the related consolidated income statements, stockholders' equity and cash flows for each of the three years in the period ended January 30, 1999. 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 30, 1999 and January 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Fresno, California February 23, 1999 (March 1, 1999 as to Note 3)
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 30, January 31, ASSETS 1999 1998 CURRENT ASSETS: Cash $ 1,693 $ 1,601 Retained interest in receivables sold (Note 3) 37,399 15,813 Receivables: Credit card receivables, less allowances of $1,195 in 1998 and $437 in 1997 (Note 3) 16,136 3,085 Vendor claims, less allowances of $121 in 1998 and $80 in 1997 2,849 3,475 ------- ------- 18,985 6,560 Merchandise inventories 123,118 99,294 Other 12,836 11,444 ------- ------- Total current assets 194,031 134,712 PROPERTY AND EQUIPMENT (Note 6): Land and land improvements 15,102 15,101 Buildings and leasehold improvements 62,561 52,339 Furniture, fixtures and equipment 77,060 64,993 Buildings and equipment under capital leases 12,148 10,875 Construction in progress 909 1,858 ------- ------- 167,780 145,166 Less accumulated depreciation and amortization 54,135 46,109 ------- ------- 113,645 99,057 OTHER ASSETS: Goodwill, less accumulated amortization of $1,554 in 1998 and $1,263 in 1997 (Note 2) 9,244 1,136 Other 7,444 7,406 ------- ------- 16,688 8,542 ------- ------- $324,364 $242,311 ======= =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands of dollars) January 30, January 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 CURRENT LIABILITIES: Trade accounts payable and accrued expenses (Note 4) $ 68,623 $ 53,633 Revolving line of credit (Note 5) 20,273 5,767 Current portion of long-term debt (Note 5) 2,710 2,641 Current portion of capitalized lease obligations (Note 6) 1,724 1,309 Deferred income taxes (Note 7) 4,470 3,783 ------- ------- Total current liabilities 97,800 67,133 LONG-TERM OBLIGATIONS, less current portion (Notes 5 and 6): Line of credit 40,000 25,000 Notes and mortgage loans payable 27,506 30,083 Capitalized lease obligations 6,608 7,337 ------- ------- 74,114 62,420 DEFERRED INCOME AND OTHER (Note 6) 24,111 25,061 DEFERRED INCOME TAXES (Note 7) 4,253 3,792 SUBORDINATED NOTE PAYABLE TO AFFILIATE, net of discount of $1,561 (Note 2) 20,618 COMMITMENTS AND CONTINGENCIES (Notes 3, 6 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; 12,575,565 and 10,478,415 issued Common stock 126 105 Additional paid-in capital 70,626 56,366 Retained earnings 32,716 27,434 ------- ------- 103,468 83,905 ------- ------- $324,364 $242,311
======= ======= See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS (In thousands of dollars, except per share data) 1998 1997 1996 Net sales $517,140 $448,192 $422,159 Net credit revenues (Note 3) 6,897 6,385 4,198 ------- ------- ------- 524,037 454,577 426,357 Costs and expenses: Cost of sales 347,531 304,558 287,164 Selling, general and administrative expenses 150,719 130,922 123,860 Depreciation and amortization 8,461 6,667 6,922 Acquisition related expenses (Note 2) 859 673 ------- ------- ------- 507,570 442,820 417,946 ======= ======= ======= Operating income 16,467 11,757 8,411 Other (income) expense: Interest expense 9,470 7,325 8,111 Miscellaneous income (2,032) (1,955) (2,792) ------- ------- ------- 7,438 5,370 5,319 ------- ------- ------- Income before income tax expense 9,029 6,387 3,092 Income tax expense (Note 7) 3,747 2,657 1,258 ------- ------- ------- Net income $ 5,282 $ 3,730 $ 1,834 ======= ======= ======= Net income per common share - basic and diluted $ 0.46 $ 0.36 $ 0.18 ======= ======= =======
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 Shares Amount Capital Earnings Total BALANCE, FEBRUARY 4, 1996 10,416,520 $104 $55,943 $21,870 $ 77,917 Net income 1,834 1,834 Shares issued to Retirement Savings Plan 56,395 1 387 388 ---------- --- ------ ------ ------ BALANCE, FEBRUARY 1, 1997 10,472,915 105 56,330 23,704 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 56,366 27,434 83,905 Net income 5,282 5,282 Shares issued for business acquisition (Note 2) 2,095,900 21 14,252 14,273 Shares issued under stock option plan 1,250 8 8 ---------- --- ------ ------ ------- BALANCE, JANUARY 30, 1999 12,575,565 $126 $70,626 $32,716 $103,468 ========== === ====== ====== =======
See notes to consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) 1998 1997 1996 OPERATING ACTIVITIES: Net income $ 5,282 $ 3,730 $ 1,834 Adjustments: Depreciation and amortization 8,461 6,667 6,922 Deferred income taxes 633 2,557 419 Amortization of deferred items (950) (888) (300) Provision for credit losses 992 470 2,724 Net loss (gain) from sale of assets 26 (72) Other non-cash items, net (106) (1,170) (1,457) Decrease (increase) in assets, excluding effect of business acquisition (Note 2): Receivables (1,312) (1,346) (9) Retained interest in receivables sold (979) Merchandise inventories (4,524) (9,227) (1,370) Other current and long-term assets 2,958 2,594 (6,518) Increase (decrease) in liabilities, excluding effect of business acquisition (Note 2): Trade accounts payable and accrued expenses (2,571) 1,873 2,570 Other current and long-term liabilities 2,605 (1,546) 6,421 ------- ------- ------- Net cash provided by operating activities 11,494 3,642 10,257 INVESTING ACTIVITIES: Available-for-sale securities (Note 3): Maturities (262,357) (230,433) Purchases 256,571 235,491 Acquisition of business (Note 2) (1,369) Purchases of property and equipment (16,801) (14,976) (6,845) Proceeds from property and equipment sales 680 365 2,026 Distributions from limited partnership 198 229 112 ------- ------- ------ Net cash used in investing activities (23,078) (9,324) (4,707) FINANCING ACTIVITIES: Net proceeds (repayments) under revolving line of credit 29,506 (8,137) (6,260) Proceeds from long-term obligations 3,214 3,878 Principal payments on long-term obligations (4,065) (3,054) (4,850) Proceeds from issuance of 1996-1 Series certificate (Note 3) 6,000 Principal payments on outstanding Series certificates (Note 3) (15,800) Changes in cash management liability and other 2,035 13,764 (4,304) ------- ------- ------- Net cash provided by (used in) financing activities 11,676 5,787 (5,536) ------- ------- ------- INCREASE IN CASH 92 105 14 CASH AT BEGINNING OF YEAR 1,601 1,496 1,482 ------- ------- ------- CASH AT END OF YEAR $ 1,693 $ 1,601 $ 1,496 ======= ======= ======= SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY: OPERATING ACTIVITY: Issuance of common stock to Retirement Savings Plan $ 388 INVESTING ACTIVITIES: Consideration for acquisition of business (Note 2): Issuance of 2,095,900 shares of common stock $ 14,273 Issuance of 8% Subordinated Note 20,467 ------- $ 34,740 ======= FINANCING ACTIVITIES: Acquisition of equipment under capital leases $ 1,273 $ 3,562 Acquisition of fixtures under long-term debt obligation $ 2,650
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 forty full-line department stores, including thirty "Gottschalks" and ten "Harris/Gottschalks" department stores, and twenty-two specialty stores which carry a limited selection of merchandise. The Company's department stores are located primarily in non-major metropolitan cities throughout California and in Oregon, Washington and Nevada, and 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. The Company operates in one reportable operating segment. 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 cause actual results to differ 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"). 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 1998, 1997 and 1996, which ended on January 30, 1999, January 31, 1998 and February 1, 1997, respectively, each consist of 52 weeks. Transfers and Servicing of Financial Assets - The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" in fiscal 1997. SFAS No. 125 requires the Company to recognize gains and losses on transfers of financial assets (securitizations) that 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 receivables sold, 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. Retained Interest in Receivables Sold - The retained interest in receivables sold consists of securities backed by receivables sold pursuant to the Company's receivables securitization program and the retained right to future income resulting from such sales which are recorded pursuant to the provisions of SFAS No. 125. The retained right to future interest income ($237,000 at January 30, 1999 and $211,000 at January 31, 1998) is carried at fair value. As of January 30, 1999 and January 31, 1998, the estimated cost to service the assets is equal to the contractually specified servicing fee, resulting in no servicing asset or liability. The certificated portion of the retained interest is considered readily marketable and is classified as available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Due to the short-term revolving nature of the credit card portfolio, the carrying value of the Company's retained interest approximates its fair value, resulting in no unrealized gains or losses. Receivables - Receivables consist primarily of customer credit card receivables that do not meet certain eligibility requirements of the Company's receivables securitization program, and as of January 30, 1999, also includes $12,708,000 of recently acquired receivables which were incorporated into the securitization program in early fiscal 1999. (See Note 2). Such receivables are not certificated and include revolving charge accounts with terms which, in some cases, provide for payments with terms in excess of 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. 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 is equal to the LIFO value of inventories at January 30, 1999 and January 31, 1998. 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 a new store that are deferred and amortized generally on a straight-line basis not to exceed a twelve month period commencing with the store opening. All new store pre-opening costs were fully amortized as of January 30, 1999. Store pre-opening costs, net of accumulated amortization, of $421,000 at January 31, 1998 is included in other current assets. The amortization of new store pre-opening costs, totaling $421,000, $589,000 and $1,337,000 in 1998, 1997 and 1996, respectively, is included in depreciation and amortization in the accompanying income statements. 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 the criteria used to classify the lease, and such amortization is combined with depreciation in the accompanying income statements. 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 30, 1999 and January 31, 1998, the investment is $2,632,000 and $2,679,000, respectively, and prepaid rent, net of accumulated amortization, is $675,000 and $793,000, respectively. Such amounts are included in other long-term assets. The Company's equity in the income of the partnership, totaling $140,000 in 1998, $141,000 in 1997 and $133,000 in 1996, 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 store and enter into a lease arrangement. Land contributed to the Company is included in land and recorded at appraised fair market values. Donated income is amortized to income over the average depreciable life of the related fixed assets built on the land for 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 32 years. Deferred income, net of accumulated amortization, is $16,347,000 as of January 30, 1999 and $17,574,000 as of January 31, 1998. Leased Department Sales - Net sales include leased department sales of $40,216,000, $35,179,000 and $32,781,000 in 1998, 1997 and 1996, respectively. Cost of sales include related costs of $34,271,000, $30,044,000 and $28,006,000 in 1998, 1997 and 1996, respectively. 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 Per Common Share - Basic earnings per common share is computed based on the weighted average number of common shares outstanding which were 11,417,744, 10,473,682 and 10,461,424 in 1998, 1997 and 1996, respectively. Diluted earnings per share includes the effect of stock options and other potentially dilutive securities, if any. In 1998, 1997 and 1996, diluted earnings per common share is equal to basic earnings per common share because the effect of potentially dilutive securities under the stock option plans were antidilutive and therefore not included. Fair Value of Financial Instruments - The carrying value of the Company's cash and cash management liability, 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 retained interest in receivables sold and the Subordinated Note are carried at their estimated fair values. 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. Borrowings with aggregate carrying values of $30,216,000 and $32,724,000 at January 30, 1999 and January 31, 1998, had estimated fair values of $27,809,000 and $31,207,000 at January 30, 1999 and January 31, 1998, respectively. Off-Balance Sheet Financial Instruments - The Company's off-balance sheet financial instruments consist primarily of certificates issued under the securitization program. (See Note 3.) The aggregate estimated fair values of the 1994-1 and 1996-1 Series certificates, based on similar issues of certificates at current rates for the same remaining maturities, with aggregate face values of $30,667,000 at January 30, 1999 and $46,000,000 at January 31, 1998 are $30,154,000 and $44,408,000, respectively. The estimated fair value of the Variable Series 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". Accordingly, no compensation expense has been recognized in the 1998, 1997 or 1996 financial statements for employee stock arrangements. Pro-forma information regarding net income and earnings per share, as calculated under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation", is disclosed in Note 8. 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. When the anticipated undiscounted cash flow from a long-lived asset is less than its carrying value, a loss is recognized based on the amount by which its carrying value exceeds its fair market value. 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 recognized no impairment loss in 1998, 1997 or 1996. Recently Issued Accounting Standards - AICPA Statement of Position (SOP) 98- 5, "Reporting on the Costs of Start-Up Activities" was recently issued and is effective for fiscal 1999. This statement requires start-up costs, such as new store pre-opening costs, to be expensed as incurred. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" was also issued and is effective for fiscal 1999. SOP 98-1 requires certain internal and external software development costs to be capitalized upon meeting certain criteria. The Company does not expect the adoption of these new accounting standards will have a material effect on its financial position or the results of its operations. Reclassifications - Certain amounts in the accompanying 1997 and 1996 consolidated financial statements have been reclassified to conform with the 1998 presentation. 2. BUSINESS ACQUISITION On August 20, 1998, the Company completed the acquisition of substantially all of the assets and business of The Harris Company ("Harris"), pursuant to an Asset Purchase Agreement entered into with Harris and El Corte Ingles, S. A. ("ECI") of Spain, the parent company of Harris. Harris operated nine full- line department stores located throughout southern California. The assets acquired consisted primarily of merchandise inventories, customer credit card receivables, fixtures and equipment and certain intangibles. The Company also assumed certain liabilities relating to the business, including vendor payables, store leases and certain other contracts. The purchase price for the assets consisted of the issuance to Harris of 2,095,900 shares of common stock of the Company and the issuance of an 8% Non-Negotiable, Extendable, Subordinated Note (the "Subordinated Note") due August 20, 2003 in the principal amount of $22,179,000. Interest on the Subordinated Note is payable semi-annually beginning in February 1999, with the principal portion due and payable upon its maturity date, unless such payment would result in the default on any of the Company's other credit facilities, whereby the maturity date of the Subordinated Note would be extended by three years to August 2006. Additional purchase liabilities recorded include costs related to the transaction, severance and related costs and costs associated with the closure of the former Harris store located in San Bernardino. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired stores are included in the Company's financial statements from the acquisition date of August 20, 1998. The purchase price has been allocated to the acquired assets and assumed liabilities on the basis of their estimated fair values as of the date of the acquisition. The financial statements reflect the preliminary allocation of the purchase price, as estimates of certain direct costs and certain store closure costs have not yet been finalized. The fair value of the assets acquired and liabilities assumed, based on the preliminary allocation of the purchase price, is summarized as follows (in thousands of dollars):
Fair value of common stock issued to Harris $14,273 Fair value of Subordinated Note 20,467 Total estimated direct fees and expenses 1,369 ------ Total purchase price $36,109 ====== Customer credit card and other receivables $11,827 Merchandise inventories 18,570 Other current and long-term assets 3,809 Leaseholds, fixtures and other equipment 5,731 Trade accounts payable and other current liabilities (11,713) Deferred income taxes (515) Excess of purchase price over the estimated fair value of identifiable net assets acquired to be amortized over 20 years 8,400 ------ Total purchase price $36,109 ======
Unaudited Pro Forma Financial Information. The following unaudited pro forma financial information for the Company gives effect to the acquisition as if it had occurred at the beginning of fiscal 1998 and 1997, and includes certain adjustments, including the amortization of goodwill, interest expense associated with acquisition debt, adjustments to rental expense to reflect new store leases, adjustments to depreciation expense to reflect the fair value of assets acquired and the related income tax effects. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what would have occurred if the acquisition had been completed as of those dates. In addition, pro forma information is not intended to be a projection of future results and does not reflect expected cost savings or synergies expected to result from the integration of the Harris stores into the Company's business.
(In thousands, except share data) 1998 1997 Net sales $565,745 $545,595 Net income (loss) $ 870 $ (2,771) Net income (loss) per common share - basic and diluted $ 0.07 $ (0.22) Weighted-average number of common shares outstanding - basic and diluted 12,575 12,569
Acquisition Related Expenses. Acquisition related expenses of $859,000 were incurred in fiscal 1998 consisting primarily of costs incurred prior to the elimination of certain duplicative operations of Harris, including certain merchandising, advertising, credit and distribution functions. As of the end of fiscal 1998, all duplicative operations of Harris have been eliminated. The Company had previously entered into negotiations for the acquisition of the stores from Harris in fiscal 1997. The parties were unable to agree on the terms of the transaction, however, and negotiations were discontinued during that year. Fiscal 1997 results include $673,000 of costs related to the proposed acquisition, consisting primarily of legal, accounting and investment banking fees. 3. CREDIT CARD RECEIVABLES Securitization Program. The Company's receivables securitization program provides the Company with a source of long-term financing that is generally more cost-effective than traditional debt financing. Under the program, the Company automatically sells all of its accounts receivable arising under its private label customer credit cards, servicing retained, to a wholly-owned subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"), and those receivables are subsequently conveyed to Gottschalks Credit Card Master Trust ("GCC Trust"), to be used as collateral for securities issued to investors. GCC Trust is a qualified special purpose entity under SFAS No. 125. Accordingly, all transfers of receivables to GCC Trust are accounted for as sales for financial reporting purposes and such transferred receivables are removed from the Company's balance sheet. The Company retains an ownership interest in certain of the receivables sold under the program, represented by Exchangeable and Subordinated Certificates, and also retains an uncertificated ownership interest in receivables that do not meet certain eligibility requirements of the program. As of January 30, 1999, the uncertificated receivables also include $12,708,000 of receivables acquired from Harris which were incorporated into the securitization program in connection with the fiscal 1999 refinancing of the program. As of January 30, 1999, the Company had three outstanding series of certificates issued through private placements under the program, including $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates (the "1994-1 Series"), a $6,000,000 principal amount 6.79% Fixed Base Class A-1 Credit Card Certificate (the "1996-1 Series"), and a Variable Base Certificate in the principal amount of up to $15.0 million (the "Variable Series"). Interest on the certificates is earned on a monthly basis and the principal portion of the certificates is payable in twelve equal monthly installments which commenced on October 15, 1998. As of January 30, 1999, the Company had repaid a total of $15,800,000 of the outstanding balances of the 1994-1 and 1996-1 Series certificates, and had reduced amounts outstanding against the Variable Series certificate to $700,000 from $7.7 million as of January 31, 1998. The outstanding principal balances of the certificates, totaling $30,900,000 and $53,700,000 as of January 30, 1999 and January 31, 1998, respectively, are off-balance sheet for financial reporting purposes. On March 1, 1999, the Company issued a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1 Series") to a single investor through a private placement. Proceeds from the issuance of the 1999-1 Series were used to repay the outstanding balances of the 1994-1, 1996-1 and Variable Series certificates, totaling $26,950,000 as of that date, reduce outstanding borrowings under the Company's revolving line of credit (Note 5) and pay certain costs associated with the transaction. Interest on the 1999-1 Series certificate is to be earned by the certificate holder on a monthly basis at a fixed interest rate of 7.66%, and the outstanding principal balance of the certificate is to be repaid in twelve equal monthly installments commencing September 2003 and continuing through August 2004. The Company is required, among other things, to maintain certain portfolio performance standards under the program. Subject to certain conditions, the master trust permits further expansion of the program to meet future receivables growth. Net Credit Revenues. Net credit revenues associated with the Company's credit card receivable portfolio, including securitized receivables, consists of the following:
(In thousands of dollars) 1998 1997 1996 Service charge revenues $13,431 $11,618 $10,493 Gain (loss) on sale of receivables (45) 1,050 Interest expense on securitized receivables (3,314) (3,579) (3,564) Charge-offs on receivables sold and provision for credit losses on receivables ineligible for sale (3,175) (2,704) (2,731) ------ ------ ------ $ 6,897 $ 6,385 $ 4,198 ====== ====== ======
The Company adopted the provisions of SFAS No. 125 in fiscal 1997. The provisions of the statement were not permitted to be applied retroactively to prior periods presented. Accordingly, the Company had no gain or loss on the sale of receivables in fiscal 1996. The gain on sale of receivables of $1,050,000 in 1997 includes a credit of $898,000 related to a change in estimate for the allowance for doubtful accounts for receivables which were ineligible for sale. 4. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES Trade accounts payable and accrued expenses consist of the following:
January 30, January 31, (In thousands of dollars) 1999 1998 Trade accounts payable $23,178 $20,950 Cash management liability 12,176 10,141 Taxes, other than income taxes 11,078 8,723 Accrued expenses 10,597 5,861 Accrued payroll and related liabilities 6,416 5,734 Federal and state income taxes payable 5,178 2,224 ------ ------ $68,623 $53,633 ====== ======
5. DEBT OBLIGATIONS Revolving Line of Credit. The Company has a revolving line of credit arrangement with Congress Financial Corporation ("Congress") which provides the Company with a $110,000,000 working capital facility through March 30, 2001. 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 (except in 1998, which was extended to February 28, 1999) to fund increased seasonal inventory requirements. Interest on outstanding borrowings under the facility is charged at a rate of approximately LIBOR plus 2.25% (7.39% at January 30, 1999), with no interest charged on the unused portion of the line of credit. On March 1, 1999, the interest rate applicable to the line of credit was reduced by 1/4% to approximately LIBOR plus 2.00%. The maximum amount available for borrowings under the line of credit was $79,871,000 as of January 30, 1999, of which $60,273,000 was outstanding as of that date. Of that amount, $40,000,000 has been classified as long-term in the accompanying financial statements as of January 30, 1999 ($25,000,000 as of January 31, 1998) 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 30, 1999. Long-Term Obligations.
Notes and mortgage loans payable consist of the following: January 30, January 31, (In thousands of dollars) 1999 1998 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 $19,242 $19,501 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 2,850 3,800 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 4,429 5,286 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 1,384 1,892 Other 2,311 2,245 ------ ------ 30,216 32,724 Less current portion 2,710 2,641 ------ ------ $27,506 $30,083 ====== ======
The scheduled annual principal maturities on notes payable and mortgage loans are $2,710,000, $2,842,000, $2,472,000, $1,362,000 and $1,412,000 for 1999 through 2003, with $19,418,000 payable thereafter. Deferred debt issuance costs related to the Company's various financing arrangements are included in other current and long-term assets and are charged to income as additional interest expense on a straight-line basis over the life of the related indebtedness. Such costs, net of accumulated amortization, totaled $1,263,000 at January 30, 1999 and $1,734,000 at January 31, 1998. Interest paid, net of amounts capitalized, was $12,063,000 in 1998, $10,302,000 in 1997 and $11,059,000 in 1996. Capitalized interest expense was $134,000 in 1998, $114,000 in 1997 and $37,000 in 1996. The weighted- average interest rate charged on the Company's various revolving line of credit arrangements was 7.88% in 1998, 8.16% in 1997 and 8.62% in 1996. Certain of the Company's long-term financing arrangements include various restrictive covenants. The Company was in compliance with all such covenants as of January 30, 1999. 6. LEASES The Company leases certain retail department stores, furniture and equipment 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. During 1998, the Company entered into leases with ECI, an affiliate of the Company, for three of the department stores acquired from Harris. (See Note 2.) Management believes the terms of the leases with ECI reflect current market rates. Rent paid to ECI totaled $457,000 in fiscal 1998. Certain of the Company's department store 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 income and amounts payable under the leases as deferred lease payments. Deferred lease payments totaled $6,850,000 at January 30, 1999 and $6,463,000 at January 31, 1998. 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 30, 1999:
Capital Operating (In thousands of dollars) Leases Leases 1999 $ 2,475 $ 19,217 2000 2,095 17,232 2001 918 16,504 2002 902 16,181 2003 889 15,940 Thereafter 6,142 127,539 ------ ------- Total minimum lease payments 13,421 $212,613 ====== ======= Amount representing interest (5,089) ------ Present value of minimum lease payments 8,332 Less current portion (1,724) ------ $ 6,608 ======
Rental expense consists of the following: (In thousands of dollars) 1998 1997 1996 Operating leases: Buildings: Minimum rentals $14,395 $13,099 $11,897 Contingent rentals 2,173 1,911 2,213 Fixtures and equipment 3,275 4,358 5,439 ------ ------ ------ $19,843 $19,368 $19,549 ====== ====== ======
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 30, 1999. The Company terminated two capital leases in fiscal 1996 in connection with the relocation of two of its department stores to new locations. The Company recognized a pre-tax gain of $1,344,000 upon the termination of the leases, 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 in fiscal 1996. The new leases have been accounted for as operating leases for financial reporting purposes. 7. INCOME TAXES
The components of income tax expense are as follows: (In thousands of dollars) 1998 1997 1996 Current: Federal $2,737 $ 92 $ 375 State 377 8 464 3,114 100 839 Deferred: Federal 210 1,976 704 State 423 581 (285) ----- ----- ----- 633 2,557 419 ----- ----- ----- $3,747 $2,657 $1,258 ===== ===== =====
The principal components of deferred tax assets and liabilities are as follows (in thousands of dollars):
January 30, January 31, 1999 1998 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Vacation accrual and employee vacation benefits $ 762 $ 689 Credit losses 658 572 Accrued employee benefits 257 353 State income taxes 125 332 LIFO inventory reserve $ (3,636) $(2,942) Workers' compensation insurance premiums (760) (574) Supplies inventory (1,340) (1,429) Gain from adoption of SFAS No. 125 (65) (450) Other items, net 322 (793) 803 (1,137) ----- ------ ------ ------ 2,124 (6,594) 2,749 (6,532) Long-Term: Net operating loss carryforwards 2,500 4,541 General business credits 2,242 2,034 Alternative minimum tax credits 3,243 777 State income taxes 504 Depreciation expense (9,221) (8,503) Accounting for leases 945 (3,364) 913 (3,408) Deferred income 1,495 (2,313) 1,699 (1,958) Other items, net 724 (1,008) 567 (454) ------ ------- ------ ------- 11,653 (15,906) 10,531 (14,323) $13,777 $(22,500) $13,280 $(20,855) ====== ======= ====== =======
Income tax expense varies from the amount computed by applying the statutory federal income tax rate to the income before income taxes. The reasons for this difference are as follows:
1998 1997 1996 Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 5.8 5.9 5.7 Amortization of goodwill .4 .6 1.3 General business credit (1.7) (1.2) Other items, net 2.0 1.3 (1.3) ---- ---- ---- Effective rate 41.5% 41.6% 40.7% ==== ==== ====
The Company paid income taxes, net of refunds, of $138,000 in 1998. The Company received income tax refunds, net of payments, of $195,000 in 1997. At January 30, 1999, the Company has, for federal tax purposes, net operating loss carryforwards of approximately $7,300,000 which expire in the years 2008 through 2011, general business credits of approximately $1,146,000 which expire in the years 2007 through 2018, and alternative minimum tax credits of approximately $2,864,000 which may be used for an indefinite period. At January 30, 1999, the Company has, for state tax purposes, enterprise zone credits of approximately $1,096,000 and alternative minimum tax credits of approximately $378,000 which may be used for an indefinite period. These carryforwards are available to offset future taxable income and are expected to be fully utilized. 8. STOCK OPTION PLANS The Company has stock option plans for directors, officers and key employees which provide for the grant of non-qualified and incentive stock options. Under the plans, the option exercise price may not be lower than 100% of the fair market value of such shares at the date of the grant. Options granted generally vest on a cumulative basis over five years and expire ten years from the date of the grant. At January 30, 1999, options for 794,500 shares were available for future grants under the plans. Option activity under the plans is as follows:
Weighted- Average Number of Exercise Shares Price Outstanding, February 4, 1996 (138,000 exercisable at a weighted- average price of $9.92) 500,000 $9.74 Granted (weighted-average fair value of $3.54) 45,000 5.75 Canceled (36,000) 9.88 ------- ----- Outstanding, February 1, 1997 (221,000 exercisable at a weighted- average price of $9.83) 509,000 9.36 Granted (weighted-average fair value of $4.26) 74,000 5.87 Exercised (5,500) 6.55 Canceled (77,000) 9.46 ======= ==== Outstanding, January 31, 1998 (298,500 exercisable at a weighted- average price of $9.72) 500,500 9.05 Granted (weighted-average fair value of $4.38) 336,000 7.73 Exercised (1,250) 5.75 Canceled (57,250) 9.46 ------- ---- Outstanding, January 30, 1999 (366,000 exercisable at a weighted- average price of $9.50) 778,000 $8.45 ======= ====
Additional information regarding options outstanding as of January 30, 1999 is as follows:
Options Outstanding Options Exercisable Weighted-Avg. ------------------- Remaining Range of Number Contractual Weighted-Avg. Number Exercise Exercise Outstanding Life (yrs.) Exercise Price Exercisable Price Prices $5.38 to $10.87 778,000 7.4 yrs. $8.45 366,000 $9.50
Additional Stock Plan Information. SFAS No. 123 requires the disclosure of pro-forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. 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, 51.08% in 1998, 51.09% in 1997 and 49.74% in 1996; risk-free interest rates, 4.6% in 1998, 5.41% in 1997 and 6.30% in 1996; 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. Had the computed fair values of the 1998, 1997 and 1996 awards been amortized to expense over the vesting period of the awards, pro-forma net income and earnings per share would have been $5,282,000, or $0.46 per share in 1998, $3,693,000, or $0.35 per share in 1997 and $1,816,000, or $0.17 per share in 1996. 9. EMPLOYEE BENEFIT PLANS The Company has a Retirement Savings Plan ("Plan") which qualifies as an employee retirement plan under Section 401(k) of the Internal Revenue Code. Full-time employees meeting certain requirements are eligible to participate in the Plan and may elect to have up to 20% of their annual eligible compensation, subject to certain limitations, deferred and deposited with a qualified trustee. Participants in the Plan may receive an employer matching contribution of up to 4% of the participants' eligible compensation, depending on the Company's quarterly and annual financial performance. The Company recognized $424,000, $875,000 and $197,000 in expense related to the Plan in 1998, 1997 and 1996, respectively. The Company has also established a Voluntary Employee Beneficiary Association ("VEBA") trust for the purpose of funding employee vacation benefits. 10. COMMITMENTS AND CONTINGENCIES The Company is party to legal proceedings and claims which have arisen during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations. The Company arranges for the issuance of letters of credit in the ordinary course of business. As of January 30, 1999, the Company had outstanding letters of credit amounting to $2,868,000. Management believes the likelihood of non-performance under such contracts is remote. The Company is in process of remodeling certain existing store locations. The estimated cost of such projects as of January 30, 1999 is $6,418,000, and such costs are expected to be funded through working capital. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1998 and 1997 (in thousands, except per share data):
1998 ------------------------------------------- Quarter Ended May 2 August 1 October 31 January 30 Net sales $95,468 $104,131 $123,118 $194,423 Gross profit 29,941 32,601 43,188 63,879 Income (loss) before income tax expense (benefit) (3,408) (2,310) 604 14,143 Net income (loss) (1,994) (1,352) 345 8,283 Net income (loss) per common share -basic and diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
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 $ (0.09) $ (0.02) $ (0.14) $ 0.62
Net income for the three month period ended January 31, 1998 includes a pre-tax adjustment to the inventory shrinkage reserve resulting in a $637,000 increase in the gross margin, and also includes an $898,000 credit related to a change in estimate for the allowance for doubtful accounts. (See Note 3.) **********
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 30, 1999: Allowance for doubtful accounts. $ 437,179 $ 991,523 (1) $ 541,759(2) $(775,296)(3)$1,195,165 ========= ========= ========== ========== ========= Allowance for vendor claims receivable $ 80,000 $ 40,700(4) $ 120,700 ========= ========= ========== ========== ========= Allowance for notes receivable $ -0- $ $ -0- ========= ========= ========== ========== ========= Year ended January 31, 1998: Allowance for doubtful accounts..$1,322,107 $ 469,935 (1) $( 898,000)(5) $(456,863)(3)$ 437,179 ========= ========= ========== ========== ========= Allowance for vendor claims receivable.$ 80,000 $ 80,000 ========= ========= ========== ========== ========= Allowance for notes receivable.$ -0- $ -0- ========= ========= ========== ========== ========= Year ended February 1, 1997: 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)(6) $ 80,000 ========= ========= ========== ========== ========= Allowance for notes receivable.. $ 282,767 $ (282,767)(7) $ -0- ========= ========= ========== ========== =========
Notes: (1) Represents the provision for credit losses on receivables ineligible for sale. (2) Represents the allowance for doubtful accounts applicable to the receivables acquired from Harris (see Note 2 to the Consolidated Financial Statements). (3) Represents uncollectible accounts written off, net of recoveries, pertaining to receivables ineligible for sale. (4) Represents the allowance for vendor claims receivable applicable to the outstanding vendor claims acquired from Harris (see Note 2 to the Consolidated Financial Statements.) (5) Represents a change in estimate for the allowance for doubtful accounts related to receivables which were ineligible for sale. (See Note 3 to the Consolidated Financial Statements.) This amount is included in net credit revenues in the fiscal 1997 consolidated income statement. (6) Reduction in provision for uncollectible vendor claims receivable. (7) Reversal of uncollectible portion of note receivable recorded in connection with transferring related asset to a held for sale classification during the year ended February 1, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 30, 1999 GOTTSCHALKS INC. By: \s\ Joseph W. Levy Joseph W. Levy Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Chairman and Chief Executive Officer (principal executive /s/ Joseph W. Levy officer) April 30, 1999 Joseph W. Levy President, Chief Operating Officer April 30, 1999 _/s/ James R. Famalett e and Director James R. Famalette Senior Vice President and Chief Financial Officer (principal April 30, 1999 financial and _/s/ Michael S. Geele accounting officer) Michael S. Geele /s/ O. James Woodward III Director April 30, 1999 O. James Woodward III /s/ Bret W. Levy Director April 30, 1999 Bret W. Levy /s/ Sharon Levy Director April 30, 1999 Sharon Levy /s/ Joseph J. Penbera Director April 30, 1999 Joseph J. Penbera /s/ Fred Ruiz Director April 30, 1999 Fred Ruiz /s/ Max Gutmann Director April 30, 1999 Max Gutmann /s/ Isidoro Alvarez Director April 30, 1999 Isidoro Alvarez /s/ Jorge Pont Director April 30, 1999 Jorge Pont EX-23 2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-54783, 33- 54789, 33-61471, and 33-61473 of Gottschalks Inc. on Form S-8 of our report dated February 23, 1999 (March 1, 1999 as to Note 3), appearing in this Annual Report on Form 10-K of Gottschalks Inc. for the year ended January 30, 1999. \s\ Deloitte & Touche LLP Fresno, California April 26, 1999 EX-27 3
5 THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH REGULATION S-T AND INCLUDES AUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 30, 1999. 12-MOS JAN-30-1999 JAN-30-1999 1,693 37,399 20,301 1,316 123,118 194,031 167,780 54,135 324,364 97,800 94,732 0 0 126 103,342 324,364 517,140 524,037 347,531 347,531 8,461 3,175 9,470 9,029 3,747 5,282 0 0 0 5,282 .46 .46
EX-10.37 4 SEVERANCE AGREEMENT This Severance Agreement (this "Agreement"), is made as of this 21st day of January, 1999, by and between Gottschalks Inc., a Delaware Corporation ("Company") and Michael S. Geele, an individual ("Employee"). 1. Subject to the provisions of paragraph (4) below, Company hereby agrees that in the event Employee's employment with the Company is terminated by written notice of Company for other than for cause (as defined below), Company will pay Employee a severance benefit equal to twelve (12) months salary, determined at Employee's annual base rate of pay in effect at the time such notice of termination is given (less standard withholdings and authorized deductions), and Employee shall have the right to continue Employee's coverage in Company's group medical plan with the Company making full payment on Cobra benefits for a period of one year from the termination date (such benefits being referred to herein as the "Severance Benefit"). 2. For purposes of this agreement, "annual base rate of pay" means Employee's annual base salary only, and excludes all other income heretofore received by Employee, such as, but not limited to, bonuses, incentive compensation, fringe benefits, commissions, overtime, retainers, fees under contracts, income arising from the exercise of stock options, or expense allowances granted by Company. 3. The Severance Benefit, less standard withholding and other authorized deductions, will be paid to Employee after the date of Employee's termination out of the general assets of the Company in the same form and at the same time as Employee's salary otherwise would have been paid to Employee if Employee had continued to be employed by the Company. 4. Subject to the provisions of this paragraph (4) following this sentence, the Severance Benefit shall be paid to Employee only in the event that Employee's employment with Company is terminated by written notice from Company (other than for cause) and only if Employee continues to report to work, and adequately performs each and every duty of Employee's employment until the date set forth in the notice of termination as Employee's date of termination (unless the Company consents to a date of termination that is prior to such date). Notwithstanding anything to the contrary contained in this Agreement, Employee shall not be entitled to the Severance Benefit if: (i) Employee's employment with Company is terminated other than by written notice of termination from Company, including without limitation, the retirement, resignation, disability or death of Employee; (ii) Company sells all or part of its business (or otherwise merges, divides, consolidates or reorganizes) and Employee has the opportunity to continue employment with the buyer (or with one of the resulting entities in the event of a merger, division, consolidation or reorganization), at or above the employee's base rate of pay, regardless of whether the other terms and conditions of Employee's employment after such sale, division, consolidation or reorganization are the same or different from the terms and conditions of Employee's employment with Company; or (iii) Employee is terminated for "cause", which includes, without limitation, a good faith determination by Company that Employee (1) has committed a material breach of his duties and responsibilities, (2) refused to perform required duties and responsibilities or performed them incompetently, (3) breached or violated any fiduciary duty owed to Company or (4) is or has been personally dishonest, or has willfully or negligently violated any law, rule or regulation or has been convicted of a felony or misdemeanor (other than minor traffic violations and similar offenses). 5. Nothing contained herein shall be construed as conferring on Employee the right to continue in the employ of the Company in Employee's present or any other capacity. Employee hereby expressly acknowledges that Employee's employment with Company is "at will" and therefore may be terminated by Company at any time, with or without cause, at Company's sole discretion. Employee also expressly acknowledges that, except for benefits to which Employee may otherwise be entitled by law, Employee shall not be entitled to receive from Company any benefits, compensation or remuneration other than the Severance Benefit upon satisfaction of the conditions which entitle Employee to receive the Severance Benefit. Employee agrees that the Severance Benefit shall constitute the exclusive and sole remedy for any termination of Employee's employment and Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. 6. This Agreement shall be governed by the laws of the State of California. This Agreement may be amended only by a subsequent written agreement signed by Employee and an authorized representative of Company following approval by the Board of Directors of Company. This Agreement is personal to Employee and is not assignable by Employee. This Agreement shall inure to the benefit of and be binding upon Company and its successors and assigns and any such successor or assignee shall be deemed substituted for Company under the terms of this Agreement for all purposes. As used herein, "successor" and "assignee" shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the stock of Company or to which Company assigns this Agreement by operation of law or otherwise. This instrument constitutes and contains the entire agreement and understanding concerning the subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof. This is an integrated document. 7. Any dispute, controversy or claim arising out of or in connection with this Agreement or any other aspect of Employee's employment with Company shall be resolved exclusively through binding arbitration to be held in Fresno County, California in accordance with California Civil Procedure Code 1282-1284.2. In the event either party institutes arbitration under this Agreement, the party prevailing in any such arbitration shall be entitled, in addition to all other relief, to reasonable attorneys' fees relating to such arbitration. The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, et. IN WITNESS WHEREOF, Company has caused to be executed and delivered, and Employee has executed and delivered, this Agreement as of the day and year first above set forth. GOTTSCHALKS INC. By: \s\ Jim Famalette Title: PRESIDENT Employee \s\ Michael Geele EX-10.38 5 GOTTSCHALKS CREDIT RECEIVABLES CORPORATION Purchaser and GOTTSCHALKS INC. Seller AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT Dated as of March 1, 1999 Schedule I List of Accounts AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT, dated as of March 1, 1999, between GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, a Delaware corporation, (the "Purchaser"), and GOTTSCHALKS INC., a Delaware corporation, (the "Seller"). W I T N E S S E T H: WHEREAS, the Seller in the ordinary course of its business finances the purchase of merchandise by consumers pursuant to consumer revolving credit card accounts thereby generating certain payment obligations; and WHEREAS, the Seller desires to sell certain existing and future payment obligations from time to time to the Purchaser, and the Purchaser desires to sell such payment obligations to the Gottschalks Credit Card Master Trust, pursuant to the Pooling and Servicing Agreement dated as of March 1, 1999 (the "Pooling and Servicing Agreement"), among the Purchaser, as depositor, the Seller, as servicer, and Bankers Trust Company, as Trustee; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.1. Definitions. Capitalized terms used herein but not otherwise defined shall have the meanings set forth in the Pooling and Servicing Agreement, including any outstanding Series Supplement thereto. The term Agreement means this Amended and Restated Receivables Purchase Agreement, as the same may from time to time be amended, supplemented or otherwise modified. SECTION 1.2. Other Definitional Provisions. (a) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Article, Section, Schedule, and Exhibit references are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (b) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. ARTICLE II Conveyance of Receivables SECTION 2.1. Conveyance of Receivables. (a) By execution of this Agreement, the Seller does hereby sell, transfer, assign, set over and otherwise convey, without recourse (except as expressly provided herein), to the Purchaser, on the Cut-Off Date (a) all of the Seller's right, title and interest in, to and under the Receivables existing at the close of business on the Cut-Off Date and all monies due or to become due and all amounts received with respect thereto and all proceeds thereof (including recoveries and "proceeds", as such term is defined in Section 9306 of the UCC as in effect in the State of California and Section 9-306 of the UCC as in effect in the State of New York, as applicable) and (b) all of the Seller's rights, remedies, powers and privileges with respect to such Receivables. Subject to Article V hereof, as of each Business Day prior to the earlier of (x) the occurrence of a Liquidation Event specified in Section 9.02(b) of the Pooling and Servicing Agreement and (y) the Trust Termination Date (each, a "Purchase Date"), the Seller does hereby sell, transfer, assign, set over and otherwise convey, without recourse (except as expressly provided herein), to the Purchaser, all of the Seller's right, title and interest in, to and under the Receivables (other than Receivables that are (i) charged off as of the date of transfer of such Receivables, (ii) repurchased by the Seller from the Purchaser (upon receipt of payment therefor in accordance with Section 2.2 or 2.4 hereof, as applicable), (iii) generated during a Block Period in Blocked Accounts, (iv) generated in a Removed Account from and after the applicable Removal Date, as provided in Section 2.06(c) of the Pooling and Servicing Agreement or (iv) arising under charge accounts acquired by Gottschalks in connection with the acquisition of new stores or another retailer, or originated by Gottschalks at such stores (unless, at the Purchaser's option, such charge accounts are included as Charge Accounts for purposes of the Pooling and Servicing Agreement) owned by the Seller at the close of business on such Purchase Date and not theretofore conveyed to the Purchaser, all monies due or to become due and all amounts received with respect thereto and all proceeds thereof (including proceeds, as defined in Section 9306 of the UCC as in effect in the State of California and Section 9-306 of the UCC as in effect in the State of New York, as applicable, and Recoveries). The foregoing sale, transfer, assignment, set-over and conveyance and any subsequent sales, transfers, assignments, set-overs and conveyances do not constitute, and are not intended to result in, the creation or an assumption by the Purchaser of any obligation of the Servicer, the Seller or any other Person in connection with the Accounts or the Receivables or under any agreement or instrument relating thereto, including any obligation to any Obligors. (b) In connection with such sale, transfer, assignment, set-over and conveyance the Seller agrees to record and file, at its own expense, one or more financing statements on form UCC-1 or amendments and assignments of previously filed financing statements, to perfect the interest of the Purchaser in the Receivables conveyed by this Amended and Restated Receivables Purchase Agreement as a sale of "accounts" (as defined in Section 9106 of the UCC as in effect in the state where the Seller's or the Servicer's chief executive offices or books and records relating to the Receivables are located) meeting the requirements of applicable state law in such form as and in each jurisdiction in which any such filing may be necessary to perfect, and maintain the perfection of, the sale transfer, assignment, set-over and conveyance of the Receivables to the Purchaser, and to file and record any continuation statements necessary to maintain the continued perfection of such interest, in each case naming the Seller as seller and the Purchaser as buyer with respect to the Receivables described in the preceding paragraph, and to deliver a file- stamped copy of such financing statements, amendments and continuation statements, or other evidence of such filings, to the Purchaser as soon as practicable after receipt thereof by the Seller. The Purchaser shall be under no obligation whatsoever to make any filing under the UCC in connection with such sales to the Purchaser. (c) The Seller further agrees, at its own expense, on or prior to the date on which each Charge Account becomes an Account, to indicate in its computer files that the Receivables created in connection with such Account have been sold to the Purchaser pursuant to this Agreement and sold to the Trust pursuant to the Pooling and Servicing Agreement for the benefit of the Certificateholders and the other Beneficiaries and (b) not less than weekly, to deliver to the Purchaser a computer file or microfiche or written list containing a true and complete list of all Accounts specifying for each Account (i) its account number, (ii) the aggregate amount of Receivables outstanding in such Account and (iii) the aggregate amount of Principal Receivables in such Account. Such file, microfiche or list, as supplemented from time to time, shall be marked as Schedule I to this Agreement and is hereby incorporated into and made a part of this Agreement. (d) The "Purchase Price" with respect to Receivables sold hereunder shall be as follows: (i) on the Cut-Off Date, an amount equal to $__________ less certain gross costs and expenses related to such purchase and sale of Receivables and (ii) on each Purchase Date thereafter, a price agreed to by the Purchaser and the Seller at the time of such purchase by the Purchaser; provided, however, that such Purchase Price shall not, in the opinion of the Purchaser, be materially less favorable to the Purchaser than prices for transactions of a generally similar character at the time of the purchase taking into account the quality of such Receivables and other pertinent factors; and provided, further, that such consideration shall in any event not be less than reasonably equivalent value therefor. (e) The parties hereto agree that (A) the Purchase Price payable on the Cut-Off Date shall be paid in (i) cash to the extent available therefor from the net proceeds of the initial sale of securities issued by the Trust formed pursuant to the Pooling and Servicing Agreement and (ii) by a capital contribution in the amount of the difference, if any, between the amount of the net proceeds of such initial sale and the Purchase Price payable on the Cut-Off Date, and that the Purchase Price payable on each Purchase Date will be paid in cash to the extent of amounts distributable to the Depositor for such purpose pursuant to the Pooling and Servicing Agreement on such Purchase Date and remaining after application to all due and unpaid obligations of the Depositor under the Pooling and Servicing Agreement and (ii) by a capital contribution in the amount of the difference, if any, between the amounts so distributable to the Depositor on such Purchase Date and the Purchase Price payable on such Purchase Date (the "Purchase Consideration"). (f) All payments hereunder shall be made not later than the close of business (New York City time) on the date specified therefor in lawful money of the United States of America in same day funds to the bank account designated in writing by the Seller to the Purchaser from time to time. Whenever any payment to be made hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. (g) Subject to Article V hereof, on each Business Day, the Seller shall evidence the sale, transfer, assignment, set over and conveyance of all its Receivables not theretofore conveyed to the Purchaser by delivering to the Purchaser a receivables transmittal (a Receivables Transmittal) specifying to the Purchaser the aggregate outstanding balance of such Receivables. Upon the receipt by the Seller on any Purchase Date of the Purchase Consideration for the Receivables to be sold by the Seller on such date, all the Seller's right, title and interest in and to such Receivables shall have been sold, assigned, transferred, conveyed and set over to the Purchaser, and the Seller hereby acknowledges the release of all of its right to control such Receivables except its right to control such Receivables in its capacity as Servicer under the Pooling and Servicing Agreement. (h) The parties hereto intend that the transfers of Receivables effected by this Agreement shall be and shall be treated as a purchase and receipt of a capital contribution by the Purchaser and a sale and capital contribution by the Seller of the Receivables and not as a lending transaction. In the event that, notwithstanding such express intent of the parties, a court of competent jurisdiction were to hold that this Agreement evidences a loan rather than a sale and capital contribution, then the Seller shall be deemed to have granted to the Purchaser as of the date hereof a security interest (as defined in the UCC as in effect in California and New York) in, to and under the Receivables now existing and hereafter created, as specified in Section 2.1(a), all monies due or to become due with respect thereto and all other proceeds of such Receivables (including any Recoveries with respect thereto), which grant is enforceable with respect to Receivables and the proceeds thereof upon execution and delivery of this Agreement, and which will be enforceable with respect to such Receivables hereafter created and the proceeds thereof, upon such creation. If this Agreement constitutes the grant of a security interest to the Purchaser in such property, upon the filing of the financing statements described in this Section 2.1 and in the case of the Receivables hereafter created and proceeds thereof, upon such creation, the Purchaser shall have a first priority security interest in such property (subject to Section 9306 of the UCC as in effect in California), free and clear of any Lien other than Permitted Liens. SECTION 2.2. Representations and Warranties of the Seller Relating to the Seller and the Agreement. The Seller hereby represents and warrants to the Purchaser as of the date hereof and as of each Closing Date as follows: (a) Organization and Good Standing. The Seller is a corporation duly organized and validly existing and in good standing under the law of the State of Delaware and has full corporate power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement. (b) Due Qualification. The Seller is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify or be in good standing or obtain licenses or approvals would not have a material adverse effect on its ability to perform its obligations hereunder. (c) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for or contemplated by this Agreement have been duly authorized by the Seller by all necessary corporate action on the part of the Seller. (d) No Conflict. The execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated by this Agreement and the fulfillment of the terms hereof and thereof applicable to the Seller, will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a material default under, any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Seller is a party or by which it or its properties are bound. (e) No Violation. The execution and delivery of this Agreement by the Seller, the performance by the Seller of the transactions contemplated by this Agreement and the fulfillment of the terms hereof and thereof applicable to the Seller, will not conflict with or violate any Requirements of Law applicable to the Seller or give rise to an adverse claim upon the Seller or the Receivables. (f) No Proceedings. There are no proceedings or investigations, pending or, to the best knowledge of the Seller, threatened against the Seller, before any Governmental Authority (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, (iii) seeking any determination or ruling that, in the reasonable judgment of the Seller, would affect the performance by the Seller of its obligations under this Agreement, (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of this Agreement or (v) seeking to affect adversely the income or franchise tax attributes of the Trust and of the Investor Certificates under the United States Federal or any state income or franchise tax systems. There are no injunctions, writs, restraining orders or other orders of any nature that would adversely affect the performance by the Seller of its obligations under this Agreement or the transactions contemplated hereby. (g) All Consents Required. All authorizations, consents, orders, approvals or other actions of any Person or of any governmental body or official required in connection with the execution and delivery by the Seller of this Agreement, the performance by the Seller of the transactions contemplated by this Agreement, and the fulfillment by the Seller of the terms hereof or thereof, have been obtained. (h) Enforceability. This Agreement has been duly executed and delivered by the Seller and constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity) and the availability of equitable remedies. (i) Place of Business; Legal Name. The principal place of business of the Seller is located in Fresno, California and the offices where the Seller keeps its records concerning the Receivables and related contracts are located in Fresno, California and there have been no other such locations during the prior four month period. The legal name of the Seller is as set forth in this Agreement, and the Seller has no trade names, fictitious names, assumed names or "doing business as" names, except for "Village East" and "Harris/Gottschalks". (j) Use of Proceeds. No proceeds of the sale of any Receivables will be used by the Seller to purchase or carry any margin security. (k) Record of Accounts. Schedule I to this Agreement (as in effect on the date in question) is an accurate and complete listing in all material respects of all of the Accounts, and the information contained therein with respect to the identity of such Accounts and the Receivables existing thereunder is true and correct in all material respects. (l) Tax Returns. The Seller has filed all required tax returns on a timely basis. (m) Compliance with Laws. The Seller has complied with all applicable laws, rules, regulations and orders in respect of the conduct of its business and the ownership of its properties and purchased assets, and has maintained all applicable permits, certifications, licenses and other rights of whatever nature necessary for the conduct of its business. (n) Pension Plans. All pension or profit sharing plans of the Seller and its consolidated subsidiaries have been fully funded in accordance with the Seller's applicable pension or profit sharing plan agreements. (o) Solvency. The Seller (i) is not insolvent and will not become insolvent after giving effect to the transactions contemplated hereby, (ii) is paying its debts as such debts become due and (iii) after giving effect to the transactions contemplated hereby, will have adequate capital to conduct its business. (p) Business Reasons for Sale. The Seller has valid business reasons for selling the Receivables to the Purchaser under this Agreement and is not obtaining a loan secured by the Receivables as collateral. The Seller will to the fullest extent permitted by generally accepted accounting principles and by applicable law, record each purchase hereunder as a sale on its books and records, reflect each purchase in its financial statements and tax returns as a sale and recognize gain or loss, as the case may be, on each purchase hereunder. (q) No Material Adverse Effect. There has been no material adverse change with respect to the Seller's operations, including its ability to perform its obligations under this Agreement. The representations and warranties set forth in this Section 2.2 shall survive the transfer and assignment of the Receivables to the Purchaser. Upon discovery by the Seller or the Purchaser of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the other party. In the event of any breach of any of the representations and warranties set forth in this Section 2.2 and if, as a result of any such breach, the Purchaser shall be obligated to purchase the Investors' Interest and/or the Depositor Interest pursuant to Section 2.03 of the Pooling and Servicing Agreement, the Seller shall repurchase such Investors' Interest and/or Depositor Interest, as the case may be, and shall pay to the Purchaser on the Business Day preceding the Distribution Date on which such purchase of the Investors' Interest and/or the Depositor Interest, as applicable, is to be made by the Purchaser an amount equal to the purchase price therefor as specified in Section 2.03 of the Pooling and Servicing Agreement. The obligation of the Seller to purchase such Investors' Interest and/or Depositor Interest, as the case may be, pursuant to this Section 2.2 shall constitute the sole remedy against the Seller respecting an event of the type specified in the first sentence of this Section 2.2 available to the Purchaser and to the Holders of the Investor Certificates and/or the Holder of the Exchangeable Certificate (or the Trustee on behalf of such Certificateholders). SECTION 2.3. Representations and Warranties of the Seller Relating to the Receivables. The Seller hereby represents and warrants to the Purchaser as of the Cut-Off Date and each Purchase Date that: (a) No Liens. Each Receivable sold hereunder has been conveyed to the Purchaser free and clear of any Lien (except for Permitted Liens) and the Purchaser has received good title to each such Receivable. (b) All Consents Required. All appraisals, consents, orders, approvals, authorizations or other actions of any Person or any governmental body or official required in connection with the conveyance of each Receivable hereunder to the Purchaser have been duly obtained and are in full force and effect. (c) Valid Sale. This Agreement constitutes a valid sale, transfer, assignment, set-over and conveyance to the Purchaser of all right, title and interest of the Seller in and to the Receivables described in Section 2.1(a) hereof, all monies due or to become due with respect thereto (including Finance Charge Receivables), and all proceeds of such Receivables (including Recoveries) and such Receivables and all proceeds thereof will be held by the Purchaser free and clear of any Lien of any Person claiming through or under the Seller or any of its Affiliates except for Permitted Liens. (d) Account or General Intangible. The Seller has taken no action to cause any Receivable sold hereunder to be anything other than an "account" or "general intangible" (each as defined in Section 9106 of the UCC as in effect in the State of California and Section 9-106 of the UCC as in effect in the State of New York, as applicable). The Seller has taken no action to evidence any Receivable sold hereunder by any "instrument" or "chattel paper" (each as defined in Section 9105 of the UCC as in effect in the State of California and Section 9-105 of the UCC as in effect in the State of New York, as applicable). The representations and warranties set forth in this Section 2.3 shall survive the transfer and assignment of the Receivables to the Purchaser. Upon discovery by the Seller or the Purchaser of a breach of any of the representations and warranties set forth in this Section 2.3, the party discovering such breach shall give prompt written notice to the other party. SECTION 2.4. Repurchase of Receivables. In the event any representation or warranty under Section 2.3 is not true and correct as of the date specified therein with respect to any Receivable or Account and the Purchaser is, as the result of any such breach, required to accept a reassignment of such Receivable or all Receivables in such Account pursuant to Section 2.04(c) of the Pooling and Servicing Agreement, then, within thirty (30) days (or such longer period as may be agreed to by the Purchaser) of the earlier to occur of the discovery of any such event by the Seller or the Purchaser, or receipt by the Seller or the Purchaser of written notice of any such event given by the Trustee or any Enhancement Provider, the Seller shall repurchase the Receivable or Receivables of which the Purchaser is required to accept reassignment pursuant to the Pooling and Servicing Agreement on the Business Day preceding the Determination Date on which such reassignment is to occur. The Seller shall purchase each such Receivable pursuant to this Section 2.4 by making a payment to the Purchaser in immediately available funds on the Business Day preceding the Determination Date on which such reassignment is to occur in an amount equal to the Purchase Price for such Receivable. Upon payment of the Purchase Price by delivery of such immediately available funds, the Purchaser shall automatically and without further action be deemed to sell, transfer, assign, set over and otherwise convey to the Seller, without recourse, representation or warranty, all the right, title and interest of the Purchaser in and to such Receivable and all monies due or to become due with respect thereto and all proceeds thereof. The Purchaser shall execute such documents and instruments of transfer or assignment and take such other actions as shall reasonably be requested by the Seller to effect the conveyance of such Receivables pursuant to this Section. The obligation of the Seller to repurchase any such Receivable shall constitute the sole remedy respecting the event giving rise to such obligation available to the Purchaser and to the Certificateholders (or the Trustee on behalf of Certificateholders). SECTION 2.5. Covenants of the Seller. So long as the Purchaser shall have any ownership interest in any Receivables sold by the Seller or until a termination date pursuant to Section 5.01 shall have occurred, whichever is later, the Seller covenants that: (a) Receivables to be Accounts or General Intangibles. The Seller shall take no action to cause any Receivable sold hereunder to be evidenced by any "instrument" or "chattel paper" (each as defined in Section 9105 of the UCC as in effect in the State of California and Section 9-105 of the UCC as in effect in the State of New York, as applicable). The Seller shall take no action to cause any Receivable sold hereunder to be anything other than an "account" or "general intangible" (each as defined in Section 9106 of the UCC as in effect in the State of California and Section 9-106 of the UCC as in effect in the State of New York, as applicable). In the event that any Receivable sold hereunder shall, at any time, be evidenced by any "instrument" or "chattel paper", the Seller shall indicate or cause to be indicated on such "instrument" or "chattel paper" a legend stating that such Receivable has been conveyed to the Purchaser pursuant to this Agreement and conveyed to the Trust pursuant to the Pooling and Servicing Agreement for the benefit of the Certificateholders and other Beneficiaries and shall deliver such instrument or chattel paper to the Trustee to be held thereby unless and until the Seller, in its capacity as Servicer under the Pooling and Servicing Agreement, requests in writing the Trustee to return such instrument or chattel paper to it (i) in connection with the repurchase by or reassignment to the Seller of the related Receivable or (ii) in connection with its enforcement, as Servicer, of such Receivable (in which case the writing to the Trustee shall certify that return of such instrument or chattel paper is necessary for the conduct of such enforcement and that such enforcement is being undertaken on behalf of the Trust or Trustee). (b) Negative Pledge. Except for the conveyances hereunder, the Seller will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) on any Receivable sold hereunder, whether now existing or hereafter created, or any interest therein; the Seller will immediately notify the Purchaser of the existence of any Lien on any Receivable sold hereunder; and the Seller shall defend the right, title and interest of the Purchaser (and of the Trustee as assignee and transferee thereof under the Pooling and Servicing Agreement) in, to and under the Receivables sold hereunder, whether now existing or hereafter created, against all claims of third parties claiming through or under the Seller. (c) Charge Account Agreements and Financial Guidelines. The Seller shall comply with and perform its obligations under any Charge Account Agreement to which the Seller is a party that relates to the Accounts and the Financial Guidelines except insofar as any failure to comply or perform would not materially and adversely affect the rights of the Trust or any of the Beneficiaries. Subject to compliance with all Requirements of Law, the Seller may change the terms and provisions of such Charge Account Agreements or the Financial Guidelines in any respect (including the calculation of the amount or the timing of charge-offs and the rate of the finance charges, if any, assessed thereon) only if (i) such change would not, in the reasonable judgment of the Seller, cause an Early Amortization Event to occur and, if the Seller owns a comparable segment of revolving credit card accounts which have characteristics the same as, or substantially similar to, the Accounts that are the subject of such change, such change is made applicable to such comparable segments of accounts or (ii) the Seller shall reasonably determine that such change is necessary in order to satisfy any Requirement of Law. (d) Conveyance of Accounts. The Seller covenants and agrees that it will not convey, assign, exchange or otherwise transfer any Account to any Person prior to the termination of this Agreement. (e) Compliance with Laws, Etc. The Seller shall comply in all material respects with all applicable laws, rules, regulations and orders applicable to the Receivables sold hereunder, including, without limitation, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy, where failure to so comply could reasonably be expected to have a material adverse effect on the amount of Collections thereunder. (f) Preservation of Corporate Existence. Except as provided in Section 4.1, the Seller shall preserve and maintain in all material respects its corporate existence, corporate rights (charter and statutory) and corporate franchises. (g) Access to Certain Information Regarding the Receivables. The Seller shall provide to the Purchaser and its assigns and their agents access to the documentation regarding the Accounts and the Receivables, such access being afforded without charge but only (i) upon reasonable request, (ii) during normal business hours, (iii) subject to the Seller's normal security and confidentiality procedures, and (iv) at offices designated by the Seller. Nothing in this Section 2.5(g) shall derogate from the obligation of the Seller, the Purchaser or its assigns, or their respective agents, to observe any applicable law prohibiting disclosure of information regarding the Obligors and the failure of the Seller to provide access as provided in this Section 2.5(g) as a result of such obligation shall not constitute a breach of this Section 2.5(g). (h) Keeping of Records and Books of Account. The Seller shall maintain and implement, or cause to be maintained or implemented, administrative and operating procedures reasonably necessary or advisable for the collection of all such Receivables, and, until the delivery to any Successor Servicer appointed pursuant to the Pooling and Servicing Agreement, keep and maintain, or cause to be kept and maintained, all documents, books, records and other information reasonably necessary or advisable for the collection of all such Receivables. (i) Performance and Compliance with Receivables and Charge Account Agreements. The Seller shall at its expense take all actions on its part reasonably necessary to maintain in full force and effect its rights under all Charge Account Agreements to which the Seller is a party. (j) Location of Records. The Seller shall keep its chief place of business and chief executive office, and the offices where it keeps the records concerning the Receivables and all underlying Charge Account Agreements (and all original documents relating thereto), at 7 River Park Place East, Fresno, California 93720 or upon prior written notice to the Purchaser, at such other locations in a jurisdiction where all action required by Section 2.5(m) shall have been taken and completed and be in full force and effect. The Seller shall at all times maintain its principal executive office within the United States of America. (k) Furnishing Copies, Etc. The Seller shall furnish to the Purchaser (i) upon the Purchaser's request, a certificate of the chief financial officer of the Seller certifying, as of the date thereof, that no termination event described in Section 5.1 has occurred and is continuing and setting forth the computations used by the chief financial officer of the Seller in making such determination; (ii) as soon as possible and in any event within five days after the occurrence of any such termination event or event that upon notice or with the passage of time or expiration of an applicable cure period (or both) may become a termination event, a statement of the chief financial officer of the Seller setting forth details of such termination event or event that with the passage of time or expiration of an applicable cure period (or both) may become a termination event and the action that the Seller proposes to take or has taken with respect thereto; and (iii) promptly following the Purchaser's request thereof, such other information, documents, records or reports with respect to the Receivables sold hereunder or the underlying Charge Account Agreements or the conditions or operations, financial or otherwise, of the Seller, as the Purchaser may from time to time reasonably request. (l) Obligation to Record and Report. The Seller shall to the fullest extent permitted by generally accepted accounting principles and by applicable law, record each purchase hereunder as a sale on its books and records, reflect each purchase in its financial statements and tax returns as a sale and recognize gain or loss, as the case may be, on each purchase hereunder. (m) Continuing Compliance with the Uniform Commercial Code. The Seller shall, without limiting the requirements of Section 2.5(o), at its expense, preserve, continue, and maintain or cause to be preserved, continued, and maintained the Purchaser's valid and properly protected title to each Receivable sold hereunder free of any Lien other than Permitted Liens, including, without limitation, filing or recording UCC financing statements, or amendments or assignments thereof, or continuation statements in each relevant jurisdiction. (n) Collections of Receivables. The Seller shall cause all Collections in respect of Receivables sold hereunder to be processed in accordance with the collection arrangements set forth in Section 4.03 of the Pooling and Servicing Agreement. (o) Further Action Evidencing Purchases. (i) The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable or that the Purchaser may reasonably request, to protect or more fully evidence the Purchaser's ownership, right, title and interest in the Receivables sold by the Seller and its rights under the Charge Account Agreements with respect thereto, or to enable the Purchaser to exercise or enforce any such rights. Without limiting the generality of the foregoing, the Seller will upon the request of the Purchaser (A) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or, in the opinion of the Purchaser, desirable, (B) indicate on its books and records (including, without limitation, originals and copies of sale slips and billing statements, to the extent practicable) that Receivables have been sold and assigned by the Seller to the Purchaser and by the Purchaser to the Trust pursuant to the Pooling and Servicing Agreement, and provide to the Purchaser, upon request, copies of any such records and (C) contact customers to confirm and verify Receivables. The Seller hereby irrevocably authorizes the Purchaser to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Receivables sold by the Seller, or the underlying Charge Account Agreements with respect thereto, without the signature of the Seller where permitted by law. If the Seller fails to perform any of its agreements or obligations under this Agreement, the Purchaser may (but shall not be required to) perform, or cause performance of, such agreements or obligations, and the expenses of the Purchaser incurred in connection therewith shall be payable by the Seller. (p) Change in Business. The Seller shall not make any change in the nature of its business as conducted on the date hereof that could reasonably be expected to have a material adverse effect on the value or collectibility of the Receivables. (q) Account Allocations. In the event that the Seller is unable for any reason to transfer Receivables to the Purchaser, then the Seller agrees that it shall allocate, after the occurrence of such event, payments on each affected Account with respect to the principal balance of such Account first to the oldest principal balance of such Account and to have such payments applied as Collections in accordance with the terms of the Pooling and Servicing Agreement. The parties hereto agree that Finance Charge Receivables, whenever created, accrued in respect of Principal Receivables which have been conveyed to the Purchaser and by the Purchaser to the Trust shall continue to be a part of the Trust notwithstanding any cessation of the transfer of additional Principal Receivables to the Purchaser and Collections with respect thereto shall continue to be allocated and paid in accordance with Article IV of the Pooling and Servicing Agreement. (r) Operations of Seller. The Seller agrees that it shall conduct its operations in such a manner that the Purchaser would not be substantively consolidated into the bankruptcy estate of the Seller or have its separate corporate existence disregarded in the event of a bankruptcy of the Seller. (s) Compliance with Certain Provisions of the Pooling and Servicing Agreement. The Seller agrees that it shall, as Servicer or Seller, as applicable, comply with and observe the provisions of Article III of the Pooling and Servicing Agreement. The Seller further agrees that it shall comply, as Seller, with the meet and confer requirements set forth in Section 8.06(b) of the Pooling and Servicing Agreement. SECTION 2.6. Customer Service Adjustments. The Seller may accept a return of goods for full or partial credit or make a daily adjustment in the principal amount or finance or other charges accrued or payable with respect to the account of a customer who has purchased merchandise or services on credit under a Charge Account Agreement, provided that such adjustment is permitted under the Seller's applicable Financial Guidelines. The aggregate amount of all such adjustments made by the Seller during any Collection Period shall be payable to the Purchaser by the Seller in immediately available funds and shall be due no later than the next succeeding Determination Date. ARTICLE III Administration and Servicing of Receivables SECTION 3.1. Acceptance of Appointment and Other Matters Relating to the Servicer. (a) The Seller agrees to act as the Servicer under this Agreement and the Pooling and Servicing Agreement, and the Purchaser consents to the Seller acting as Servicer. The Seller, as Servicer, will have ultimate responsibility for servicing, managing and making collections on the Receivables and for holding such Receivables in trust for the benefit of the Purchaser and the Trust. The Seller, as Servicer, will have the authority to make any management decisions relating to such Receivables, to the extent such authority is granted to the Servicer under this Agreement and the Pooling and Servicing Agreement. (b) The Seller, as Servicer, shall service and administer the Receivables sold hereunder in accordance with the provisions of the Pooling and Servicing Agreement. (c) In the event that a Successor Servicer is appointed pursuant to the Pooling and Servicing Agreement, such Successor Servicer shall act as Successor Servicer under this Agreement and the Purchaser consents to the appointment of such Successor Servicer hereunder. SECTION 3.2. Servicing Compensation. As full compensation for its servicing activities hereunder and under the Pooling and Servicing Agreement, the Seller, as Servicer, shall be entitled to receive the Servicing Fee on each Distribution Date. The Servicing Fee shall be paid in accordance with the terms of the Pooling and Servicing Agreement. SECTION 3.3. Allocations and Applications of Collections and Other Funds. The Seller, as Servicer, will apply all Collections with respect to the Receivables sold hereunder and all funds on deposit in the Collection Account as described in Article IV of the Pooling and Servicing Agreement. SECTION 3.4. Other Actions Taken by the Seller. The Seller hereby agrees that upon the occurrence of an event described in Section 10.01(e) of the Pooling and Servicing Agreement with respect to the Seller, the Seller hereby agrees to cause its customer service employees to distribute envelopes to Obligors for mail-in payments rather than accepting In-Store Payments at the customer service window. ARTICLE IV Other Matters Relating to the Seller SECTION 4.1. Merger or Consolidation of, or Assumption, of the Obligations of the Seller. The Seller shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (a) immediately after giving effect to any such transaction, the consolidated tangible net worth of the surviving person shall not have materially decreased, determination to be made on a pro forma basis after giving effect to the proposed transaction; and (b) the corporation formed by such consolidation or into which the Seller is merged or the Person which acquires by conveyance or transfer the properties and assets of the Seller substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and, if the Seller is not the surviving entity, such corporation shall expressly assume, by written agreement supplemental hereto, executed and delivered to the Purchaser, in form satisfactory to the Purchaser, the performance of every covenant and obligation of the Seller hereunder and shall benefit from all the rights granted to the Seller; (c) the Seller shall have delivered to the Purchaser and the Trustee (i) an Officers' Certificate signed by a Vice President (or any more senior officer) stating that such consolidation, merger, conveyance or transfer complies with this Section 4.1 and that all conditions precedent herein provided for relating to such transaction have been complied with and (ii) an Opinion of Counsel that such supplemental agreement is legal, valid and binding and that the entity surviving such consolidation, conveyance or transfer is organized and existing under the laws of the United States of America or any State thereof or the District of Columbia; (d) the Seller shall have delivered notice to the Rating Agencies of such consolidation, merger, conveyance or transfer and the Rating Agency Condition shall have been satisfied; and (e) Consent of Certificateholders shall have been obtained, which consent shall not be unreasonably withheld in the event that the Rating Agency Condition shall have been satisfied. provided, however, that notwithstanding the provisions at this Section 4.1, the Seller shall not merge into or convey or transfer its properties and assets substantially as an entirety to the Purchaser. SECTION 4.2. Seller Indemnification of the Purchaser. The Seller shall indemnify and hold harmless the Purchaser, from and against any loss, liability, expense, claim, damage or injury suffered or sustained by reason of any acts, omissions or alleged acts or omissions arising out of activities of the Seller pursuant to this Agreement (including, without limitation, as Servicer hereunder) or arising out of or based on the arrangement created by this Agreement and the activities of the Seller taken pursuant thereto (other than collection losses on the Receivables or amounts due with respect thereto, unless such collection losses arise from a breach of a representation or warranty by the Seller), including any judgment, award, settlement, reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided, however, that the Seller shall not indemnify the Purchaser if such acts, omissions or alleged acts or omissions constitute fraud, gross negligence or willful misconduct by the Purchaser; and provided, further, that the Seller shall not indemnify the Purchaser for any liabilities, cost or expense of the Purchaser with respect to any Federal, state or local income or franchise taxes (or any interest or penalties with respect thereto) required to be paid by the Purchaser in connection herewith to any taxing authority. Any indemnification under this Article IV shall survive the termination of this Agreement. ARTICLE V Termination SECTION 5.1. Termination. This Agreement will terminate immediately after the Trust terminates pursuant to the Pooling and Servicing Agreement. In addition, the Purchaser shall not sell and the Seller shall not purchase Receivables hereunder following the occurrence of a Liquidation Event or Early Amortization Event relating to the insolvency or bankruptcy of the Seller. ARTICLE VI Miscellaneous Provisions SECTION 6.1. Amendment. (a) This Agreement may be amended from time to time by the Seller and the Purchaser without the consent of any of the Certificateholders (but with notice to the Rating Agency) to: (i) add to the covenants of the Seller for the benefit of the Certificateholders, or to surrender any right or power conferred upon the Seller herein; or (ii) cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or in any Certificate. provided, however, that such action shall not adversely affect in any material respect the interests of any Certificateholder or the Holder of the Exchangeable Certificate. (b) This Agreement may also be amended from time to time by the Purchaser and Seller with the consent of the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of each materially adversely affected Series for the purpose of adding, eliminating or changing provisions; provided, however, that no such amendment shall (i) reduce in any manner the amount of or delay the timing of any distributions to be made to Certificateholders or deposits of amounts to be so distributed without the consent of each affected Certificateholder, (ii) change the definition of or the manner of calculating the interest of any Certificateholders without the consent of each affected Certificateholder, (iii) reduce the aforesaid percentage required to consent to any such amendment without the consent of each Certificateholder or (iv) adversely affect the rating of any Series or Class by any Rating Agency without the consent of the Holders of Investor Certificates of such Series or Class evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of such Series or Class. Any amendment to be effected pursuant to this subsection (b) shall be deemed to materially adversely affect all outstanding Series, other than any Series with respect to which such action shall not adversely affect in any material respect the interests of any Holder of Investor Certificates of such Series. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's rights, duties or immunities under this Agreement or otherwise. (c) Promptly after the execution of any such amendment or consent (other than an amendment pursuant to subsection (a) above), the Seller shall furnish notification of the substance of such amendment to the Trustee, each Certificateholder, each Enhancement Provider and each Rating Agency. (d) It shall not be necessary for the consent of Certificateholders under this Section 6.1 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by Certificateholders shall be subject to such reasonable requirements as the Trustee may prescribe. (e) Notwithstanding anything in this Section 6.1 to the contrary, no amendment may be made to this Agreement which would adversely affect in any material respect the interests of any Enhancement Provider without the consent of such Enhancement Provider. SECTION 6.2. Limited Recourse. Notwithstanding anything to the contrary contained herein, the obligations of the Purchaser hereunder shall not be recourse to the Purchaser (or any person or organization acting on behalf of the Purchaser or any affiliate, officer or director of the Purchaser), other than to any assets of the Purchaser not pledged to third parties or otherwise encumbered in a manner permitted by the Purchaser's Certificate of Incorporation; provided, however, that any payment by the Purchaser made in accordance with this Section 6.2 shall be made only after payment in full of any amounts that the Purchaser is obligated to deposit in the Collection Account pursuant to the Pooling and Servicing Agreement. SECTION 6.3. No Petition. The Seller hereby covenants and agrees that it will not at any time institute, or join in instituting, against the Purchaser any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or similar law. SECTION 6.4. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 6.5. Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered at or mailed by registered mail, return receipt requested, to the parties at such addresses specified in the Pooling and Servicing Agreement. SECTION 6.6. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or rights of the Certificateholders. SECTION 6.7. Assignment. Notwithstanding anything to the contrary contained herein, this Agreement may not be assigned by the Seller without the prior consent of the Purchaser and the Trustee. The Purchaser may assign its rights, remedies, powers and privileges under this Agreement to the Trustee on behalf of the Trust pursuant to the Pooling and Servicing Agreement. SECTION 6.8. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Purchaser or the Seller, as the case may be, any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exhaustive of any rights, remedies, powers and privileges provided by law. SECTION 6.9. Counterparts. This Agreement may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. SECTION 6.10. Third-Party Beneficiaries. This Agreement will inure to the benefit of and be binding upon the parties hereto, the Certificateholders and the other Beneficiaries and their respective successors and permitted assigns. Except as otherwise provided in this Agreement, no other Person will have any right or obligation hereunder. SECTION 6.11. Merger and Integration. Except as specifically stated otherwise herein, this Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and all prior understandings, written or oral, are superseded by this Agreement. This Agreement may not be modified, amended, waived, or supplemented except as provided herein. SECTION 6.12. Headings. The headings herein are for purposes of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof. SECTION 6.13. Rule 144A Information. For so long as any of the Investor Certificates of any Series or Class are restricted securities within the meaning of Rule 144(a)(3) under the 1933 Act, the Seller agrees to cooperate with the Purchaser to provide to any Certificateholders of such Series or Class and to any prospective purchaser of Investor Certificates designated by such Certificateholder, upon the request of such Certificateholder or prospective purchaser, any information required to be provided to such holder or prospective purchaser to satisfy the condition set forth in Rule 144A(d)(4) under the 1933 Act. IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Amended and Restated Receivables Purchase Agreement to be duly executed by their respective officers as of the day and year first above written. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Purchaser By: \s\ Michael Geele Title: President GOTTSCHALKS INC., as Seller By: \s\ Jim Famalette Title: President SCHEDULE I List of Accounts The list of all Accounts specifying for each Account, (i) its account number (ii) the aggregate amount of Receivables outstanding in such Account, and (iii) the aggregate amount of Principal Receivables in such Account has been delivered in the form of computer tape. Such tape is incorporated herein by this reference. ARTICLE I Definitions. SECTION 1.1. Definitions 1 SECTION 1.2. Other Definitional Provisions 1 ARTICLE II Conveyance of Receivables. SECTION 2.1. Conveyance of Receivables 2 SECTION 2.2. Representations and Warranties of the Seller Relating to the Seller and the Agreement 4 SECTION 2.3. Representations and Warranties of the Seller Relating to the Receivables 7 SECTION 2.4. Repurchase of Receivables 8 SECTION 2.5. Covenants of the Seller 8 SECTION 2.6. Customer Service Adjustments 12 ARTICLE III Administration and Servicing of Receivables. SECTION 3.1. Acceptance of Appointment and Other Matters Relating to the Servicer 12 SECTION 3.2. Servicing Compensation 13 SECTION 3.3. Allocations and Applications of Collections and Other Funds 13 SECTION 3.4. Other Actions Taken by the Seller 13 ARTICLE IV Other Matters Relating to the Seller. SECTION 4.1. Merger or Consolidation of, or Assumption, of the Obligations of the Seller 13 SECTION 4.2. Seller Indemnification of the Purchaser 14 ARTICLE V Termination. SECTION 5.1. Termination 14 ARTICLE VI Miscellaneous Provisions. SECTION 6.1. Amendment 15 SECTION 6.2. Limited Recourse 16 SECTION 6.3. No Petition 16 SECTION 6.4. Governing Law 16 SECTION 6.5. Notices 16 SECTION 6.6. Severability of Provisions 16 SECTION 6.7. Assignment 16 SECTION 6.8. No Waiver; Cumulative Remedies 17 SECTION 6.9. Counterparts 17 SECTION 6.10. Third-Party Beneficiaries 17 SECTION 6.11. Merger and Integration 17 SECTION 6.12. Headings 17 SECTION 6.13. Rule144A Information 17 An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-10.39 6 GOTTSCHALKS CREDIT RECEIVABLES CORPORATION Depositor GOTTSCHALKS INC. Servicer and BANKERS TRUST COMPANY Trustee _________________________________________ POOLING AND SERVICING AGREEMENT Dated as of March 1, 1999 _________________________________________ GOTTSCHALKS CREDIT CARD MASTER TRUST POOLING AND SERVICING AGREEMENT dated as of March 1, 1999, among GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, a Delaware corporation, as Depositor, GOTTSCHALKS INC., a Delaware corporation, as Servicer, and BANKERS TRUST COMPANY, a New York banking corporation, as Trustee. In consideration of the mutual agreements herein contained, each party agrees as follows for the benefit of the other parties and the Beneficiaries to the extent provided herein: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. Whenever used in this Agreement, the following words and phrases shall have the following meanings: "Account" shall mean (i) each Charge Account existing on the Cut-Off Date (ii) each Charge Account originated by the Seller in the normal operation of its credit card business after the Cut-Off Date and (iii) any Charge Account acquired by, or originated at any store acquired by, the Seller after the Cut- Off Date from a third party that the Seller, upon satisfaction of the Rating Agency Condition, chooses to include as a Charge Account for purposes of this Agreement; provided, however, that a Charge Account originated by the Seller during the continuance of a Block Period shall not constitute an Account hereunder until and unless the Charge Account subsequently constitutes a Supplemental Account; provided further, that any Charge Account that constitutes a Removed Account shall not constitute an Account hereunder from and after its Removal Date. "Account Information" shall have the meaning specified in Section 2.02(c). "Adjusted Invested Amount" shall mean, as of any date, an amount equal to the Required Series Pool Balance. "Adjusted Net Worth" shall have the meaning set forth in that certain Loan and Security Agreement between the Servicer (or the successor thereto) and Congress Financial Corporation (or the successor thereto), dated December 20, 1996, as amended, or any replacement line of credit obtained by the Servicer (or the successor thereto). "Adjustment Payment" shall have the meaning specified in Section 3.09(a) hereof. "Affiliate" shall mean, with respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" shall mean this Pooling and Servicing Agreement, as the same may from time to time be amended, modified or otherwise supplemented, including with respect to any Series or Class, by the related Supplement. "Allocation Day" with respect to any Series shall have the meaning specified in the related Series Supplement. "Applicants" shall have the meaning specified in Section 6.07 hereof. "Appointment Date" shall have the meaning specified in Section 9.02 hereof. "Authorized Newspaper" shall mean any newspaper or newspapers of general circulation in Fresno County, California and in New York, New York customarily published on each Business Day, whether or not published on Saturdays, Sundays and holidays. "Beneficiary" shall mean any of the Certificateholders and any Enhancement Provider. "Blocked Account" means a Charge Account originated by the Seller during the continuance of a Block Period. "Block Period" shall have the meaning specified in Section 2.08(a) hereof. "Bondable Persons" shall mean those officers and employees of the Servicer directly responsible for handling funds, documents and computer systems directly relating to any of the servicing functions delegated to the Servicer hereunder and performed by the Servicer at its headquarters in Fresno, California. "Business Day" shall mean any day other than (a) a Saturday or a Sunday, or (b) another day on which banking institutions or trust companies in the States of New York or California are authorized or obligated by law, executive order or governmental decree to be closed. "Certificate" shall mean any Certificate issued pursuant to a Series Supplement or the Exchangeable Certificate. "Certificate Rate" shall mean, with respect to any Series or Class, the certificate rate specified therefor in the related Supplement. "Certificate Register" shall have the meaning specified in Section 6.04(a) hereof. "Certificateholder" or "Holder" shall mean (x) a holder of any Investor Certificate or (y) a Person (other than GCRC or any Affiliate thereof) in whose name a Subordinated Certificate is registered or (z) a Person (other than GCRC or any Affiliate thereof) in whose name the Exchangeable Certificate is registered or, upon the pledge of the Exchangeable Certificate by GCRC or any Affiliate thereof, the pledgee of the Exchangeable Certificate. The purpose of the exclusion of GCRC or any Affiliate thereof from this definition is to prevent such entities from exercising the rights, whether voting or otherwise, of a Certificateholder hereunder. "Certificateholders Representative" shall mean, unless otherwise provided in a Supplement, a representative appointed by Consent of Certificateholders. "Charge Account" shall mean a consumer revolving credit card account (i) originated by the Seller pursuant to a Charge Account Agreement (ii) originated by the Harris Stores and purchased by the Seller prior to the Cut-Off Date and (iii) any Charge Account acquired by, or originated at any store acquired by, the Seller after the Cut- Off Date from a third party that the Seller, upon satisfaction of the Rating Agency Condition, chooses to include as a Charge Account for purposes of this Agreement. "Charge Account Agreement" shall mean an agreement with the Seller or, with respect to Charge Accounts acquired by the Seller after the Cut-Off Date, an agreement as to which the Seller is an assignee or is otherwise an obligee, pursuant to which a Person is obligated to pay for purchased merchandise or services under a credit plan that permits such Person to purchase merchandise and services on credit, together with any finance charges and other charges related thereto, as such agreement may be amended, modified or supplemented from time to time. "Class" shall mean, with respect to any Series, any one of the classes of Certificates of that Series. "Closing Date" shall mean, with respect to any Series, the Closing Date specified in the related Supplement. "Collection Account" shall have the meaning specified in Section 4.02 hereof. "Collection Period" shall mean, with respect to each Distribution Date, the preceding calendar month. "Collection Servicer" shall mean an institution (other than the Servicer) reasonably acceptable to the Trustee and Certificateholders, as evidenced by a Consent of Certificateholders, which shall have been appointed to perform the functions specified in Section 3.03(x)(D) hereof; provided, however, that Union Bank of California and Bank of America are hereby preapproved to serve as Collection Servicers hereunder. "Collection Servicer Agreement" shall have the meaning specified in Section 3.03(x)(D) hereof. "Collections" shall mean, without duplication, all payments by or on behalf of Obligors received by the Servicer in respect of the Receivables, in the form of cash, checks, wire transfers or any other form of payment as provided in such Obligor's Charge Account Agreement. "Commitment Fee" shall mean, as of any date of determination and for any Investor Certificate of any Series, the per annum rate of any commitment or similar fee payable with respect to any such Certificate as of such date from Finance Charge Collections that are allocable to such Certificate. "Consent of Certificateholders" shall mean, with respect to any proposed action or inaction, the written consent of Certificateholders representing not less than a majority of the Adjusted Invested Amount of each Series of Investor Certificates then outstanding, or if a Series shall have more than one Class, of each Class within any said Series. "Contractually Delinquent" with respect to an Account, shall mean an Account as to which the required minimum payment set forth on the related billing statement has not been received by the due date thereof. "Corporate Trust Office" shall mean the principal office of the Trustee in the City of New York, at which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Agreement is located at Four Albany Street, New York, New York 10006, Attention: Corporate Trust & Agency Group, Structured Finance Team. "Cut-Off Date" shall mean the open of business for the Seller's retail stores on March 1, 1999. "Dedicated Zip Code" shall mean the dedicated zip code, or similar arrangement, to which Obligors are instructed to mail their payments in respect of Receivables, and any successor arrangement to which the Consent of Certificateholders shall have been obtained. "Defaulted Amount" with respect to any Determination Date shall mean an amount (which shall not be less than zero) equal to (a) for all the Accounts included in the Pool, the amount of Principal Receivables which became Defaulted Receivables during the immediately preceding Collection Period minus (b) the full amount of any such Defaulted Receivables which are subject to reassignment or assignment to the Depositor or the Servicer in accordance with the terms of this Agreement; provided, however, that, if an Insolvency Event occurs with respect to the Depositor the amounts of such Defaulted Receivables which are subject to reassignment to the Depositor shall not be included in clause (b) and, if an Insolvency Event occurs with respect to the Servicer, the amount of such Defaulted Receivables which are subject to assignment to the Servicer shall not be included in clause (b). "Defaulted Receivables" shall mean, with respect to any Collection Period, all Receivables which are charged off by the Servicer as uncollectible in respect of such Collection Period in accordance with the Servicer's customary and usual servicing procedures for servicing Obligor receivables comparable to the Receivables which have not been sold to third parties. Notwithstanding the foregoing, a Principal Receivable shall become a Defaulted Receivable on the day on which such Principal Receivable is recorded as charged off on the Servicer's computer master file of Accounts but, in any event, shall be deemed a Defaulted Receivable no later than the earlier of (i) the day on which it becomes 180 days Contractually Delinquent and (ii) the day which is 30 days after the day on which the Servicer receives notice of any of the following events: (A) the Obligor has filed for bankruptcy (B) the Obligor has had a bankruptcy petition filed against it or (C) the Obligor is deceased. Receivables that are Ineligible Receivables at the time that they are transferred to the Trust shall not be considered Defaulted Receivables hereunder. "Deposit Account Agreement" shall mean a letter agreement entered into by and among the Servicer, the Trustee and a financial institution at which a Local Deposit Account is maintained for the purpose of receiving Collections, substantially in the form of Exhibit K hereto. "Depositor" shall mean GCRC, and its successors in interest to the extent permitted hereunder. "Depositor Exchange" shall have the meaning given in Section 6.03(c) hereof. "Depositor Interest" shall have the meaning specified in Section 4.01 hereof. "Determination Date" with respect to any Distribution Date shall mean the day that is two Business Days prior to such Distribution Date. "Direct Debit Payments" shall mean any payment made by an Obligor with respect to a Receivable via an electronic debit made by a Collection Servicer to a checking, savings or other account maintained by the Obligor and crediting the Obligor's Charge Account. "Discount Portion" shall mean the portion of Principal Receivables that shall be treated as Finance Charge Receivables pursuant to Section 2.07(a) hereof. "Discount Rate"' shall have the meaning specified in Section 2.07(b) hereof. "Distribution Date" shall mean the 15th day of each month or, if such day is not a Business Day, the next succeeding Business Day. "Distribution Date Statement" shall mean, with respect to any Series, a report prepared by the Servicer on each Determination Date for the immediately preceding Collection Period in substantially the form set forth in the related Supplement. "Duff & Phelps" shall mean Duff & Phelps Credit Rating Co., or its successors. "Early Amortization Event" shall have the meaning specified in Section 9.01 hereof and, with respect to any Series, shall also mean any Early Amortization Event specified in the related Supplement for that Series. "Early Amortization Period" shall mean, with respect to any Series, the period beginning at the close of business on the day on which an Early Amortization Event occurs or is deemed to have occurred, and in each case ending upon the earlier to occur of (a) the payment in full to the Certificateholders of such Series of the Invested Amount with respect to such Series (including, to the extent set forth in the applicable Series Supplement, reimbursement of charge-offs in respect thereof and payment of any accrued make-whole premium and interest thereon), (b) the Termination Date with respect to such Series, and (c) termination of the Trust. "Eligible Account" shall mean, as of any time of determination, each Charge Account owned by the Seller: (a) which was created in accordance with the Financial Guidelines of the Seller at the time of creation of such Charge Account; (b) which is payable in U.S. dollars; (c) which has in full force and effect a Charge Account Agreement that has been duly authorized and which constitutes the legal, valid and binding obligation of the Obligor enforceable against such Obligor in accordance with its terms and is not subject to any dispute, offset, counterclaim or defense whatsoever, including defenses arising out of violations of usury laws (except the discharge in bankruptcy of such Obligor); (d) which has in full force and effect all consents, licenses, or authorizations of, or registrations with, any governmental authority required to be obtained or given in connection with such Charge Account; (e) which has not been closed at the request of the Obligor; (f) which has not been identified by the Seller in its computer files as having an Obligor that is (i) deceased, (ii) a minor under the laws of his/her state of residence or (iii) not competent to enter into a contract or incur debt; (g) which has not been sold or pledged to any Person other than the Depositor or the Trust, as applicable, and which does not include Receivables which have been sold or pledged to any other Person; (h) the Receivables of which the Seller has not charged off in its customary and usual manner for charging off Receivables in such Charge Accounts unless such Charge Account is subsequently reinstated; (i) not more than 120 days Contractually Delinquent; (j) under which a credit card is outstanding that has not expired or been identified by the Seller or the Servicer as lost or stolen; (k) which has not been identified by the Seller or the Servicer in its computer files as a Charge Account as to which the Seller or the Servicer has any confirmed record of any fraud-related activity by the Obligor thereunder; (l) which has been identified by the Servicer in its computer files as having an Obligor that has provided as his/her most recent billing address an address located in the United States or its territories or possessions or Canada; (m) which has not been identified by the Servicer in its computer files as having an Obligor that is involved in a voluntary or involuntary bankruptcy proceeding; and (n) under which no Receivable arising therefrom has been classified as an Ineligible Receivable. "Eligible Deposit Account" shall mean either (a) a segregated account with an Eligible Institution or (b) a segregated trust account with the corporate trust department of a depository institution or trust company organized under the laws of the United States or any one of the states thereof, including the District of Columbia (or any domestic branch of a foreign bank) having corporate trust powers and acting as trustee for funds deposited in such account subject to regulations on fiduciary funds on deposit substantially similar to 12 C.F.R. 9-10(b). "Eligible Institution" shall mean a depository institution (which may be the Trustee) or trust company organized under the laws of the United States of America or any one of the states thereof, or the District of Columbia (or any domestic branch of a foreign bank) which at all times (i) has a long-term unsecured debt rating of A2 or better by Moody's, A or better by Standard & Poor's, A or better by Duff & Phelps or A or better by Fitch or such other rating that is acceptable to each Rating Agency, as evidenced by a letter from such Rating Agency to the Trustee and (ii) is a member of the FDIC. "Eligible Investments" shall mean book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form in each case having original or remaining maturities of thirty (30) days or less, but in no event maturing later than the Distribution Date next succeeding the Trustee's acquisition thereof which evidence: (a) obligations of, or obligations fully guaranteed as to timely payment by, the United States of America; (b) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof, including the District of Columbia (or any domestic branch of a foreign bank) and subject to supervision and examination by Federal or state banking or depository institution authorities; provided, however, that at the time of the Trust's investment or contractual commitment to invest therein, the commercial paper or other short- term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a person or entity other than such depository institution or trust company) thereof shall have a credit rating from each Rating Agency in the highest investment category granted thereby; (c) commercial paper having, at the time of the Trust's investment or contractual commitment to invest therein, a rating from each Rating Agency in the highest investment category granted thereby; (d) investments in money market funds having a rating from each Rating Agency in the highest investment category granted thereby and which seek to maintain a constant net asset value (including those for which the Trustee acts as investment manager or advisor); (e) bankers' acceptances issued by any depository institution or trust company referred to in clause (b) above; provided, however, that at the time of the Trust's investment or contractual commitment to invest therein, the commercial paper or other short- term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a person or entity other than such depository institution or trust company) thereof shall have a credit rating from each Rating Agency in the highest investment category granted thereby; and (f) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed as to timely payment by, the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with (i) a depository institution or trust company (acting as principal) described in clause (b) above or (ii) a depository institution or trust company the deposits of which are insured by FDIC. "Eligible Receivable" shall mean any Receivable that, at the time of determination: (a) exists under an Eligible Account; (b) constitutes an "account" or "general intangible" as defined in Article 9 of the UCC as then in effect in the Relevant UCC State; (c) does not contravene any laws, rules or regulations applicable thereto (including, without limitation, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) or the Charge Account Agreement that could reasonably be expected to have an adverse impact on the amount of Collections thereunder; (d) has in full force and effect all consents, licenses, or authorizations of, or registrations with, any governmental authority required to be obtained or given in connection with the creation of such Receivable; (e) is free and clear of all Liens and security interests arising under or through the Depositor (other than Permitted Liens); (f) as to which all obligations required to be fulfilled by the Seller or the Depositor, as applicable, have been fulfilled; (g) as to which neither the Seller nor the Depositor, as applicable, has taken any action which would impair, or failed to take any action necessary to avoid impairing, the rights of the Trust or the Certificateholders therein; and (h) is not more than 120 days Contractually Delinquent. "Eligible Servicer" shall mean the Bankers Trust Company or an entity which, at the time of its appointment as Servicer, (a) is servicing a portfolio of consumer revolving credit card accounts, (b) is legally qualified and has the capacity to service the Accounts, (c) has demonstrated the ability to professionally and competently service a portfolio of similar accounts in accordance with high standards of skill and care, (d) is qualified to use the software that is then currently being used to service the Accounts or obtains the right to use or has its own software which is adequate to perform its duties under this Agreement, and (e) shall have been the subject of a Consent of Certificateholders and shall have satisfied the Rating Agency Condition. "Enhancement" shall mean the rights and benefits provided to the Certificateholders of any Series or Class pursuant to any letter of credit, surety bond, cash collateral account, spread account, guaranteed rate agreement, maturity liquidity facility, tax protection agreement, interest rate swap agreement or other similar arrangement. The subordination of any Series or Class to any other Series or Class or the Exchangeable Certificate or of the Depositor Interest to any Series or Class shall be deemed to be an Enhancement. "Enhancement Agreement" shall mean any agreement, instrument or document governing the terms of any Enhancement or pursuant to which any Enhancement is issued or outstanding. "Enhancement Provider" shall mean a Person providing any Enhancement, other than any Certificateholder (including any holder of a Subordinated Certificate) whose rights under a Certificate are subordinated to any Series or Class. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plan" shall have the meaning specified in Section 6.04(e)(i) hereof. "Excess Balance Test" shall mean, with respect to any Determination Date and any particular Series, a test that is satisfied if the related Series Pool Balance as of the first day of each of the twelve calendar months preceding such Determination Date shall have exceeded the sum of the related Required Series Pool Balance and the Required Exchangeable Certificate Amount as of the first day of each such calendar month by at least 5%, provided, however that for purposes of determining whether the requirements of the second sentence of Section 6.03(b)(iv) hereof have been met with respect to the issuance of a new Series of Certificates, such test need only be met for the one-month time period specified in such section. "Exchange" shall have the meaning given thereto in Section 6.03(c) hereof. "Exchange Date" shall have the meaning given thereto in Section 6.03(c) hereof. "Exchange Notice" shall have the meaning given thereto in Section 6.03(c) hereof. "Exchangeable Amount" shall mean, with respect to any outstanding Series, the amount specified in the related Supplement. "Exchangeable Certificate" shall mean the certificate substantially in the form of Exhibit A and exchangeable as provided in Section 6.03 of this Agreement. "FASB" shall mean the Financial Accounting Standards Board. "FDIC" shall mean the Federal Deposit Insurance Corporation or any successor entity thereto. "Finance Charge Collections" shall mean Collections under the Receivables other than Principal Collections; provided, that all Miscellaneous Payments shall be Finance Charge Collections. "Finance Charge Receivables" shall mean, with respect to any Account, all amounts billed to the related Obligor in respect of interest and all other finance charges (including, without limitation, late fees, returned check fees and credit life insurance premiums), any Discount Portion and all amounts resulting from application of a Discount Rate pursuant to Section 2.07 hereof, and any recoveries on Receivables (i.e. Miscellaneous Payments) previously charged off as uncollectible. "Financial Guidelines" shall mean the written policies and procedures relating to the operation of the consumer credit card business of the Seller, including, without limitation, the written policies and procedures for determining the creditworthiness of credit card customers, the extension of credit to credit card customers, and the maintenance of credit card accounts and collection of credit card receivables, as such policies and procedures may be amended from time to time in conformance with all Requirements of Law. "Fitch" shall mean Fitch IBCA, Inc. or its successors. "Gottschalks" shall mean Gottschalks Inc., a Delaware corporation, and its successors in interest. "Governmental Authority" shall mean the United States of America and any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Independent Certified Public Accountants" shall mean any of (a) Arthur Anderson & Co. (b) Deloitte & Touche, (c) Ernst & Young, (d) KMPG Peat Marwick and (e) PricewaterhouseCoopers; provided such firm is independent within the meaning of the Securities Act of 1933, as amended. "Ineligible Account" shall mean a Charge Account that at the time of determination is not an Eligible Account. "Ineligible Receivable" shall mean any Receivable that at the time of determination is not an Eligible Receivable. "Initial Holder" shall mean Monumental Life Insurance Company. "Insolvency Event" shall have the meaning specified in Section 10.01(e). "In-Store Payments" shall mean any payment made by an Obligor with respect to a Receivable by personal delivery of cash, check, money order or any other form of payment to a cashier or other employee of the Seller at a retail premise. "Interest Period" shall mean, with respect to any Distribution Date, the period from and including the Distribution Date immediately preceding such Distribution Date (or, in the case of the first Distribution Date, from and including the Closing Date) to but excluding such Distribution Date. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended. "Invested Amount" shall mean, for each Series, the aggregate invested amount for each Class of such Series. "Investor Certificates" shall mean any one of the certificates executed by the Depositor and authenticated by the Trustee, substantially in the form attached to the related Supplement, other than the Exchangeable Certificate and any Subordinated Certificate. "Investor Exchange" shall have the meaning specified in Section 6.03(c) hereof. "Investors' Interest" shall have the meaning specified in Section 4.01 hereof. "Investors' Servicing Fee" shall mean the portion of the Servicing Fee allocable to the Holders of Investor Certificates of a Series pursuant to the terms of the related Supplement. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, participation interest, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including any conditional sale or other title retention agreement and any financing lease having substantially the same economic effect as any of the foregoing. "Liquidation Event" shall have the meaning specified in Section 9.02(b) hereof. "Local Deposit Account" shall mean any Eligible Deposit Account that is maintained pursuant to a Deposit Account Agreement for the purpose of receiving Collections. "Local Deposit Account Bank" shall mean a bank that holds one or more Local Deposit Accounts for receiving Collections pursuant to a Deposit Account Agreement. "Minimum Depositor Interest" shall have the meaning given thereto in any Supplement. "Miscellaneous Payments" shall mean, with respect to any Collection Period, all Collections and recoveries (net of reasonable recovery expenses) in respect of Receivables previously written-off. "Monthly Servicing Fee" shall mean, with respect to any Series, the amount specified therefor in the related Supplement. "Moody's" shall mean Moody's Investors Service, Inc. or its successors. "1933 Act" shall mean the Securities Act of 1933, as amended. "Notice Date" shall have the meaning specified in Section 2.08(d) hereof. "Notices" shall have the meaning specified in Section 13.06 hereof. "Obligor" shall mean a Person obligated to make payments with respect to a Receivable arising under a Charge Account. "Officer's Certificate" shall mean, with respect to any corporation, unless otherwise specified in this Agreement, a certificate signed by the Chairman of the Board, Vice Chairman of the Board, President, any Vice President, Treasurer, any Assistant Treasurer, Secretary or any Assistant Secretary of such corporation. "Opinion of Counsel" shall mean a written opinion of counsel, in form and substance satisfactory to the Trustee, who may be counsel for, or an employee of, the Depositor or Gottschalks, and who shall be reasonably acceptable to the Trustee. "Outstanding Balance" shall mean, with respect to a Receivable on any day, the aggregate amount owed by the Obligor thereunder as of the close of business on the prior Business Day (net of returns and adjustments). "Permitted Lien" shall mean, with respect to the Receivables: (a) Liens in favor of the Depositor created pursuant to the Receivables Purchase Agreement assigned to the Trustee pursuant to this Agreement; (b) Liens in favor of the Trustee pursuant to this Agreement; and (c) Liens which secure the payment of taxes, assessments and governmental charges or levies, if such taxes, assessment and governmental charges or levies are either (x) not delinquent or (y) being contested in good faith by appropriate legal or administrative proceedings and as to which adequate reserves in accordance with generally accepted accounting principles shall have been established. "Permitted Transaction" shall have the meaning specified in Section 2.05(f) hereof. "Person" shall mean any legal person, including any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, governmental entity or other entity of similar nature. "Pool" shall mean, at any time of determination, all Accounts with respect to which the related Receivables have been transferred to the Trust pursuant to Section 2.01 hereof. "Pool Balance" shall mean, at any time of determination, the aggregate of Principal Receivables constituting Eligible Receivables in the Pool at such time. "Principal Collections" shall mean Collections of Principal Receivables. "Principal Receivables" shall mean, for any day with respect to any Account, amounts shown on the Servicer's records on such day as Receivables (other than such amounts which represent Finance Charge Receivables) payable by the related Obligor; provided that Principal Receivables shall not include the Discount Portion. The receipt of each Adjustment Payment and each Transfer Deposit Amount shall also be treated as a collection of a Principal Receivable. "Principal Terms" shall mean, with respect to any Series: (a) the name or designation; (b) the initial principal amount or invested amount (or method for calculating such amount); (c) the Certificate Rate (or method for the determination thereof); (d) the payment date or dates and the date or dates from which interest shall accrue; (e) the method for allocating Collections to Certificateholders; (f) the designation of any Series Accounts and the terms governing the operation of any such Series Accounts; (g) the Monthly Servicing Fee, and the Investors' Servicing Fee, if any; (h) the identity of the Enhancement Provider and the terms of any form of Enhancement with respect thereto, if any; (i) the terms on which the Investor Certificates of such Series may be exchanged for Investor Certificates of another Series, repurchased by the Depositor or remarketed to other investors; (j) the Termination Date; (k) the number of Classes of Investor Certificates of such Series and, if more than one Class, the rights and priorities of each such Class; (l) the extent to which the Investor Certificates of such Series will be issuable in temporary or permanent global form (and, in such case, the depository for such global certificate or certificates, the terms and conditions, if any, upon which such global certificates may be exchanged, in whole or in part, for definitive certificates and the manner in which any interest payable on a temporary or global certificate will be paid); (m) whether the Investor Certificates of such Series may be issued in bearer form and any limitations imposed thereon; (n) the priority of such Series with respect to any other Series; (o) whether such Series will be part of a group; (p) the Required Series Pool Balance for such Series; and (q) the Minimum Depositor Interest. "Purchase Price" shall mean, with respect to any Receivable for any date on which such Receivable is to be purchased (a) an amount equal to the principal amount payable by the Obligor in respect thereof as reflected in the records of the Servicer as of the date of purchase, plus (b) late charges and interest, if any, accrued thereon at a per annum rate equal to the rate being charged to the Obligor under the Charge Account Agreement based on the actual number of days elapsed over a year of 360 days. "Rating Agency" shall mean, with respect to any outstanding Series or Class, each statistical rating agency, if any, selected by the Depositor to rate the Investor Certificates of such Series or Class. "Rating Agency Condition" shall mean, with respect to any action, that, after any required notice has been given to the applicable Rating Agencies, each such Rating Agency shall have notified each of the Depositor, the Servicer and the Trustee in writing that such action will not result in a reduction or withdrawal of the rating of any outstanding Series or Class with respect to which it is a Rating Agency. "Reassignment" shall have the meaning specified in Section 2.06(c) hereof. "Receivables" shall mean, with respect to any Obligor, all right to payment for money due or to become due under a Charge Account Agreement arising in an Account from a sale of merchandise or services, and includes the right to payment of any interest or finance charges (including, without limitation, late fees, credit life insurance premiums and Miscellaneous Payments) and other obligations of such Obligor with respect thereto. Each Receivable includes, without limitation, all rights of the Seller and obligations of the Obligor under the applicable Charge Account Agreement. Each increase in the Outstanding Balance of any Receivable (other than any such increase resulting from the accrual of interest or finance charges or other fees with respect to such Receivable) shall, for purposes of Article II, constitute a separate Receivable. The receipt of each Adjustment Payment and each Transfer Deposit Amount shall be treated as a collection of a Principal Receivable. "Receivables Purchase Agreement" shall mean the amended and restated receivables purchase agreement between Gottschalks and the Depositor, in substantially the form attached hereto as Exhibit J, dated as of the date hereof, governing the terms and conditions upon which the Depositor acquired and is acquiring the initial Receivables transferred to the Trust on the Closing Date and all Receivables acquired thereafter, as the same may from time to time be amended, modified or otherwise supplemented. "Record Date" shall mean, with respect to any Distribution Date, the last day of the month preceding the month in which such Distribution Date occurs and, if distributions are made on any date other than a Distribution Date, the day immediately preceding such other date. "Recoveries" shall mean, with respect to any Distribution Date, any amounts received during the Related Collection Period by the Servicer with respect to Defaulted Receivables (net of reasonable recovery expenses). "Related Collection Period" shall mean, with respect to (a) any Distribution Date, the preceding Collection Period and (b) any Allocation Day, the Collection Period during which such Allocation Day occurs. "Related Distribution Date" shall mean, with respect to any Collection Period or Allocation Day, the Distribution Date following such Collection Period or following the month in which such Allocation Day occurs. "Related Documents" shall mean, collectively, the Receivables Purchase Agreement and, with respect to any Series, any applicable Enhancement Agreement and any applicable certificate purchase agreement. "Relevant UCC State" shall mean each jurisdiction in which the filing of a UCC financing statement is necessary to perfect the security interest of the Trustee established under the Agreement. "Removal Date" shall have the meaning specified in Section 2.06(b) hereof. "Removal Notice Date" shall have the meaning specified in Section 2.06(b) hereof. "Removed Accounts" shall have the meaning specified in Section 2.06(a) hereof. "Required Exchangeable Certificate Amount" shall have the meaning specified in the related Series Supplement. "Required Pool Balance" shall mean, at any time of determination, the sum of the Required Series Pool Balances for all outstanding Series at such time. "Required Series Pool Balance" with respect to any Series shall have the meaning specified in the related Supplement. "Requirements of Law" for any Person shall mean the certificate or articles of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, court order or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject, whether Federal, state or local (including usury laws, and the Federal Truth in Lending Act and the Equal Credit Opportunity Act). "Responsible Officer" shall mean any Managing Director, Principal, Vice President, Assistant Vice President, Assistant Secretary, Assistant Treasurer, trust officer and any other officer of the Trustee customarily performing functions within the corporate trust department and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with that relevant subject. "Revolving Period" shall mean, with respect to any Series, the period specified as such in the related Supplement. "Seller" shall mean Gottschalks. "Series" shall mean any series of Certificates issued pursuant to a Supplement. "Series Account" shall mean any deposit, trust, escrow, reserve or similar account maintained for the benefit of the Certificateholders of any Series or Class, as specified in any Supplement. "Series Allocation Percentage" shall mean, with respect to any Series, (a) with respect to all collections on Receivables, prior to the commencement of the related Controlled Amortization Period or an Early Amortization Period, a fraction, expressed as a percentage, the numerator of which is the Adjusted Invested Amount for such Series and the denominator of which is the sum of the Adjusted Invested Amounts for all outstanding Series, in each case, measured as of the first day of the relevant Collection Period, (b) with respect to Finance Charge Collections and Default Amounts during the related Controlled Amortization Period or an Early Amortization Period, the percentage described in clause (a), and (c) with respect to Principal Collections during the related Controlled Amortization Period or an Early Amortization Period, a fraction, expressed as a percentage, the numerator of which the Adjusted Invested Amount for such Series and the denominator of which is the sum of the Adjusted Invested Amounts for all outstanding Series, in each case, measured as of the first day of the last Collection Period to commence before the commencement of the Controlled Amortization Period or Early Amortization Period. "Series Cut-Off Date" shall mean, with respect to any Series, the date specified as such in the related Supplement. "Series Issuance Date" shall mean, with respect to any Series, the date specified as such in the related Supplement. "Series Pool Balance" with respect to a particular Series shall mean, as of any date of determination, the product of (a) the Pool Balance as of such date and (b) the related Series Allocation Percentage for such date. "Series Termination Date" shall mean the Distribution Date specified in the related Supplement for termination of the related Series. "Service Transfer" shall have the meaning specified in Section 10.01 hereof. "Servicer" shall initially mean Gottschalks, in its capacity as Servicer under this Agreement, and after any Service Transfer, the Successor Servicer. "Servicer Default" shall have the meaning specified in Section 10.01 hereof and in any Series Supplement. "Servicer Default Certificate" shall mean an Officer's Certificate to be delivered by the Servicer upon the occurrence of certain Servicer Defaults identifying the specific Servicer Default(s), the Servicer's strategy for curing any such Servicer Default and certifying that (i) the Servicer is working in good faith to effect a cure of the Servicer Default in question and (ii) to the best of the Servicer's knowledge as of the date of such Officer's Certificate, the Servicer Default in question is curable within the time frame set forth in such Officer's Certificate. "Servicing Fee" shall mean the aggregate of any Monthly Servicing Fees specified in the Supplements. "Servicing Officer" shall mean any officer of the Servicer involved in, or responsible for, the administration and servicing of the Receivables whose name appears on a list of servicing officers furnished to the Trustee by the Servicer, as such list may from time to time be amended. "Special Interest Receivables" shall mean, with respect to an Account, Receivables arising under special promotional programs pursuant to which the accrual of finance charges with respect to such Receivables is waived, reduced or deferred. "Standard & Poor's" shall mean Standard & Poor's Ratings Services or its successors. "Subordinated Certificate" shall mean, with respect to any Series, the Certificates specified as such in the related Supplement. "Successor Servicer" shall have the meaning specified in Section 10.02(a) hereof. "Supplement" and "Series Supplement" shall mean, with respect to any Series, a Supplement to this Agreement, executed and delivered in connection with the original issuance of the Investor Certificates of such Series pursuant to Section 6.03 hereof, and all amendments thereof and supplements thereto. "Supplemental Accounts" shall mean, as of the applicable Supplemental Addition Date, each Charge Account designated by the Depositor pursuant to Section 2.08(b) or (c) hereof. "Supplemental Addition Date" shall mean, with respect to a Charge Account originated by the Seller during the continuance of a Block Period, the first Business Day on which Receivables arising under such Charge Account are to be transferred to the Trust as specified in the notice provided pursuant to Section 2.08(d)(i) hereof. "Tax Opinion" shall mean, with respect to any action, an Opinion of Counsel (which shall not have been issued by an employee of the Depositor or Gottschalks) to the effect that, for Federal income tax purposes, (a) such action will not adversely affect the characterization as debt of the Investor Certificates of any outstanding Series or Class that were characterized as debt at the time of their issuance, (b) such action will not cause or constitute a taxable event with respect to any Certificateholders or the Trust, (c) in the case of Section 6.03(b) hereof, the Investor Certificates of the new Series will properly be characterized as debt and (d) such action will not cause the Trust to be treated as an association (or publicly traded partnership) taxable as a corporation. "Termination Date" shall mean, with respect to any Series, the termination date specified in the related Supplement. "Termination Notice" shall have the meaning specified in Section 10.01 hereof. "Termination Proceeds" shall have the meaning specified in Section 12.02(c) hereof. "Transfer Agent and Registrar" shall have the meaning specified in Section 6.04(a) hereof. "Transfer Date" shall mean, with respect to each Receivable, the Business Day after the Cut-Off Date and prior to the earlier of (i) the occurrence of a Liquidation Event, and (ii) the Trust Termination Date, on which such Receivable was created (or, if such date of creation was not a Business Day, the next succeeding Business Day) and transferred to the Trust pursuant to Section 2.01 hereof. "Transfer Deposit Amount" shall mean, with respect to any Receivable reassigned or assigned to the Depositor or the Servicer, as applicable, pursuant to Section 2.04(c) or Section 3.03 hereof, the amounts specified in such Sections. "Trust" shall mean the Gottschalks Credit Card Master Trust created by this Agreement, the corpus of which shall consist of the Trust Assets. "Trust Assets" shall have the meaning specified in Section 2.01 hereof. "Trust Liquidation Proceeds" shall have the meaning specified in Section 9.02(c) hereof. "Trust Termination Date" shall have the meaning specified in Section 12.01 hereof. "Trustee" shall mean Bankers Trust Company, a New York banking corporation, not in its individual capacity but solely as Trustee hereunder, or its successor in interest, or any successor trustee appointed as herein provided. "UCC" shall mean the Uniform Commercial Code, as amended from time to time, as in effect in any specified jurisdiction. "Vice President" when used with respect to the Depositor and Servicer shall mean any vice president whether or not designated by a number or word or words added before or after the title "vice president". "Village East" shall mean the Village East women's apparel division of Gottschalks. Section 1.02. Other Definitional Provisions. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (c) Any reference to each Rating Agency shall only apply to any specific rating agency if such rating agency is then rating the Investor Certificates of any outstanding Series. (d) Unless otherwise specified, references to any amount as on deposit or outstanding on any particular date shall mean such amount at the close of business on such day. (e) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (f) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (g) References herein to "Collections received" shall be deemed to include Collections received and processed as to principal and finance charges and shall not include unprocessed Collections (i.e., Collections which have been received but for which the Servicer in the ordinary course of its business has not yet identified in its computer records the principal and finance charge components). ARTICLE II CONVEYANCE OF RECEIVABLES SECTION 2.01. Conveyance of Receivables. By execution of this Agreement, the Depositor does hereby sell, transfer, assign, set over and otherwise convey, without recourse (except as expressly provided herein), to the Trustee, on behalf of the Trust, for the benefit of the Beneficiaries, (a) all of Depositor's right, title and interest in, to and under the Receivables existing at the close of business on the Cut-Off Date, and all monies due or to become due and all amounts received with respect thereto and all proceeds thereof (including "proceeds", as defined in Section 9306 of the UCC as in effect in the State of California and Section 9-306 of the UCC as in effect in the State of New York, and Recoveries) and (b) all of the Depositor's rights, remedies, powers and privileges under the Receivables Purchase Agreement. As of each Transfer Date, the Depositor does hereby sell, transfer, assign, set over and otherwise convey, without recourse (except as expressly provided herein), to the Trustee, on behalf of the Trust, for the benefit of the Beneficiaries, all of the Depositor's right, title and interest in, to and under the Receivables (other than Receivables that are (i) charged off as of the date of transfer, (ii) repurchased by the Depositor, (iii) generated during a Block Period in Blocked Accounts, (iv) generated in a Removed Account from and after the applicable Removal Date, as provided in Section 2.06(c) hereof or (iv) arising under charge accounts acquired by Gottschalks in connection with the acquisition of new stores or another retailer, or originated by Gottschalks at such stores (unless included in the Trust at the Depositor's option)) owned by the Depositor at the close of business on such Transfer Date and not theretofore conveyed to the Trustee, on behalf of the Trust, for the benefit of the Beneficiaries, all monies due or to become due and all amounts received with respect thereto and all proceeds thereof (including proceeds, as defined in Section 9306 of the UCC as in effect in the State of California, and Recoveries). Such property, together with all monies on deposit in, and Eligible Investments credited to, the Collection Account or any Series Account and any Enhancements including such monies as are from time to time available thereunder shall collectively constitute the assets of the Trust (the 'Trust Assets'). The foregoing sale, transfer, assignment, set-over and conveyance and any subsequent sales, transfers, assignments, set-overs and conveyances do not constitute, and are not intended to result in, the creation or an assumption by the Trust, the Trustee or any Beneficiary of any obligation of the Servicer, the Seller, the Depositor or any other Person in connection with the Accounts, the Receivables, or under any agreement or instrument relating thereto, including any obligation to any Obligors. The foregoing sale, transfer, assignment, set-over and conveyance to the Trust shall be made to the Trustee, on behalf of the Trust, and each reference in this Agreement to such sale, transfer, assignment, set-over and conveyance shall be construed accordingly. In connection with such sale, transfer, assignment, set-over and conveyance, the Depositor agrees to record and file, at its own expense, a financing statement on form UCC-1 (and continuation statements when applicable) with respect to the Receivables now existing and hereafter created for the sale of "accounts" (in each case as defined in Section 9106 of the UCC as in effect in any state where the Depositor's or the Seller's chief executive offices or books and records relating to the Receivables are located) and with respect to all other Trust Assets meeting the requirements of applicable state law in such manner and in such other jurisdictions as are necessary to perfect, and maintain the perfection of, the sale and assignment of the Receivables to the Trust, and to deliver a file-stamped copy of each such financing statement or other evidence of such filing to the Trustee on or prior to the first Closing Date, and in the case of any continuation statements filed pursuant to this Section 2.01, as soon as practicable after receipt thereof by the Depositor. The Depositor further agrees, at its own expense, (a) on or prior to the date on which each Charge Account becomes an Account, to cause the Seller to indicate in its computer files as required by the Receivables Purchase Agreement, that the Receivables created in connection with such Account have been sold to the Depositor in accordance with the Receivables Purchase Agreement and sold to the Trust pursuant to this Agreement and (b) no less frequently than weekly, to deliver to the Trustee (or cause the Seller to do so) a computer file or microfiche or written list containing a true and complete list of all Accounts specifying for each Account, (i) its account number (ii) the aggregate amount of Receivables outstanding in such Account, and (iii) the aggregate amount of Principal Receivables in such Account. Such file, microfiche or list, as supplemented from time to time, shall be marked as Schedule I to this Agreement and is hereby incorporated into and made a part of this Agreement. The Trustee shall be under no obligation whatsoever to verify the accuracy or completeness of the information contained on Schedule I from time to time. It is the intention of the Depositor and the Servicer that the arrangements with respect to the Receivables shall constitute a purchase and sale of such Receivables and not a loan. In the event, however, that a court of competent jurisdiction were to hold that the transactions evidenced hereby constitute a loan and not a purchase and sale, it is the intention of the parties hereto that this Agreement shall constitute a security agreement under applicable law. In this regard, Depositor hereby grants and transfers to the Trustee a first priority security interest in all of the Depositor's right, title and interest in, to and under (i) the Receivables now existing and hereafter created and arising in connection with the Accounts, all monies due or to become due with respect thereto (including all Finance Charge Receivables) and all proceeds thereof (including proceeds as defined in Section 9306 of the UCC as in effect in the State of California and Section 9-306 of the UCC as in effect in the State of New York) (ii) the Receivables Purchase Agreement, (iii) any other Trust Assets and (iv) Recoveries, to secure a loan in an amount equal to the unpaid principal amount of the Investor Certificates and Subordinated Certificates issued hereunder or to be issued pursuant to this Agreement and the interest accrued thereon (as applicable) at the related Certificate Rate. Section 2.02. Acceptance by Trustee. (a) The Trustee hereby acknowledges its acceptance, on behalf of the Trust, of all right, title and interest previously held by the Depositor in and to the property, now existing and hereafter created, conveyed to the Trust pursuant to Section 2.01 hereof and declares that it shall maintain such right, title and interest, upon the trust herein set forth, for the benefit of the Beneficiaries. The Trustee further acknowledges that, prior to or simultaneously with the execution and delivery of this Agreement, the Depositor delivered to the Trustee the computer file or microfiche or written list relating to the Accounts existing on the Cut-Off Date described in Section 2.01 hereof. (b) The Trustee shall have no power to create, assume or incur indebtedness or other liabilities in the name of the Trust other than as contemplated in this Agreement. (c) The Trustee hereby agrees not to disclose to any Person any of the account numbers or other information contained in the computer files or microfiche or written lists delivered to the Trustee or the bailee of the Trustee by the Depositor pursuant to this Agreement ("Account Information") except as is required in connection with the performance of its duties hereunder or in enforcing the rights of the Certificateholders or to a Successor Servicer appointed pursuant to Section 10.02, any successor trustee appointed pursuant to Section 11.08, any co-trustee or separate trustee appointed pursuant to Section 11.10 or any other Person in connection with a UCC search or as mandated pursuant to any Requirement of Law applicable to the Trustee. The Trustee agrees to take such measures as shall be reasonably requested by the Depositor to protect and maintain the security and confidentiality of such information, and, in connection therewith, shall allow the Depositor to inspect the Trustee's or the bailee of the Trustee's security and confidentiality arrangements from time to time during normal business hours. In the event that the Trustee is required by law to disclose any Account Information, the Trustee shall use its best efforts to provide the Depositor with written notice no later than five days prior to any disclosure pursuant to this subsection 2.02(c), unless such notice is prohibited by law, of any such request or requirement so that the Depositor may request a protective order or other appropriate remedy. Section 2.03. Representations and Warranties of the Depositor Relating to the Depositor and this Agreement. (a) The Depositor hereby represents and warrants to the Trust and to the Trustee as of each Closing Date that: (i) Organization and Good Standing. The Depositor is a corporation duly organized and validly existing and in good standing under the law of the State of Delaware and has full corporate power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement, each Supplement, and the Related Documents to which it is a party, and to authorize the Trustee to execute and deliver the Certificates on behalf of the Depositor. The Depositor's legal name is Gottschalks Credit Receivables Corporation, and it has no tradenames, fictitious names, assumed names or doing business as names. The Depositor has no subsidiaries. (ii) Due Qualification. The Depositor is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify or be in good standing or obtain licenses or approvals would not have a material adverse effect on its ability to perform its obligations hereunder. (iii) Due Authorization. The execution and delivery by the Depositor of this Agreement, each Supplement, each Certificate and the Related Documents to which it is a party, and the authentication and delivery by the Trustee of the Certificates on behalf of the Depositor, and the consummation of the transactions provided for or contemplated by this Agreement, each Supplement and the Related Documents to which the Depositor is a party, have been duly authorized by the Depositor by all necessary corporate action on the part of the Depositor. (iv) No Conflict. The execution and delivery by the Depositor of this Agreement, each Supplement, the Related Documents to which it is a party and the Certificates, the performance by the Depositor of the transactions contemplated by this Agreement, each Supplement and the Related Documents to which it is a party and the fulfillment of the terms hereof and thereof applicable to the Depositor, will not conflict with, result in any breach of any of the terms and provisions of or constitute (with or without notice or lapse of time or both) a default under, any indenture contract, agreement, mortgage, deed of trust, or other instrument to which the Depositor is a party or by which it or its properties are bound. (v) No Violation. The execution and delivery by the Depositor of this Agreement, each Supplement, the Related Documents to which it is a party and the Certificates, the performance by the Depositor of the transactions contemplated by this Agreement, each Supplement and the Related Documents to which it is a party and the fulfillment of the terms hereof and thereof applicable to the Depositor, will not conflict with or violate any Requirements of Law applicable to the Depositor or give rise to an adverse claim upon the Depositor or the Receivables. (vi) No Proceedings. There are no proceedings or investigations pending or, to the best knowledge of the Depositor, threatened against the Depositor before any Governmental Authority (i) asserting the invalidity of this Agreement, any Supplement, any of the Related Documents or the Certificates, (ii) seeking to prevent the issuance of the Certificates or the consummation of any of the transactions contemplated by this Agreement, any Supplement, any of the Related Documents or the Certificates, (iii) seeking any determination or ruling that, in the reasonable judgment of the Depositor, would materially and adversely affect the performance by the Depositor of its obligations under this Agreement, any Supplement or the Related Documents to which it is a party, (iv) seeking any determination or ruling that would affect the validity or enforceability of this Agreement, any Supplement, any of the Related Documents or the Certificates or (v) seeking to affect adversely the income or franchise tax attributes of the Trust and of the Investor Certificates under Federal or state income or franchise tax systems. There is no injunction, writ, restraining order or other order of any nature that adversely affects the Depositor's performance of this Agreement or the transaction contemplated hereby. (vii) All Consents Required. All appraisals, authorizations, consents, orders, approvals or other actions of any Person or of any governmental body or official required in connection with the execution and delivery by the Depositor of this Agreement, each Supplement, each Certificate and the Related Documents to which it is a party, the execution and delivery by the Trustee of the Certificates on behalf of the Depositor, the performance by the Depositor of the transactions contemplated by this Agreement, each Supplement and the Related Documents to which it is a party, and the fulfillment by the Depositor of the terms hereof and thereof, have been obtained. (viii) Enforceability. This Agreement, each Supplement, each Certificate and the Related Documents to which it is a party have been duly executed and delivered, and each constitutes a legal, valid and binding obligation of the Depositor, enforceable against the Depositor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights generally and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity) and the availability of equitable remedies. (ix) Solvency. The Depositor is not insolvent and will not become insolvent after giving effect to the transactions contemplated hereby; the Depositor is paying its debts as they become due; the Depositor, after giving effect to the transactions contemplated hereby, will have adequate capital to conduct its business. (x) Record of Accounts. Schedule I to this Agreement (as in effect on the date in question) is an accurate and complete listing in all material respects of all the Accounts, and the information contained therein with respect to the identity and eligibility of such Accounts and the Receivables existing thereunder is true and correct in all material respects. (xi) Place of Business. The principal place of business of the Depositor is in Fresno, California, and the offices where the Depositor keeps its records concerning the Receivables and related contracts are in Fresno, California and there have been no other such locations during the prior four months; provided that in the event that the Depositor shall have changed its place of business in accordance with Section 13.02(c) hereof, all references herein to Fresno, California shall thereafter be to such new place of business. (xii) Use of Proceeds. No proceeds of the issuance of any Certificate will be used by the Depositor to purchase or carry any margin security. (xiii) Not an Investment Company. The Depositor is not an "investment company" or "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions thereof. (xiv) Compliance. All applicable laws, rules, regulations and orders with respect to the Depositor, its business and properties and purchased assets have been complied with. All applicable permits, certifications, etc., have been maintained. The Depositor has filed all required tax returns on a timely basis. (xv) Limited Purpose. The Depositor engages in no activities other than those pursuant to this Agreement and the transactions contemplated hereby. (xvi) Sale Treatment. The Depositor will treat (i) its investment in the Receivables pursuant to the Receivables Purchase Agreement and (ii) the Trust's investment in the Receivables pursuant to this Agreement as a purchase of Receivables, rather than a loan, for financial reporting purposes. The representations and warranties set forth in this Section 2.03 shall survive the transfer and assignment of the Receivables to the Trust and the issuance of the Certificates. Upon discovery by the Depositor, the Servicer or upon a Responsible Officer of the Trustee having actual knowledge of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice thereof to the other parties and to any Enhancement Providers. (b) In the event that any of the representations and warranties set forth in subsections (viii), (ix), (xii) and (xiii) of this Section 2.03 have been breached, and such breach has a material adverse effect on the value of the Receivables or the interests of the Certificateholders, then either (i) the Trustee, if a Responsible Officer thereof has actual knowledge of such a breach, or (ii) Certificateholders evidencing not less than a majority in aggregate unpaid Invested Amount of all outstanding Certificates of each Series, by notice then given in writing to the Depositor (and to the Trustee, any Enhancement Providers and the Servicer), may direct the Depositor to purchase the Investors' Interest not already owned thereby on a Distribution Date within sixty (60) days of such notice (or such longer period as may be specified in such notice), and the Depositor shall be obligated to make such purchase on a Distribution Date within such 60-day period on the terms and conditions set forth below; provided, however, that no such purchase shall be required to be made if, by the end of such 60-day period (or such longer period as may be approved by the Trustee), such breach shall have been remedied in all material respects, and any material adverse effect on the Investors' Interest and/or the Depositor Interest, as applicable, caused thereby shall have been cured. In the event the Depositor is so directed, the Depositor shall deposit in the Collection Account in immediately available funds on the Business Day preceding such Distribution Date, in payment for such purchase, an amount equal to the sum of the amounts specified therefor with respect to each outstanding Series, as applicable, in the related Supplement. Notwithstanding anything to the contrary in this Agreement, such amounts shall be distributed to the Certificateholders as applicable, on such Distribution Date in accordance with Article IV hereof and the terms of each Supplement. If the Trustee or the Certificateholders give notice directing the Depositor to purchase the Investors' Interest and/or the Depositor Interest as provided above, the obligation of the Depositor to effect such purchase pursuant to this Section 2.03(b) shall constitute the sole remedy respecting all events of the type specified in this Section 2.03(b) available to the Certificateholders and/or the Holder of the Exchangeable Certificate (or the Trustee on behalf of such Certificateholders). Section 2.04. Representations and Warranties of the Depositor Relating to the Receivables; Reassignment. (a) Representations and Warranties. The Depositor hereby represents and warrants to the Trust and to the Trustee as of each Transfer Date that: (i) Each Receivable conveyed hereunder has been conveyed to the Trust free and clear of any Lien, except for Liens permitted under Section 2.05(a) hereof, and the Trust has received good title to each such Receivable. (ii) All appraisals, authorizations, consents, orders, approvals or other actions of any Person or of any governmental body or official required in connection with the conveyance of each Receivable hereunder to the Trust have been duly obtained and are in full force and effect. (iii) This Agreement constitutes either (A) a valid transfer, assignment, set-over and conveyance to the Trust of all right, title and interest of the Depositor in, to and under (i) the Receivables now existing and hereafter created and arising in connection with the Accounts, all monies due or to become due with respect thereto (including all Finance Charge Receivables), all proceeds of such Receivables, (ii) the Receivables Purchase Agreement, and (iii) Miscellaneous Payments thereon, and such Receivables and all proceeds thereof will be held by the Trust free and clear of any Lien of any Person claiming through or under the Depositor or any of its Affiliates except for Permitted Liens or (B) a grant of a security interest (as defined in the UCC as in effect in California and New York) in, to and under (i) the Receivables now existing and hereafter created and arising in connection with the Accounts, all monies due or to become due with respect thereto (including all Finance Charge Receivables), and all proceeds of such Receivables, (ii) the Receivables Purchase Agreement, and (iii) Miscellaneous Payments thereon, which grant is enforceable with respect to the existing Receivables and any Receivables arising hereafter and the proceeds thereof upon execution and delivery of this Agreement, and which will be enforceable with respect to such Receivables hereafter created and the proceeds thereof, upon such creation. If this Agreement constitutes the grant of a security interest to the Trust in such property, upon the filing of the financing statement described in Section 2.01 and in the case of the Receivables hereafter created and proceeds thereof, upon such creation, the Trust shall have a first priority perfected security interest in such property (subject to Section 9306 of the UCC as in effect in the State of California), except for Permitted Liens. (iv) the Depositor has taken no action to cause any Receivable sold hereunder to be anything other than an "account" or "general intangible" (each as defined in Section 9106 of the UCC as in effect in California and Section 9-106 of the UCC as in effect in New York). The Depositor has taken no action to evidence any Receivable sold hereunder by any "instrument" or "chattel paper" (as defined in Section 9105 of the UCC as in effect in California and Section 9-105 of the UCC as in effect in New York). (b) Notice of Breach. The representations and warranties set forth in this Section 2.04 shall survive the transfer and assignment of the Receivables to the Trust and the issuance of the Certificates. Upon discovery by the Depositor, the Servicer or upon a Responsible Officer of the Trustee having actual knowledge of a breach of any of the representations and warranties set forth in this Section 2.04, the party discovering such breach shall give prompt written notice thereof to the other parties and to any Enhancement Providers. The Trustee shall provide, promptly after receiving notice thereof, written notice to the Rating Agencies of any such breach. (c) Reassignment. In the event any representation or warranty under subsection (a) of this Section 2.04 is not true and correct as of the date specified therein with respect to any Receivable or Account, and such breach has a material adverse effect on the Investors' Interest or the Depositor Interest in any such Receivable or Account, then, within thirty (30) days (or such longer period as may be approved by the Trustee) of the earlier to occur of (i) the discovery of any such event by the Depositor or the Servicer, or (ii) receipt by the Depositor or the Servicer of written notice of any such event given by the Trustee or any Enhancement Provider, the Depositor shall accept a reassignment of such Receivable or, in the case of such an untrue representation or warranty with respect to an Account, all Receivables in such Account, on the Determination Date immediately succeeding the day of such discovery or notice (or such other Determination Date as may be agreed to by the Trustee) on the terms and conditions set forth in the next succeeding paragraph; provided, however, that no such reassignment shall be required to be made with respect to such Receivable if, by the end of such 30-day period (or such longer period as may be agreed to by the Trustee), the breached representation or warranty shall then be true and correct in all material respects and any material adverse effect caused thereby shall have been cured. The Depositor shall accept a reassignment of each such Receivable by directing the Servicer to deduct, subject to the next sentence, the portion of such reassigned Receivable that is a Principal Receivable from the Pool Balance on or prior to the end of the Collection Period in which such reassignment obligation arises. If, following such deduction, the Pool Balance would be less than the Required Pool Balance then, unless a Liquidation Event has occurred, not later than 12:00 noon (New York City time) on the day on which such reassignment occurs, the Depositor shall deposit in the Collection Account in immediately available funds the amount (the Transfer Deposit Amount) by which the Pool Balance would be less than the Required Pool Balance (up to the principal amount of such Receivables); provided, that if the Transfer Deposit Amount is not deposited as required by this sentence then the Principal Receivables shall only be deducted from the Pool Balance to the extent that the Pool Balance is not reduced below the Required Pool Balance and the Principal Receivables which have not been so deducted shall not be reassigned to the Depositor and shall remain part of the Trust. Any Transfer Deposit Amount deposited in the Collection Account shall be considered Collections of Principal Receivables and shall be applied in accordance with Article IV hereof and the terms of each Supplement. Upon reassignment of such Receivable, but only after payment by the Depositor of the Transfer Deposit Amount, if any, the Trust shall automatically and without further action be deemed to sell, transfer, assign, set-over and otherwise convey to the Depositor, without recourse, representation or warranty, all the right, title and interest of the Trust in and to such Receivable and all moneys due or to become due with respect thereto and all proceeds thereof. The Trustee shall execute such documents and instruments of transfer or assignment and take such other actions as shall reasonably be requested by the Depositor to effect the conveyance of such Receivables pursuant to this Section 2.04. The obligation of the Depositor to accept a reassignment of any such Receivable and to pay any related Transfer Deposit Amount shall constitute the sole remedy respecting the event giving rise to such obligation available to Certificateholders (or the Trustee on behalf of the Certificateholders). Section 2.05. Covenants of the Depositor. The Depositor hereby covenants that: (a) No Liens. Except for (i) the conveyances hereunder or (ii) as provided in subsection (c) of Section 6.03 hereof, the Depositor shall not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on, any Receivable, whether now existing or hereafter created, or any interest therein, or the Depositor's rights, remedies, powers or privileges with respect to the Receivables under the Receivables Purchase Agreement, or the Exchangeable Certificate or the Depositor Interest, and the Depositor shall defend the right, title and interest of the Trust in, to and under the Receivables, whether now existing or hereafter created, and such rights, remedies, powers and privileges, against all claims of third parties claiming through or under the Depositor; provided, however, that nothing in this Section 2.05(a) shall prevent or be deemed to prohibit the Depositor from suffering to exist upon any of the Receivables any Permitted Lien. (b) Account Allocations. In the event that the Depositor is unable for any reason to transfer Receivables to the Trust when required in accordance with the terms of this Agreement, then the Depositor agrees that it shall allocate, after the occurrence of such event, payments on each affected Account with respect to the principal balance of such Account first to the oldest principal balance of such Account and to have such payments applied as Collections in accordance with the terms of this Agreement. The parties hereto agree that Finance Charge Receivables, whenever created, accrued in respect of Principal Receivables which have been conveyed to the Trust shall continue to be a part of the Trust notwithstanding any cessation of the transfer of additional Principal Receivables to the Trust and Collections with respect thereto shall continue to be allocated and paid in accordance with the terms of this Agreement. (c) Delivery of Collections. In the event that the Depositor or the Seller receives payments in respect of Receivables, the Depositor agrees to turn over or cause to be turned over to the Servicer all payments received thereby in respect of the Receivables as soon as practicable after receipt thereof, but in no event later than two (2) Business Days after the receipt by the Depositor or the Seller. (d) Notice of Liens. The Depositor shall notify the Trustee promptly after becoming aware of any Lien on any Receivable other than Permitted Liens. (e) Compliance With Law. The Depositor hereby agrees to comply with all Requirements of Law applicable to the Depositor in connection with the performance of its obligations hereunder, the failure to comply with which would have a materially adverse effect on the interests of the Beneficiaries. (f) Activities of the Depositor. The Depositor will not engage in any business or activity of any kind or enter into any transaction other than: (i) the businesses, activities and transactions contemplated and authorized by its Certificate of Incorporation and by-laws, this Agreement or the Related Documents; (ii) acquiring, selling, financing, holding, assigning, pledging and otherwise dealing with wholesale and retail receivables arising out of the sale of consumer products and related activities and transactions; (iii) transferring such receivables to trusts pursuant to a pooling and servicing agreement or similar agreement or arrangement; (iv) authorizing, selling and delivering any class of certificates or other securities of any such trust; and (v) engaging in any activity and exercising any powers permitted to corporations under the laws of the State of Delaware that are related or incidental to the foregoing and necessary, convenient or advisable to accomplish the foregoing (such businesses, activities and transactions, collectively, "Permitted Transactions"). (g) Indebtedness. Except for the issuance of any Series hereunder pursuant to Section 6.03 hereof, the Depositor will not create, incur or assume any indebtedness (other than ordinary operating expenses incurred in connection with the operation of its business as permitted hereunder) or issue any securities or sell or transfer any receivables to a trust or other Person which issues securities in respect of any such receivables, unless the Consent of Certificateholders shall have been obtained. (h) Guarantees. Except as provided in its Certificate of Incorporation and by-laws, the Depositor will not become or remain liable, directly or contingently, in connection with any indebtedness or other liability of any other Person, whether by guarantee, endorsement (other than endorsements of negotiable instruments for deposit or collection in the ordinary course of business), agreement to purchase, agreement to supply or advance funds, or otherwise, except in connection with Permitted Transactions. (i) Investments. Except as provided in its Certificate of Incorporation or by-laws, or the Receivables Purchase Agreement, the Depositor will not make or suffer to exist any loans or advances to, or extend any credit to, or make any investments (by way of transfer of property, contributions to capital, purchase of stock or securities or evidences of indebtedness, acquisition of the business or assets, or otherwise) in, any Affiliate provided, however, that the Depositor shall not be prohibited under this Section 2.05(i) from declaring or paying any dividends in respect of its common stock or repurchasing Receivables pursuant to Section 2.04(a). (j) Stock; Merger. The Depositor will not (i) sell any shares of any class of its capital stock to any Person (other than the Seller) or enter into any transaction of merger or consolidation unless (A) the surviving Person of such merger or consolidation assumes all of the Depositor's obligations under this Agreement, each Supplement, the Related Documents and the Certificates, (B) the Depositor shall have received the Consent of Certificateholders with respect to such transaction, which Consent shall not be unreasonably withheld, and the Rating Agency Condition shall have been satisfied and (C) such merger or consolidation does not conflict with any provisions of the certificate of incorporation of the Depositor, or (ii) terminate, liquidate or dissolve itself (or suffer any termination, liquidation or dissolution), or (iii) acquire or be acquired by any Person (other than as permitted pursuant to clause (i) above), or (iv) otherwise make (or suffer) any material change in the organization of or method of conducting its business. (k) Agreements. The Depositor will not become a party to, or permit any of its properties to be bound by, any indenture, mortgage, instrument, contract, agreement, lease or other undertaking, except this Agreement, the Related Documents and any document relating to a Permitted Transaction, or cancel, terminate, amend, supplement, modify or waive any of the provisions of the Receivables Purchase Agreement or any of the other Related Documents or request, consent or agree to or suffer to exist or permit any such cancellation, termination, amendment, supplement, modification or waiver. (l) Separate Business. Other than with respect to In-Store Payments, the Depositor will not permit its assets to be commingled with those of the Seller, and the Depositor shall maintain separate corporate records and books of account from those of the Seller, shall observe all corporate formalities, and will not amend or modify its certificate of incorporation unless the Rating Agency Condition shall have been satisfied. The Depositor will conduct its business and all business correspondence solely in its own name and will cause the Seller to conduct its business solely in its own name so as not to mislead others as to the identity of the entity with which those others are concerned. The Depositor will provide for its own operating expenses and liabilities from its own funds, except that the initial expenses of the Depositor may be paid by the Seller. The Depositor will not hold itself out, or permit itself to be held out, as having agreed to pay, or as being liable for, the debts of the Seller. The Depositor will cause the Seller not to hold itself out, or permit itself to be held out, as having agreed to pay, or as being liable for, the debts of the Depositor. The Depositor will be operated such that it would not be substantively consolidated in the bankruptcy estate of the Seller and its separate existence disregarded in the event of the Seller's bankruptcy. The financial statements of the Seller will reflect the separate corporate existence of the Depositor. The Depositor will maintain two independent directors as provided in its Certificate of Incorporation. (m) Performance of Obligations. The Depositor punctually will perform and observe all of its obligations and agreements contained in the Receivables Purchase Agreement. If any officer of the Depositor has knowledge of the occurrence of a breach or default by the Seller or the Depositor under the Receivables Purchase Agreement, the Depositor promptly will notify the Trustee of such breach or default, and the Trustee will provide copies of such notice to the Rating Agencies. Any such notice will specify the action, if any, the Depositor is taking in respect of such breach or default. Without the Trustee's prior consent, the Depositor may not waive any material breach or default under, or amend, the Receivables Purchase Agreement. (n) Servicer Default. If any officer of the Depositor has knowledge of a Servicer Default, the Depositor promptly will notify the Trustee in writing of such Servicer Default, and the Trustee shall provide copies of such notice to the Rating Agencies. Section 2.06. Removal of Accounts. (a) On each Determination Date on which the Excess Balance Test has been satisfied, the Depositor shall have the right to remove from the Trust all of the Trust's right, title and interest in, to and under the Receivables then existing and thereafter created, all monies due, or to become due, and all amounts received with respect thereto and all proceeds thereof in or with respect to those Accounts randomly designated by the Depositor (the "Removed Accounts") in an aggregate amount not greater than the amount by which the related Series Pool Balance exceeds 105% of the sum of the related Required Series Pool Balance and the Required Exchangeable Certificate Amount. (b) Such removal of Removed Accounts shall not be effective unless the following are satisfied prior to the proposed effective date of such removal (the "Removal Date"): (i) on or before the twentieth (20th) Business Day prior to the Removal Date (the "Removal Notice Date"), the Depositor shall give the Certificateholders, the Trustee, each Rating Agency and the Servicer written notice of the proposed action, which shall specify for each Removed Account, (i) its account number, (ii) the aggregate amount of Receivables outstanding in such Removed Account on the Removal Notice Date, and (iii) the aggregate amount of Principal Receivables in such Removed Account on the Removal Notice Date; (ii) the Depositor shall have delivered to the Trustee an Officer's Certificate substantially in the form of Exhibit G hereto; and the Trustee may conclusively rely on such certificate, shall have no duty to make inquiries with regard to the matters set forth therein and shall incur no liability in so relying; and (iii) the Rating Agency Condition shall have been satisfied. (c) Upon satisfaction of the conditions set forth in subsections 2.06(a) and (b), the Trustee shall execute and deliver a written reassignment substantially in the form of Exhibit E hereto (the "Reassignment") to the Depositor, the Depositor's Interest will be reduced by an amount equal to the Purchase Price, and the Receivables from the Removed Accounts shall no longer constitute a part of the Trust as of the related Removal Date. (d) Notwithstanding the foregoing, upon the effective date of any rules promulgated by FASB that would preclude sale accounting treatment for the conveyance of the Receivables for FASB 125 purposes because of the existence or continued effectiveness of the removal provisions of this Section 2.06, then the Depositor shall no longer have the right to so remove accounts and the provisions of this Section 2.06 shall no longer be in effect. Section 2.07. Discount Option. (a) The Depositor may, at any time, upon thirty (30) days' prior written notice to the Servicer, the Trustee and each Rating Agency, designate a fixed percentage, not to exceed 10%, of the amount of Collections in respect of Special Interest Receivables arising in the Accounts on and after the date of such designation that otherwise would be treated as Principal Collections to be treated as Finance Charge Collections. Such designation will become effective on the date specified therein only if the Depositor shall have delivered to the Trustee an Officer's Certificate, dated the date of such designation, to the effect that the Depositor reasonably believes that such designation will not result in an Early Amortization Event or have a material adverse effect on the Certificateholders. (b) The Depositor may, at any time, upon thirty (30) days prior written notice to the Servicer, the Trustee and each Rating Agency, designate a percentage (the "Discount Rate") to be subtracted from the price at which Receivables are conveyed to the Trust after a specified date; provided that in the event that the Discount Rate exceeds 2.5%, the Rating Agency Condition shall have been satisfied; provided, further, that in the event the Discount Rate exceeds 3.0%, the Consent of Certificateholders shall also have been obtained. The Depositor may give any number of such written notifications during the life of the Trust but only one such notification with respect to any Collection Period. Such notification shall be given prior to the first day of such Collection Period, and shall be effective as of the first day of such Collection Period. (c) In addition to any Discount Rate which may be designated pursuant to subsection (b) above, the following shall apply: (i) the Discount Rate shall be 1.0% with respect to Receivables conveyed to the Trust on the initial Closing Date and thereafter until such time as the Depositor shall notify the Trustee in writing of a new Discount Rate, in accordance with the terms of this Section 2.07, and (ii) during July and November of each year, the Discount Rate may, at the Depositor's option, increase an additional 1.5% to take into account the effects of reductions in the Pool Balance resulting from the Seller's "Secret Sales" promotional campaigns, unless and until the Servicer shall have given written notice to each of the Trustee, the Depositor and the Rating Agencies that the Seller has discontinued its "Secret Sales" promotional campaigns and (iii) Special Interest Receivables conveyed to the Trust shall be conveyed at a Discount Rate not to exceed 10%. The Depositor hereby confirms that no "Secret Sales" campaign or similar promotional campaign shall have an adverse effect on the Investor Certificates of any Series that is not compensated for by (x) the 1.5% automatic increase in the Discount Rate, and (y) the payments, if any, required to be made as a result thereof pursuant to Section 3.09(a) hereof. Section 2.08. Block Period; Supplemental Accounts. (a) On any Determination Date on which the Excess Balance Test is satisfied, the Depositor may, at its option, discontinue, indefinitely or for a specified period (the "Block Period"), inclusion of Charge Accounts originated by the Seller during such Block Period as Accounts. The Depositor may, at its option, terminate a Block Period, upon which termination all Receivables in all Accounts shall thereafter be conveyed to the Trust pursuant to Section 2.01 hereof. (b) In connection with the termination of any Block Period, the Depositor may designate any Charge Account that was originated by the Seller during such Block Period for inclusion as Supplemental Accounts. (c) If on any Determination Date during any Block Period the Required Series Pool Balance for any Series (or the equivalent for any other Series) is greater than the Series Pool Balance for such Series the Depositor shall randomly designate additional Charge Accounts for inclusion as Supplemental Accounts in an amount sufficient to increase such Series Pool Balance until the Series Pool Balance equals the Required Series Pool Balance for such Series. The Block Period shall be deemed to have terminated for such designated Charge Accounts for so long as the Depositor is required to designate additional Charge Accounts pursuant to this subsection. Receivables from such Supplemental Accounts shall be transferred to the Trust on or before the fifth (5th) Business Day following such Determination Date. (d) The commencement or termination of a Block Period, or the designation of Supplemental Accounts, shall not be effective, and no transfer pursuant to Section 2.08(c) effected, unless the following are satisfied prior to the proposed effective date of any such action: (i) on or before (A) the thirtieth (30th) Business Day prior to the commencement of any Block Period, (B) the third (3rd) Business Day prior to the termination of a Block Period, or (C) the fifth (5th) Business Day prior to the proposed effective date with respect to additions pursuant to Section 2.08(b) or (c) (as applicable, the "Notice Date"), the Depositor shall give the Trustee, each Rating Agency and the Servicer written notice of the proposed action, which in the case of (x) the commencement of a Block Period shall set forth in reasonable detail computations evidencing satisfaction of the Excess Balance Test, and (y) additions pursuant to Section 2.08(b) or (c) shall specify the proposed effective date of the action (the "Supplemental Addition Date") and, for each Charge Account to be designated as a Supplemental Account, (I) its account number, (II) the aggregate amount of Receivables outstanding in such Supplemental Account on the Notice Date and (III) the aggregate amount of Principal Receivables in such Supplemental Account on the Notice Date; (ii) in the case of additions pursuant to Section 2.08(b) or (c), the Depositor shall deliver to the Trustee an Officer's Certificate substantially in the form of Exhibit F hereto; and (iii) the Rating Agency Condition shall have been satisfied. ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES SECTION 3.01. Acceptance of Appointment and Other Matters Relating to the Servicer. (a) The Servicer shall service and administer the Receivables, collect payments due under the Receivables and charge-off as uncollectible Receivables, all in accordance with procedures that are customary and usual in the industry for servicing receivables comparable to the Receivables and to the extent not inconsistent with the foregoing, exercise the same degree of skill and care as that used in servicing receivables for its own account. The Servicer shall have full power and authority acting alone or through any party properly designated hereunder, to do any and all of the foregoing in connection with such servicing and administration which it may deem necessary or desirable. Without limiting the generality of the foregoing and subject to Section 10.01 hereof, the Servicer is hereby authorized and empowered, unless such power and authority is revoked by the Trustee on account of the occurrence of a Servicer Default: (i) to instruct the Trustee to make withdrawals and payments from the Collection Account and any Series Account as set forth in this Agreement and, with respect to any Series Account, the related Supplement; (ii) to instruct the Trustee to take any action required or permitted under any Enhancement Agreement; (iii) to execute and deliver, on behalf of the Trust for the benefit of the Beneficiaries, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Receivables and, after the delinquency of any Receivable and to the extent permitted under and in compliance with applicable Requirements of Law, to commence enforcement proceedings with respect to such Receivables; (iv) to make any filings, reports, notices, applications, registrations with, and seek any consents or authorizations from, the Securities and Exchange Commission and any State securities authority on behalf of the Trust as may be necessary or advisable to comply with any Federal or State securities laws or reporting requirements; and (v) to delegate certain of its servicing, collection, enforcement and administrative duties hereunder with respect to the Accounts and the Receivables to any Person who agrees to conduct such duties in accordance with the Financial Guidelines and this Agreement; provided, however, that the Servicer shall notify the Trustee, the Rating Agencies and any Enhancement Providers in writing of any such delegation of its duties which is not in the ordinary course of its business, that no delegation will relieve the Servicer of its liability and responsibility with respect to such duties and that the Rating Agency Condition shall have been satisfied and the Consent of Certificateholders obtained. With respect to any such delegation the Trustee shall execute any limited powers of attorney and other documents prepared by the Servicer which are reasonably necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder. (b) In the event that the Depositor is unable for any reason to transfer Receivables to the Trust in accordance with the provisions of this Agreement (including by reason of the application of the provisions of Section 9.02 hereof or any court of competent jurisdiction ordering that the Depositor not transfer any additional Principal Receivables to the Trust) then, in any such event, the Servicer agrees (i) to give prompt written notice thereof to the Trustee, any Enhancement Providers and each Rating Agency and (ii) that it shall allocate, after the occurrence of any such event, payments on each Account with respect to the principal balance of such Account first to the oldest principal balance of such Account, and to have such payments applied as Collections in accordance with Section 4.02 hereof. The parties hereto agree that Finance Charge Receivables, whenever created, accrued in respect of Principal Receivables which have been conveyed to the Trust shall continue to be a part of the Trust notwithstanding any cessation of the transfer of additional Principal Receivables to the Trust and Collections with respect thereto shall continue to be allocated and paid in accordance with the terms of this Agreement. (c) The Servicer shall not, and any Successor Servicer shall not be obligated to, use separate servicing procedures, offices, employees or accounts for servicing the Receivables from the procedures, offices, employees and accounts used by the Servicer in connection with servicing other receivables comparable to the Receivables. (d) The Servicer shall comply with and perform its servicing obligations with respect to the Receivables in accordance with the Charge Account Agreements relating to the Accounts and the Financial Guidelines, except insofar as any failure to so comply or perform would not materially and adversely affect the rights of the Trust or any of the Beneficiaries. Subject to compliance with all Requirements of Law, the Servicer (or if it is not then acting as Servicer, the Seller) may change the terms and provisions of the Charge Account Agreements or the Financial Guidelines in any respect (including the calculation of the amount or the timing of charge-offs and the rate of the finance charge, if any assessed thereon), only if (i) as a result of such change, in the reasonable judgment of the Servicer (or the Seller, as the case may be) no Early Amortization Event will occur, or (ii) the Servicer (or the Seller, as the case may be) shall reasonably determine that such change is necessary in order to satisfy any Requirement of Law. Section 3.02. Servicing Compensation. (a) The Monthly Servicing Fee with respect to each outstanding Series shall be payable to the Servicer, in arrears, on each Distribution Date occurring prior to the earlier of the first Distribution Date following the Series Termination Date for such Series and the first Distribution Date on which the Invested Amount for such Series is zero. In no event shall the Trust, the Trustee, the Certificateholders or the Holder of any Subordinated Certificate be liable for any Monthly Servicing Fee or Servicing Fee. The Monthly Servicing Fee shall be payable to the Servicer solely to the extent amounts are available for distribution in accordance with the terms of the Supplements. (b) The Servicer's expenses include the amounts due to the Trustee pursuant to Section 11.05 hereof and the reasonable fees and disbursements of independent accountants and all other expenses incurred by the Servicer in connection with its activities hereunder, and including all other fees and expenses of the Trust not expressly stated herein to be for the account of the Certificateholders but not including any federal, state or local income or franchise taxes, if any, of the Trust or the Certificateholders. The Servicer shall be required to pay such expenses for its own account, and shall not be entitled to any payment therefor other than the Servicing Fee. The Servicer will be solely responsible for all fees and expenses incurred by or on behalf of the Servicer in connection herewith, and the Servicer will not be entitled to any fee or other payment from, or claim on, any of the Trust Assets (other than the Servicing Fee). Section 3.03. Representations, Warranties and Covenants of the Servicer. (a) The Seller as Servicer hereby makes, and any Successor Servicer by its appointment hereunder shall make, on each Closing Date (and on the date of any such appointment) the following representations, warranties and covenants, on which the Trustee has relied in accepting the Receivables in trust and in authenticating the Certificates: (i) Organization and Good Standing. Such party is a corporation or other Person duly organized, validly existing and in good standing under the applicable laws of the state of its organization and has full power, authority and legal rights to own its properties and conduct its receivable servicing business as such properties are presently owned and as such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement and any Supplement. (ii) Due Qualification. Such party is duly qualified to do business and is in good standing as a foreign Person (or is exempt from such requirements) and has obtained all necessary licenses and approvals in each jurisdiction in which the servicing of the Receivables as required by this Agreement requires such qualification except where the failure to so qualify or be in good standing or obtain licenses or approvals would not have a material adverse effect on its ability to perform its obligations hereunder. (iii) Due Authorization. The execution, delivery, and performance of this Agreement and any applicable Supplement has been duly authorized by such party by all necessary action on the part thereof. (iv) Binding Obligation. This Agreement and any Supplement have been duly executed and delivered by such party, and each constitutes a legal, valid and binding obligation of such party, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect, affecting the enforcement of creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity) and the availability of equitable remedies. (v) No Violation. The execution and delivery of this Agreement and any Supplement by such party, the performance of the transactions contemplated by this Agreement and any Supplement and the fulfillment of the terms hereof and thereof applicable to such party will not conflict with, violate, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Requirement of Law applicable to such party or any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which such party is a party or by which it is bound. (vi) No Proceedings. There are no proceedings or investigations, pending or, to the best knowledge of such party, threatened against such party before any Governmental Authority (i) seeking to prevent the issuance of the Certificates or the consummation of any of the transactions contemplated by this Agreement or any Supplement, (ii) seeking any determination or ruling that, in the reasonable judgment of such party, would affect the performance by such party of its obligations under this Agreement or the applicable Supplement, or (iii) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of this Agreement or any Supplement. (vii) Compliance with Requirements of Law. Such party shall duly satisfy all obligations on its part to be fulfilled under or in connection with the Receivables and the Accounts, will maintain in effect all qualifications required under Requirements of Law in order to service properly the Receivables and the Accounts, and to conduct its business generally, and will comply with all Requirements of Law in connection with servicing the Receivables and the Accounts, and the conduct of its business generally, the failure to comply with which would have a materially adverse effect on the interests of the Beneficiaries. (viii) No Rescission or Cancellation. Such party shall not reschedule, revise, defer, cancel or settle payments due on any Receivable, except as expressly provided herein or in accordance with the Financial Guidelines and sound industry practices for servicing receivables comparable to the Receivables. (ix) Protection of Beneficiaries Rights. Such party shall take no action, nor omit to take any action, which would materially impair the rights of Beneficiaries in the Receivables. (x) Servicer Accounts. (A) Schedule III hereto contains a true and complete list of all accounts maintained for the purpose of receiving Collections (each, a "Local Deposit Account"). In the event that any Local Deposit Account shall be held in the name of a party other than the Trustee, on or prior to the initial Closing Date, such party shall, with respect to each such Local Deposit Account, (i) cause such Local Deposit Account to be transferred into the name of the Trustee and enter into a Deposit Account Agreement in respect of such account, or (ii) terminate such Local Deposit Account. (B) Such party shall not establish any new Local Deposit Accounts unless such party shall have first given notice to the Trustee of such new Local Deposit Account (which notice shall constitute an amendment of Schedule III hereto) and entered into a Deposit Account Agreement in respect of such account. (C) Each Local Deposit Account shall be in the name of the Trustee and bear a designation clearly indicating that the funds deposited therein are held solely for the benefit of the Beneficiaries. (D) On or before the date hereof, such party shall have entered into an agreement (a "Collection Servicer Agreement") with a Collection Servicer who shall act solely at the instruction of the Trustee. Each such Collection Servicer Agreement shall provide that each day Collections are received in the Dedicated Zip Code, such party shall cause one of its employees (who shall at all times be covered by a fidelity bond and errors and omissions policy substantially similar to that referred to in Section 3.10 hereof) to deliver the contents thereof to the Servicer for processing, and upon completion of such processing to deposit all such Collections into a Local Deposit Account. The Collection Servicer Agreement with Union Bank of California, dated March 25, 1994 between the Servicer and Union Bank of California, is hereby preapproved. In the event of the termination thereof, the Servicer shall forthwith establish a successor Collection Servicer Agreement. Any successor, replacement or additional Collection Servicer Agreement shall be in form and substance satisfactory to the Certificateholders as evidenced by a Consent of the Certificateholders. (E) On or before the date hereof, such party shall cause its Dedicated Zip Code to be transferred into the name of the Trustee. The Servicer shall cause the terms of each Charge Account to provide that all payments made by mail shall be addressed to the Servicer at the Dedicated Zip Code. The Servicer shall not change said address or payment instructions without the Consent of Certificateholders, not to be unreasonably withheld. (xi) Negative Pledge. Except for the conveyances under the Receivables Purchase Agreement and under this Agreement, the Servicer will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) on, any Receivable, whether now existing or hereafter created, or any interest therein, and the Servicer shall defend the right, title and interest of the Trust in, to and under the Receivables whether now existing or hereafter created, against all claims of third parties claiming through or under the Depositor or the Servicer. (xii) Receivables Not To Be Evidenced by Promissory Notes. Except in connection with its enforcement or collection of a Receivable, the Servicer will take no action to cause any Receivable to be evidenced by an instrument or chattel paper (as defined in the UCC as in effect in the State of California). (xiii) All Consents Required. All appraisals, authorizations, consents, orders, approvals or other actions of any Person or of any governmental body or official required in connection with the execution and delivery by the Servicer of this Agreement, each Supplement and the Related Documents to which it is a party, the performance by the Servicer of the transactions contemplated by this Agreement, each Supplement and the Related Documents to which it is a party, and the fulfillment by the Servicer of the terms hereof and thereof, have been obtained. (b) Notice of Breach. The representations and warranties set forth in this Section 3.03 shall survive the transfer and assignment of the Receivables to the Trust and the issuance of the Certificates. Upon discovery by the Depositor, the Servicer or upon a Responsible Officer of the Trustee having actual knowledge of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice thereof to the other parties and any Enhancement Providers. The Trustee shall give written notice to the Rating Agencies and to the Certificateholders promptly upon receipt of such notice. (c) Purchase. In the event the Depositor or the Servicer receives written notice from the Trustee or any Enhancement Provider that any covenant under clause (vii), (viii) or (ix) of subsection (a) above has not been complied with and such noncompliance has not been cured within thirty (30) days thereafter (or such longer period as the Trustee may permit) and has a material adverse effect on the interests of the Certificateholders then, unless a Liquidation Event has occurred, the Servicer shall purchase such Receivable or if such non- compliance is with respect to any Account, all Receivables in such Account, and the proceeds therefrom shall be applied in accordance with the terms of Article IV hereof. (d) Payment of Purchase Price; Etc. Upon each payment by the Servicer of the Purchase Price for the Receivables to be purchased from the Trust pursuant to subsection (c) above, the Trust shall automatically and without further action be deemed to sell, transfer, assign, set over and otherwise convey to the Servicer, without recourse, representation or warranty, all the right, title and interest of the Trust in, to and under such Receivables and all monies due or to become due with respect thereto and all proceeds thereof. The Trustee shall execute such documents and instruments of transfer or assignment and take such other actions as shall reasonably be requested by the Servicer to effect the conveyance of any such Receivables pursuant to this Section 3.03. The obligation of the Servicer to purchase such Receivables and to make the deposits required to be made to the Collection Account as provided in subsection (a) above, shall constitute the sole remedy respecting the event giving rise to such obligation available to the Certificateholders (or the Trustee on behalf of the Certificateholders). Section 3.04. Reports and Records for the Trustee. (a) Records. Upon reasonable prior notice by the Trustee or a Certificateholders' Representative, the Servicer shall make available at an office of the Servicer (or other location designated by the Servicer if such records are not accessible by the Servicer at an office of the Servicer) selected by the Servicer for inspection by the Trustee or its agent and a Certificateholders' Representative on a Business Day during the Servicer's normal business hours a record setting forth (i) the Collections on each Receivable and (ii) the amount of Receivables, in each case for the period preceding the date of the inspection, or such shorter period as may be reasonably requested by the Trustee. The Servicer shall, at all times, maintain its computer files with respect to the Receivables in such a manner so that the Receivables may be specifically identified and, upon reasonable prior request of the Trustee or a Certificateholders' Representative, shall make available to the Trustee or its agent and a Certificateholders' Representative, at an office of the Servicer (or other location designated by the Servicer if such computer files are not located at an office of the Servicer) selected by the Servicer, on any Business Day of the Servicer during the Servicer's normal business hours any computer programs necessary to make such identification. (b) Distribution Date Statement. On each Determination Date, the Servicer shall, prior to 9:00 a.m. (Los Angeles time) on such day, deliver to the Trustee, the Certificateholders and the Rating Agencies the Distribution Date Statement for the related Collection Period substantially in the form attached to the related Series Supplement. The Trustee shall be under no duty to recalculate, verify or recompute the information supplied to it under this Section 3.04 or such other matters as are set forth in any Distribution Date Statement. Section 3.05. Annual Servicer's Certificate. The Servicer will deliver to the Rating Agencies, Certificateholders, the Trustee and any Enhancement Providers on or before April 15 of each calendar year, beginning with April 15, 2000, an Officer's Certificate substantially in the form of Exhibit C hereto stating that (a) a review of the activities of the Servicer during the preceding calendar year and of its performance under this Agreement was made under the supervision of the officer signing such certificate and (b) to the best of such officer's knowledge, based on such review, the Servicer has performed in all material respects its obligations under this Agreement throughout such year, or, if there has been a default in the performance of any such obligation, specifying each such default known to such officer and the nature and status thereof. A copy of such certificate may be obtained by any Certificateholder by a request in writing to the Trustee addressed to the Corporate Trust Office. Section 3.06. Independent Public Accountants' Servicing Report. (a) On or before the fourth monthly anniversary of the initial Closing Date, and thereafter on or before the 120th day following the end of each of the Servicer's fiscal years, beginning with the fiscal year ending in 2000, the Servicer shall cause a firm of Independent Certified Public Accountants (who may also render other services to the Servicer or the Depositor) to furnish a report to the Trustee, any Enhancement Provider and each Rating Agency, to the effect that such firm has made a study and evaluation in accordance with generally accepted auditing standards of the Servicer's internal accounting controls relative to the servicing of Accounts under this Agreement, and that, on the basis of such examination, such firm is of the opinion (assuming the accuracy of any reports generated by the Servicer's third party agents) that the system of internal accounting controls in effect on the last day of the first monthly anniversary of the initial Closing Date or such fiscal year, as the case may be, relating to servicing procedures performed by the Servicer, taken as a whole, provided reasonable assurance that such internal control system was sufficient for the prevention and detection of errors and irregularities and that such servicing was conducted in compliance with such provisions of this Agreement of which such accountants can reasonably be expected to possess adequate knowledge of the subject matter, which are susceptible of positive assurance by such accountants and for which their professional competence is relevant, except for such exceptions as they believe to be immaterial and such other exceptions as shall be set forth in such statement. A copy of each such report will be sent to each Certificateholder and a copy of the initial such report shall be sent to each Rating Agency by the Servicer. In the event such firm requires the Trustee to agree to the procedures performed by such firm, the Servicer shall direct the Trustee in writing to so agree; it being understood and agreed that the Trustee will deliver such letter of agreement in conclusive reliance upon the direction of the Servicer, and the Trustee makes no independent inquiry or investigation as to, and shall have no obligation or liability in respect of, the sufficiency, validity or correctness of such procedures. (b) Within 120 days after each fiscal year for the Servicer (commencing with the year ended January 30, 2000), the Servicer shall deliver to the Trustee and to each Rating Agency, an agreed upon procedures report prepared by accountants independent of the Servicer solely to assist in evaluating compliance with the requirement set forth in Section 3.04(b) hereof during the preceding 12-month period ended on the Date of Determination immediately following the end of the fiscal year of the Servicer (or other applicable period in the case of the first such report or letter) to the effect that such accountants have reviewed certain records and documents relating to the servicing of the Accounts and Receivables under the Agreement and any Supplement (using procedures specified in such report) and as a result of such review, and in connection with such procedures, they are reporting such exceptions, if material, as shall be set forth therein. For the purpose of such report, exceptions shall be considered material when either individually or in the aggregate such exceptions exceed $250,000. Such report or letter shall also indicate that the firm is independent with respect to the Servicer and the Depositor within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. In the event such accountants require the Trustee to agree to the procedures performed by such firm, the Servicer shall direct the Trustee in writing to so agree; it being understood and agreed that the Trustee will deliver such letter of agreement in conclusive reliance upon the direction of the Servicer, and the Trustee makes no independent inquiry or investigation as to, and shall have no obligation or liability in respect of, the sufficiency, validity or correctness of such procedures. (c) To the extent the Servicer or Successor Servicer is a privately-held entity and is no longer subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, within 120 days after the close of each fiscal year of the Servicer or Successor Servicer, if applicable, the Servicer shall deliver to the Holders of Investor Certificates audited financial statements of the Servicer as at the end of such fiscal year and for the fiscal year then ended, in each case certified by a firm of Independent Certified Public Accountants. The Servicer is currently a publicly-held entity subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the Servicer or Successor Servicer will give prompt notice to the Trustee of any change in such status. Section 3.07. Tax Treatment. The Depositor has structured this Agreement and the Investor Certificates with the intention that the Investor Certificates will qualify under applicable federal, state, local and foreign tax law as indebtedness of the Depositor. The Depositor, the Servicer and each Holder of Investor Certificates agree to treat and to take no action inconsistent with the treatment of the Investor Certificates (or beneficial interest therein) as indebtedness of the Depositor for purposes of federal, state, local and foreign income or franchise taxes and any other tax imposed on or measured by income. Each Holder of Investor Certificates, by acceptance of its Certificate, agrees to be bound by the provisions of this Section 3.07. Furthermore, the parties hereto agree that the Trust shall be treated as a security device only, and shall not file tax returns or obtain an employer identification number on behalf of the Trust. Section 3.08. Notices to the Seller. In the event the Seller is no longer acting as Servicer, any Successor Servicer appointed pursuant to Section 10.02 hereof shall deliver or make available to the Seller, as the case may be, each certificate and report required to be prepared forwarded or delivered thereafter pursuant to Section 3.04, Section 3.05 or Section 3.06 hereof. Section 3.09. Adjustments. (a) If the Servicer adjusts downward the amount of any Principal Receivable because of a rebate, refund, credit adjustment or billing error to an Obligor, or because such Receivable was created in respect of merchandise which was refused or returned by an Obligor, or if the Servicer otherwise adjusts the amount of any Receivable without receiving Collections therefor or without charging off such amount as uncollectible in accordance with the Servicer's customary and usual procedures for the servicing of comparable charge account receivables, then, in any such case, the Pool Balance will be automatically increased or reduced, as appropriate, by the amount of the adjustment. Furthermore, if following such an adjustment the Pool Balance would be less than the Required Pool Balance on the immediately preceding Determination Date (after giving effect to the allocations, distributions, withdrawals and deposits to be made on the Distribution Date immediately following such Determination Date) then, unless a Liquidation Event has occurred, the Depositor shall be required to pay an amount equal to such deficiency (up to the amount of such adjustment) into the Collection Account on the Business Day on which such adjustment or reduction occurs (each such payment an Adjustment Payment). (b) If (i) the Servicer makes a deposit into the Collection Account in respect of a Collection of a Receivable and such Collection was received by the Servicer in the form of a check which is not honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any Collection and deposits an amount that is less than or more than the actual amount of such Collection, the Servicer shall appropriately adjust the amount subsequently deposited into the Collection Account to reflect such dishonored check or mistake. Any Receivable in respect of which a dishonored check is received shall be deemed not to have been paid. Section 3.10. Fidelity Bond and Errors and Omissions Insurance. The Servicer shall maintain at all times prior to the termination of the Trust, at its own expense, a blanket fidelity bond and an errors and omissions insurance policy, with broad coverage with responsible companies on all Bondable Persons. Any such fidelity bond and errors and omissions insurance shall protect and insure the Servicer against losses, including forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of such persons and shall be maintained in a form and amount that would meet the requirements of prudent institutional consumer credit card servicers. No provision of this Section 3.10 requiring such fidelity bond and errors and omissions insurance shall diminish or relieve the Servicer from its duties and obligations as set forth in this Agreement. The Servicer shall be deemed on any date to have complied with this provision if one of its respective Affiliates has on such date such fidelity bond and errors and omissions policy coverage and, by the terms of such fidelity bond and errors and omission policy, the coverage afforded thereunder extends to the Servicer in the form and amount described above in this Section 3.10. The Servicer shall cause each and every sub-servicer for it to maintain a policy of insurance covering errors and omissions and a fidelity bond which would meet such requirements. Upon request of the Trustee, the Servicer shall cause to be delivered to the Trustee a certification evidencing coverage under such fidelity bond and insurance policy. Any such fidelity bond or insurance policy shall not be cancelled or modified in a materially adverse manner without ten (10) days' prior written notice to the Trustee and the Rating Agencies. ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS SECTION 4.01. Rights of Certificateholders. The Investor Certificates shall represent fractional undivided interests in the Trust Assets, which, with respect to each Series, shall consist of the right to receive, to the extent necessary to make the required payments with respect to the Investor Certificates of such Series at the times and in the amounts specified in the related Supplement, the portion of Collections allocable to the Holders of Investor Certificates of such Series pursuant to this Agreement and such Supplement, funds on deposit in the Collection Account allocable to the Holders of Investor Certificates of such Series pursuant to this Agreement and such Supplement, funds on deposit in any related Series Account and funds available pursuant to any related Enhancement (collectively, with respect to all Series, the "Investors' Interest"); provided, that the Investor Certificates of one Series or Class shall not have any interest in any Series Account created, or Enhancement provided, for the benefit of any other Series or Class. The Exchangeable Certificate shall represent the ownership interest in the remainder of the Trust Assets not allocated to the Investors' Interest (or to any Subordinated Certificate) pursuant to this Agreement or any Supplement, including the right to receive the Collections with respect to the Receivables and other amounts at the times and in the amounts specified in this Agreement or in any Supplement (collectively, the "Depositor Interest"). Each Subordinated Certificate shall represent only such rights and interests as shall be specified in any Supplement relating thereto. Section 4.02. Establishment of the Collection Account. The Servicer, for the benefit of the Beneficiaries, shall cause to be established and maintained in the name of the Trust an Eligible Deposit Account bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Beneficiaries (the "Collection Account"). The Trustee shall possess all right, title and interest in all funds from time to time on deposit in, and all Eligible Investments credited to, the Collection Account and in all proceeds thereof. The Collection Account shall be under the sole dominion and control of the Trustee for the benefit of the Beneficiaries. If, at any time, the Collection Account ceases to be an Eligible Deposit Account, the Servicer shall establish a substitute Eligible Deposit Account as the Collection Account, instruct the Trustee to transfer any cash and/or any Eligible Investments to such new Collection Account and, from the date any such substitute account is established, such account shall be the Collection Account. Pursuant to the authority granted to the Servicer in Section 3.01 hereof, the Servicer shall have the power, revocable by the Trustee, to instruct the Trustee to make withdrawals and payments from the Collection Account for the purposes of carrying out the duties of the Servicer or the Trustee as specified in this Agreement. All Eligible Investments shall be held by the Trustee for the benefit of the Beneficiaries. Funds on deposit in the Collection Account shall, at the written direction of the Servicer, be invested by the Trustee solely in Eligible Investments that will mature so that such funds will be available at the close of business on or before the next Business Day. Each Business Day, all interest and other investment income (net of losses and investment expenses) earned on funds on deposit in the Collection Account shall be released to the Depositor. Schedule II, which is hereby incorporated into and made part of this Agreement, identifies the Collection Account by setting forth the account number of such account, the account designation of such account and the name of the institution with which such account has been established. If a substitute Collection Account is established pursuant to this Section 4.02, the Servicer shall provide to the Trustee an amended Schedule II, setting forth the relevant information for such substitute Collection Account. Section 4.03. Collections Arrangements. Obligors shall at all times hereunder be instructed to make payments on the Receivables only (i) to the Dedicated Zip Code (ii) as In- Store Payments or (iii) as Direct Deposit Payments. All Collections on Receivables received in the Dedicated Zip Code will, pending remittance to the Collection Account, be held for the benefit of the Trust and shall be deposited into a Local Deposit Account as promptly as possible after the processing of such Collections. In-Store Payments shall be deposited in a Local Deposit Account as promptly as possible after the date of processing of such Collections, but in no event later than the next Business Day following such date of processing. Direct Deposit Payments shall be deposited in a Local Deposit Account as promptly as possible after the date of processing of such Collections, but in no event later than the next Business Day following such date of processing. Section 4.04. Collection Allocations. (a) Each day's Collections will be allocated by the Servicer at the commencement of business on the next succeeding Business Day to each Series from and after the Series Cut- Off Date for such Series, as specified in this Section 4.04, and Collections so allocated will be recorded as such in the Collection Account ledger maintained by the Trustee promptly after receipt of and in accordance with the written instructions of the Servicer with respect thereto. Amounts allocated to any Series will not, except as specified in the related Supplement, be available to the Investor Certificates of any other Series. In addition, Collections received during a Business Day will be allocated by the Servicer at the commencement of business on the next succeeding Business Day between Investor Certificates, the Exchangeable Certificate and any Subordinated Certificate as specified in the relevant Supplement. Amounts so allocated to Investor Certificates will not be available to the holder of the Exchangeable Certificate or any Subordinated Certificate, and amounts allocated to the Exchangeable Certificate or any Subordinated Certificate will not, except as specified in the related Supplement, be available to the Holders of Investor Certificates. Allocations among the Holders of Investor Certificates of a Series and among the Classes in any Series shall be made as set forth in this Agreement and in the related Supplement or Supplements. (b) Finance Charge Collections, Principal Collections and Miscellaneous Payments received during a Business Day shall be allocated to each Series by the Servicer at the commencement of business on the next succeeding Business Day based on the Series Allocation Percentage. Thereafter, for each Series, the Servicer shall allocate to the holder of the Exchangeable Certificate an amount equal to the product of (A) the Exchangeable Holder's Percentage (as defined in each Supplement) and (B) the aggregate amount of such Collections allocated to the Series for such Business Day. Collections allocated to a Series and not otherwise allocated to the holder of the Exchangeable Certificate shall be retained in the Collection Account for further disposition as specified in the Supplement for such Series. Unless specified in any Supplement (with respect to a retained amount account, reserve account, spread account or other cash retention account), the Servicer need not retain amounts allocated to the Exchangeable Certificate pursuant to any Supplement, and shall instead pay such amounts or shall direct the Trustee in writing to pay such amounts as collected to the holder of the Exchangeable Certificate. Miscellaneous Payments shall be treated as Finance Charge Collections. Any Discount Rate or Discount Portion arising in any Collection Period under Section 2.07 will be deducted from Principal Collections each day that such Collections are allocated hereunder and allocated as Finance Charge Collections. ARTICLE V DISTRIBUTIONS AND REPORTS TO CERTIFICATEHOLDERS SECTION 5.01. Distributions. (a) On each Distribution Date, the Trustee shall distribute to the Certificateholders of record on the preceding Record Date (other than as provided in Section 12.02 of the Agreement respecting a final distribution) such Certificateholder's pro rata share of the amounts required to be distributed pursuant to the related Supplement and in accordance with the written direction of the Servicer. Except as provided in Section 12.02 of the Agreement with respect to a final distribution, distributions to Certificateholders hereunder shall be made by wire transfer in immediately available funds. Section 5.02. Reports and Statements to Certificateholders. On each Distribution Date, the Trustee shall forward to each Certificateholders the Distribution Date Statement described in Section 3.04(b) hereof. (a) The Trustee shall maintain at its Corporate Trust Office a copy of each such Distribution Date Statement received by it pursuant to subsection (b) of Section 3.04 hereof. The Trustee shall make such statements available for inspection by Certificateholders upon reasonable notice at its Corporate Trust Office. (b) On or before January 31 of each calendar year, beginning with calendar year 2000, the Trustee shall furnish or cause to be furnished to each Person who at any time during the preceding calendar year was a Certificateholder, a statement prepared by the Servicer containing the information required to be contained in the monthly statements to Certificateholders described in subsection (b) of Section 3.04, as the case may be, aggregated for such calendar year or the applicable portion thereof during which such Person was a Certificateholder, together with such other information as is customarily provided by a Trustee to an issuer of indebtedness in order to assist such issuer in meeting the requirements of the Internal Revenue Code and such other customary information as the Servicer has indicated to the Trustee is necessary to enable the Certificateholders to prepare their tax returns. Such obligation of the Trustee shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Trustee pursuant to any requirements of the Internal Revenue Code as from time to time in effect. ARTICLE VI THE CERTIFICATES SECTION 6.01. The Certificates. (a) The Investor Certificates of any Series or Class and any Subordinated Certificate shall be issued substantially in the form of the respective exhibit attached to the related Supplement. The Exchangeable Certificate shall be issued in registered form, and shall be executed, authenticated and delivered as provided in Section 6.02 hereof. Investor Certificates shall be issued in minimum denominations of $1,000,000 and in integral multiples of $100,000 in excess thereof. The Exchangeable Certificate shall be a single certificate and shall represent the entire Depositor Interest. (b) Each Certificate shall be executed by manual or facsimile signature by the Depositor. Certificates bearing the manual or facsimile signature of an individual who was, at the time such signature was affixed, an officer of the Depositor shall not be rendered invalid in the event such individual ceased to be an officer of the Depositor prior to the authentication and delivery of such Certificates. No Certificates shall be entitled to any benefit under this Agreement, or be valid for any purpose, unless there appears on such Certificate a certificate of authentication executed by or on behalf of the Trustee by the manual signature of a duly authorized signatory, and such certificate upon any Certificate shall be conclusive evidence that such Certificate has been duly authenticated and delivered hereunder. Unless otherwise provided in the Series Supplement pursuant to which any Certificates are issued, all Certificates shall be dated the date of their authentication. Section 6.02. Authentication of Certificates. The Trustee shall authenticate and deliver the Certificates of each Series and Class that are issued upon original issuance to or upon the written order of the Depositor. The Trustee shall, upon the written request of the Depositor, authenticate and deliver the Exchangeable Certificate to the Depositor simultaneously with its delivery of the Certificates of the first Series to be issued hereunder. Section 6.03. New Issuances. (a) The Depositor may, from time to time, direct the Trustee in writing, on behalf of the Trust, to issue one or more new Series of Investor Certificates pursuant to a Supplement. Except as otherwise provided in the related Supplement, the Investor Certificates of all outstanding Series, each Subordinated Certificate issued pursuant to any Supplement and the Exchangeable Certificate shall be equally and ratably entitled to the benefits of this Agreement without preference, priority or distinction, all in accordance with the terms and provisions of this Agreement and the related Supplement. (b) On or before any Series Issuance Date, the parties hereto shall execute and deliver a Supplement which shall specify the Principal Terms of the new Series. The terms of such Supplement may modify or amend the terms of this Agreement solely as applied to such new Series. The obligation of the Trustee to issue the Certificates of such new Series and to execute and deliver the related Supplement is subject to satisfaction of the following conditions: (i) on or before the fifth Business Day immediately preceding the Series Issuance Date, the Depositor shall have given the Trustee, the Servicer, each Rating Agency and any Enhancement Provider written notice of such issuance (which notice shall specify, among other things, the applicable initial principal amount and interest rates of the Certificates to be issued) and the related Series Issuance Date; (ii) the Depositor shall have delivered to the Trustee the related Supplement, in form satisfactory to the Trustee, executed by each party hereto other than the Trustee; (iii) the Depositor shall have delivered to the Trustee any related Enhancement Agreement in form reasonably satisfactory to the Trustee, executed by each of the parties thereto, other than the Trustee; (iv) the Depositor shall have delivered to the Trustee: (A) an Officer's Certificate to the effect that the Excess Balance Test, with regard to each outstanding Series, has been satisfied as of the last Determination Date, and in the case of the issuance of a new Series of Fixed Based Certificates, that the Excess Balance Test has been satisfied calculated on a projection basis, and setting forth in reasonable detail computations evidencing such satisfaction. Notwithstanding the foregoing, in the case of the issuance of a new Series of Certificates the Closing Date of which is within two months of the commencement of any Controlled Amortization Period with respect to any outstanding Series, the requirement of this Section 6.03(b)(iv) will have been met upon the delivery by the Depositor to the Trustee of an Officer's Certificate to the effect that (i) the Excess Balance Test has been met for each such Series for the calendar month preceding the Closing Date of such new Series and (ii) the Excess Balance Test has been met for each such Series for the calendar month following the Closing Date of such new Series, after giving effect to any subsequent purchase of Receivables with the proceeds of such issuance or other application of proceeds from the issuance of such New Series, or (B) the Consent of Certificateholders approving said new issuance; provided that each Certificateholder by its acceptance of its Certificates shall be deemed to have agreed that its consent to any issuance of a new Series hereunder shall not be unreasonably withheld; (v) the Rating Agency Condition shall have been satisfied with respect to such issuance; (vi) the Depositor shall have delivered to the Trustee a certificate of a Vice President or more senior officer, dated the Series Issuance Date, to the effect that the Depositor reasonably believes that such issuance will not result in the occurrence of an Early Amortization Event; (vii) the Depositor shall have delivered to the Trustee a Tax Opinion, dated the Series Issuance Date, with respect to such issuance; and (viii) the Trustee shall have approved said issuance; provided, however, that the Trustee agrees that such consent shall not be unreasonably withheld. Upon satisfaction of the above conditions, the Trustee shall execute the Supplement and any Enhancement Agreement, and the Depositor shall deliver to the Trustee the executed Certificates of such Series for authentication and delivery by the Trustee upon the written order of the Depositor. (c) In connection with any new Series, the Depositor shall tender the Exchangeable Certificate to the Trustee in exchange for (i) one or more newly issued Series of Certificates and (ii) a reissued Exchangeable Certificate (any such tender a Depositor Exchange). In addition, to the extent permitted for any Series as specified in the related Supplement, the Holders of Certificates of such Series may tender their Certificates and the Depositor may tender the Exchangeable Certificate to the Trustee pursuant to the terms and conditions set forth in such Supplement in exchange for (i) in the case of the Certificateholders of such Series, one or more newly issued Series of Certificates and (ii) in the case of the Depositor, a reissued Exchangeable Certificate (an "Investor Exchange"; a Depositor Exchange and Investor Exchange are referred to collectively herein as an Exchange). The Depositor may perform an Exchange by notifying the Trustee, in writing, at least five days in advance (an "Exchange Notice") of the date upon which the Exchange is to occur (an "Exchange Date"). Any Exchange Notice shall state the designation of any Series to be issued on the Exchange Date and the Principal Terms with respect to such Series of Certificates. Upon satisfaction of such conditions, and those set forth in Section 6.03 hereof, the Trustee shall cancel the existing Exchangeable Certificate or applicable Certificates, as the case may be, and issue, as provided above, such Series and/or a new Exchangeable Certificate, dated the Exchange Date. Section 6.04. Registration of Transfer and Exchange of Certificates. (a) The Trustee shall cause a register (the "Certificate Register") to be kept at its office or agency in which a transfer agent and registrar (the "Transfer Agent and Registrar") shall record the issuance of the Certificates and the Exchangeable Certificate, including the identity of the Registered Holder, and each transfer, pledge and exchange of such Certificates as herein provided. The Transfer Agent and Registrar shall initially be the Trustee and any co-transfer agent and co- registrar chosen by the Depositor and acceptable to the Trustee. Any reference in this Agreement to the Transfer Agent and Registrar shall include any co-transfer agent and co-registrar unless the context requires otherwise. (b) The Transfer Agent and Registrar shall maintain at its expense, an office or agency in The City of New York where Certificates may be surrendered for registration of transfer or exchange. The Trustee or the Transfer Agent and Registrar, as the case may be, shall not be required to register the transfer or exchange of any Certificate for a period of fifteen (15) days preceding the due date for any payment with respect to such Certificate. In addition, the Trustee or the Transfer Agent and Registrar shall not subdivide Certificates into units smaller than the minimum initial amount specified in 6.01 hereof. (c) Upon the surrender of any Certificates for registration of transfer or exchange, the Trustee may execute, on behalf of the Depositor, and shall authenticate and the Transfer Agent and Registrar shall deliver one or more new Certificates of the same series or class in authorized denominations of like aggregate amount and tenor to the Certificateholder or designated transferee(s). Every Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in a form satisfactory to the Trustee or the Transfer Agent and Registrar duly executed by the Certificateholder or its attorney-in-fact duly authorized in writing. All Certificates surrendered for registration of transfer, exchange or payment shall be canceled and disposed of in a manner satisfactory to the Trustee. The Depositor shall deliver to the Trustee executed Certificates in such amounts and at such times as are necessary to enable the Trustee to fulfill its responsibilities under this Agreement and the Certificates. (d) Unless otherwise provided in the related Supplement, no service charge shall be made for any registration of transfer or exchange of Certificates, but the Transfer Agent and Registrar may require payment of a sum sufficient to recover any tax or governmental charge that may be imposed in connection with any such transfer or exchange. (e) Registration of transfer or exchange of Certificates containing a legend to the effect set forth on Exhibit H-1 hereto shall be effected only if such transfer or exchange is made pursuant to an effective registration statement under the 1933 Act, or is exempt from the registration requirements under the 1933 Act. In the event that registration of a transfer is to be made in reliance upon an exemption from the registration requirements under the 1933 Act, the transferor or the transferee shall, at its expense, deliver to the Depositor, the Servicer and the Trustee prior to registration an investment letter from the transferee, substantially in the form of the respective exhibit attached to the related Supplement. Certificates issued upon registration of transfer of, or exchange for, Certificates bearing a legend shall also bear such legend unless the Depositor, the Servicer, the Trustee and the Transfer Agent and Registrar receive an Opinion of Counsel, satisfactory to each of them, to the effect that such legend may be removed. Whenever a Certificate containing the legend referred to above is presented to the Transfer Agent and Registrar for registration of transfer, the Transfer Agent and Registrar shall promptly seek written instructions from the Servicer regarding such transfer and shall be entitled to receive and conclusively rely upon instructions signed by a Servicing Officer prior to registering any such transfer. The Depositor hereby agrees to indemnify the Transfer Agent and Registrar and the Trustee and to hold each of them harmless against any loss, liability or expense incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by them in relation to any such instructions furnished pursuant to this clause (e). (f) Registration of transfer or exchange of Certificates containing a legend to the effect set forth on Exhibit I hereto shall be effected only if such transfer or exchange is made to a Person that is not an employee benefit plan or individual retirement account subject to Title I of ERISA or Section 4975 of the Internal Revenue Code, or any trust established under any such employee benefit plan or individual retirement account (or established to hold the assets thereof), or any "governmental plan" (as defined in section 3(32) of ERISA or Section 414(d) of the Internal Revenue Code) organized in a jurisdiction having prohibitions on transactions with such governmental plan similar to those contained in Section 406 of ERISA or Section 4975 of the Internal Revenue Code (each such employee benefit plan, individual retirement account and trust, an "ERISA Plan"). No part of the funds used by any Person (other than the Initial Holder) to acquire any Certificate may constitute assets (within the meaning of ERISA and any applicable rules and regulations) of an ERISA Plan. (g) In addition to any limitation in Section 6.04(h) below, the Exchangeable Certificate may not be transferred, assigned, exchanged, pledged or otherwise conveyed unless the conditions set forth in (i) and (ii) below have been satisfied: (i) the Rating Agency Condition shall have been satisfied in connection with the proposed action; and (ii) the Depositor shall have delivered to the Trustee a Tax Opinion, dated the date of such exchange (or transfer or exchange as provided below), with respect to such exchange. The Trustee shall not register the transfer of the Exchangeable Certificate except upon receipt of certification from the Depositor to the effect that such transfer complies with the provisions of the 1933 Act. (h) It is the understanding of the parties to this Agreement that Gottschalks Inc. has particular expertise in performing the functions given by this Agreement to the Servicer and that the Investor Certificateholders will be purchasing the Certificates relying on Gottschalks Inc.'s exercising such expertise in performing such functions. As provided in Sections 8.05 and 8.07 of the Agreement, the Servicer is not permitted to resign except as provided herein and the parties understand that the Servicer's performance of its servicing functions and the quality of the Receivables will best be ensured if the Depositor retains all or a portion of the Exchangeable Certificate. Accordingly, the Depositor's interest in the Exchangeable Certificate shall not be sold, transferred, assigned, exchanged, pledged, participated or otherwise conveyed, unless (i) such sale, transfer, assignment, exchange, pledge or conveyance would not reduce the Depositor's retained interest in the Exchangeable Certificate and any Subordinated Certificate then outstanding below the Minimum Depositor Interest for any Series and, in the aggregate, for all Series, then outstanding and (ii) in the case of an Exchange pursuant to Section 6.03(c) hereof, the conditions for issuance of a Series are satisfied. The Trustee may rely on any Officer's Certificate as to the foregoing. Section 6.05. Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificate is surrendered to the Transfer Agent and Registrar, or the Transfer Agent and Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Certificate and (b) there is delivered to the Transfer Agent and Registrar and the Trustee such security or indemnity as may be required by them to hold each of them harmless (provided that an unsecured agreement of indemnity from an institutional Certificateholder with a net worth or statutory surplus of not less than $50 million shall be sufficient indemnity), then, in the absence of actual notice to a Responsible Officer of the Trustee that such Certificate has been acquired by a bona fide purchaser, the Depositor shall execute and the Trustee shall authenticate, and the Transfer Agent and Registrar shall deliver in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of the same Series or Class and like aggregate amount and tenor. In connection with the issuance of any new Certificate under this Section 6.05, the Trustee or the Transfer Agent and Registrar may require the Certificateholder to pay a sum sufficient to recover any tax or governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee and Transfer Agent and Registrar) connected therewith. Any duplicate Certificate issued pursuant to this Section 6.05 shall constitute complete and indefeasible evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. Section 6.06. Persons Deemed Owners. The Trustee, the Transfer Agent and Registrar and any agent of any of them may, prior to due presentation of a Certificate for registration of transfer or exchange, treat the Person or Persons in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving distributions pursuant to the terms of the related Supplement and for all other purposes whatsoever; and, in any such case, neither the Trustee, the Transfer Agent and Registrar nor any of their respect agents shall be affected by any notice to the contrary. Notwithstanding the foregoing, in determining whether the holders of the requisite Certificates have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Certificates owned by the Depositor, the Servicer or any Affiliate thereof, shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Certificates that a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Certificates so owned that have been pledged in good faith shall not be disregarded and may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledge's right so to act with respect to such Certificates and that the pledgee is not the Depositor, the Servicer or any Affiliate thereof. Section 6.07. Access to List of Registered Certificateholders' Names and Addresses. The Trustee will furnish or cause to be furnished by the Transfer Agent and Registrar to the Servicer, within five (5) Business Days after receipt by the Trustee of a request therefor, a list of the names and addresses of the Certificateholders. If three or more holders of Investor Certificates (the Applicants) apply to the Trustee, and such application states that the Applicants desire to communicate with other Certificateholders with respect to their rights under this Agreement or any Supplement or under the Investor Certificates and is accompanied by a copy of the communication that such Applicants propose to transmit, then the Trustee, after having been indemnified to its reasonable satisfaction by such Applicants for its costs and expenses, shall afford or shall cause the Transfer Agent and Registrar to afford such Applicants access during normal business hours to the most recent list of Certificateholders of such Series or all outstanding Series, as applicable, held by the Trustee. Such list shall be as of a date no more than forty-five (45) days prior to the date of receipt of such Applicants' request. Every Certificateholder, by receiving and holding an Investor Certificate, agrees with the Trustee that neither the Trustee, the Transfer Agent and Registrar nor any of their respective agents, shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Certificateholders hereunder, regardless of the sources from which such information was derived. ARTICLE VII OTHER MATTERS RELATING TO THE DEPOSITOR SECTION 7.01. Liability of the Depositor. The Depositor shall be liable for all obligations, covenants, representations and warranties of the Depositor arising under or related to this Agreement. Except as provided in the preceding sentence, the Depositor shall be liable only to the extent of the obligations specifically undertaken by it in its capacity as Depositor hereunder. Section 7.02. Limitation on Liability of the Depositor. Subject to Section 7.01 and Section 7.03 hereof, neither the Depositor nor any of the directors, officers, employees, affiliates, stockholders, agents or representatives or advisors of the Depositor shall be under any liability to the Trust, the Trustee, the Certificateholders or any other Person for any action taken or for refraining from taking any action in its capacity as Depositor pursuant to this Agreement whether arising from express or implied duties under this Agreement; provided, however, that this provision shall not protect the Depositor or any such Person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. The Depositor and any director, officer, employee, affiliate, stockholder, agent, representative or advisor of the Depositor may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Depositor shall not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its obligations hereunder and in its reasonable opinion may involve it in any expense or liability. Section 7.03. Depositor Indemnification. (A) The Depositor shall indemnify and hold the Trust, for the benefit of the Beneficiaries, and the Trustee, harmless from and against any loss, liability, reasonable expense, damage or injury suffered or sustained by reason of any acts or omissions or alleged acts or omissions arising out of or based upon this Agreement, including, but not limited to, any judgment, general settlement, reasonable attorneys' fees and other costs and expenses incurred by the Trustee in connection with the defense of any actual or threatened action, proceeding or claim (other than losses on Receivables and amounts due with respect thereto); provided, however, that the Depositor shall not indemnify the Trust or the Trustee or any officer, director, employee or agent of the Trustee if such actual or threatened action, proceeding or claim arose out of, or such loss, liability, expense, damage or injury was caused by fraud, negligence, breach of fiduciary duty or willful misconduct by any of the foregoing; provided, further, that the Depositor shall not be liable, directly or indirectly, for or in respect of any indebtedness evidenced or created by any Certificate, including with respect to any Enhancement, recourse as to which is limited solely to the assets of the Trust allocated for payment thereof as provided in this Agreement and any applicable Supplement; provided, further, that the Depositor shall not indemnify the Trust, the Trustee or any Beneficiary for any liabilities, cost or expense of the Trust with respect to any action taken by the Trustee at the request of any such Beneficiary to the extent the Trustee is fully indemnified by such Beneficiary with respect to such action or with respect to any Federal, state or local income or franchise taxes (or any interest or penalties with respect thereto) required to be paid by the Trust or any Beneficiary in connection herewith to any taxing authority. In the event that the Trustee is or the Trust Assets are liable to any third party (not including the Trustee or its agents or the Holders of the Investor Certificates) for any losses, claims, damages or liabilities arising out of the holding of the Receivables or the administration of this Agreement, any Related Document or any related arrangement that are not paid out of the Trust Assets, the Depositor (as holder of the Exchangeable Certificate) agrees (i) to be liable as though the Agreement and any Supplement created a partnership under the Uniform Partnership Act and (ii) to contribute to the Trust for the benefit of such third party, without limitation as to the amount, sufficient cash to satisfy and discharge such liability. The Trustee agrees to use any such cash advanced by the Depositor to satisfy and discharge such liability. The agreement by the Depositor set forth in this Section shall not limit the liability of the Depositor hereunder to any Person specified herein. With respect to any liability for which the Depositor would not be obligated to make a contribution to the Trust, but for the operation of this Section 7.03, any party to this Agreement that would be liable for such liability were such liability not paid or discharged by the Depositor pursuant to this Section 7.03, shall indemnify and hold the Depositor harmless against such liability; provided that nothing in this Section shall be construed to imply that the Holders of any Investor Certificates have any liability to third parties. Any indemnification under this Article VII shall survive the termination of this Agreement and the earlier removal or resignation of the Trustee. ARTICLE VIII OTHER MATTERS RELATING TO THE SERVICER SECTION 8.01. Liability of the Servicer. The Servicer shall be liable under this Article VIII only to the extent of the obligations specifically undertaken by the Servicer in its capacity as Servicer. Section 8.02. Limitation on Liability of the Servicer. Except as provided in Section 8.01 and Section 8.03 hereof, neither the Servicer nor any of the directors, officers, employees, affiliates, stockholders, agents, representatives or advisors of the Servicer shall be under any liability to the Trust, the Trustee, the Certificateholders or any other Person for any action taken or for refraining from taking any action in its capacity as Servicer pursuant to this Agreement; provided, however, that this provision shall not protect the Servicer or any such Person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. The Servicer and any director, officer, employee, affiliate, stockholder, agent, representative or advisor of the Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Servicer shall not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its obligations hereunder that in its reasonable opinion may involve it in any expense or liability. Section 8.03. Servicer Indemnification of the Trust and the Trustee. The Servicer shall indemnify and hold harmless the Trust, for the benefit of the Beneficiaries, and the Trustee from and against any loss, liability, reasonable expense, damage or injury suffered or sustained by reason of any acts or omissions or alleged acts or omissions arising out of or based upon this Agreement, including, but not limited to, any judgment, general settlement, reasonable attorneys' fees and other costs and expenses incurred by the Trustee in connection with the defense of any actual or threatened action, proceeding or claim (other than losses on Receivables and amounts due with respect thereto); provided, however, that the Servicer shall not indemnify the Trust or the Trustee or any officer, director, employee or agent of the Trustee if such actual or threatened action, proceeding or claim arose out of, or such loss, liability, expense, damage or injury was caused by fraud, negligence, breach of fiduciary duty or willful misconduct by any of the foregoing; provided, further, that the Servicer shall not be liable, directly or indirectly, for or in respect of any indebtedness evidenced or created by any Certificate, including with respect to any Enhancement, recourse as to which is limited solely to the assets of the Trust allocated for payment thereof as provided in this Agreement and any applicable Supplement; provided, further, that the Servicer shall not indemnify the Trust, the Trustee or any Beneficiary for any liabilities, cost or expense of the Trust with respect to any action taken by the Trustee at the request of any such Beneficiary to the extent the Trustee is fully indemnified by such Beneficiary with respect to such action or with respect to any Federal, state or local income or franchise taxes (or any interest or penalties with respect thereto) required to be paid by the Trust or any Beneficiary in connection herewith to any taxing authority. The Servicer shall indemnify and hold harmless the Trustee and its officers, directors, employees or agents from and against any loss, liability, reasonable expense, damage or injury suffered or sustained by reason of the acceptance of the Trust by the Trustee, the issuance by the Trust of the Certificates or any of the other matters contemplated herein or in any Supplement (other than losses on Receivables and amounts due with respect thereto). Any indemnification under this Article VIII shall run directly to and be enforceable by an injured party subject to the limitations hereof and shall survive the resignation or removal of the Servicer, the resignation or removal of the Trustee and/or the termination of the Trust and shall survive the termination of this Agreement. Any such indemnification shall not be payable from the assets of the Trust. Section 8.04. Merger or Consolidation of, or Assumption of, the Obligations of the Servicer. Subject to subsection 3.01(a), the Servicer shall not consolidate with or merge into any other entity or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the entity formed by such consolidation or into which the Servicer is merged or the Person which acquires by conveyance or transfer the properties and assets of the Servicer substantially as an entirety shall be a corporation or other acquiring entity organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and, if the Servicer is not the surviving entity, such entity shall expressly assume, by written agreement supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the performance of every covenant and obligation of the Servicer as applicable hereunder and shall benefit from all the rights granted to the Servicer, as applicable hereunder. (To the extent that any right, covenant or obligation of the Servicer, as applicable hereunder, is inapplicable to the successor entity, such successor entity shall be subject to such covenant or obligation, or benefit from such right, as would apply, to the extent practicable, to such successor entity); (ii) the Servicer shall have delivered to the Trustee an Officer's Certificate signed by a Vice President (or any more senior officer) stating that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 8.04 and that all conditions precedent herein provided for relating to such transaction have been complied with and an Opinion of Counsel that such supplemental agreement is legal, valid and binding and that the entity surviving such consolidation, conveyance or transfer is organized and existing under the laws of the United States of America or any State thereof or the District of Columbia; and (iii) the Servicer shall have delivered notice to the Rating Agencies of such consolidation, merger, conveyance or transfer and the Rating Agency Condition shall have been satisfied. Section 8.05. The Servicer Not to Resign. The Servicer shall not resign from the obligations and duties hereby imposed on it except upon determination that (a) the performance of its duties hereunder is no longer permissible under applicable law and (b) there is no reasonable action that the Servicer could take to make the performance of its duties hereunder permissible under applicable law. No such resignation shall become effective until the Trustee or a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 10.02 hereof. If the Trustee is unable within sixty (60) days of the date of such determination to appoint a Successor Servicer, the Trustee shall serve as Successor Servicer hereunder. Section 8.06. Access to Certain Information Regarding the Receivables; Meet and Confer. (a) The Servicer shall provide to the Trustee and its agents, as well as any Certificateholders' Representative, access to the documentation regarding the Accounts and the Receivables, such access being afforded without charge and as often as requested but only (i) during normal business hours, (ii) subject to the Servicer's normal security and confidentiality procedures, (iii) upon receipt of written notice at least two Business Days in advance of such visit, and (iv) at offices designated by the Servicer. Nothing in this Section 8.06 shall derogate from the obligation of the Depositor, the Trustee or the Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors and the failure of the Servicer to provide access as provided in this Section 8.06(a) as a result of such obligation shall not constitute a breach of this Section 8.06(a). (b) Subject to the provisions of Section 8.06(a)(i) through (iv) above, the Servicer shall also provide upon reasonable request to a Certificateholders' Representative access to one or more senior officers of the Servicer to discuss the financial position of the Servicer and its ability to perform its obligations hereunder. Section 8.07. Delegation of Duties. In the ordinary course of business, the Servicer may at any time delegate any duties hereunder to any Person who agrees to conduct such duties in accordance with the Charge Card Agreements, the Financial Guidelines, this Agreement and each Supplement. The Servicer shall give prompt written notice of any such delegation of a material function to the Rating Agencies, the Trustee and any Enhancement Providers. Such delegation shall not relieve the Servicer of its liability and responsibility with respect to such duties, and shall not constitute a resignation within the meaning of Section 8.05 hereof. Section 8.08. Examination of Records. The Depositor and the Servicer shall indicate generally in their respective computer files or other records that the Receivables arising in the Accounts have been conveyed to the Trust pursuant to this Agreement for the benefit of the Beneficiaries. The Depositor and the Servicer shall, prior to the sale or transfer to a third party of any receivable held in its custody, examine its computer and other records to determine that such receivable is not a Receivable. ARTICLE IX EARLY AMORTIZATION EVENTS SECTION 9.01. Early Amortization Events. If any one of the following events shall occur: (a) the Depositor or the Servicer (or the Seller, if it is not the Servicer) shall file a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws or the Depositor or the Servicer (or the Seller, as aforesaid) shall file a petition or answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable Federal or state law, or shall consent to the filing of any such petition, answer or consent; or the Depositor or the Servicer (or the Seller, as aforesaid) shall appoint, or consent to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or the Depositor or the Servicer (or the Seller, as aforesaid) shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; (b) any order for relief against the Depositor or the Servicer (or the Seller, if it is not the Servicer) shall have been entered by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws; or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of the Depositor or the Servicer (or the Seller, as aforesaid) under any other similar applicable Federal or state law; or a decree or order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of the Depositor or the Servicer (or the Seller, as aforesaid) or of any substantial part of its property or for the winding up or liquidation of its affairs, shall have been entered; (c) the occurrence of a Servicer Default; or (d) the Trust or the Depositor shall become an "investment company" within the meaning of the Investment Company Act of 1940, as amended. then, subject to applicable law, and after the applicable grace period, if any, an amortization event (an "Early Amortization Event") shall occur without any notice or other action on the part of the Trustee or any Beneficiary, immediately upon the occurrence of such event. The Trustee shall provide written notice to the Rating Agencies promptly after receipt of written notice of any such event. Section 9.02. Additional Rights Upon the Occurrence of Certain Events. (a) If a Liquidation Event occurs with respect to the Depositor, the Depositor shall on the day such Liquidation Event occurs (the "Appointment Date") immediately cease to transfer Receivables to the Trust and shall promptly give notice to the Trustee of such Liquidation Event. Within fifteen (15) days of the Appointment Date, the Trustee shall (i) publish a notice in an Authorized Newspaper that a Liquidation Event or violation has occurred and that the Trustee intends to sell, dispose of or otherwise liquidate the Receivables on commercially reasonable terms and in a commercially reasonable manner and (ii) give written notice to Certificateholders describing the provisions of this Section 9.02 and requesting instructions from such Holders. Unless the Trustee shall have received instructions within thirty (30) days from the date notice pursuant to clause (ii) above is first given from Certificateholders pursuant to a Consent of Certificateholders, to the effect that such Certificateholders disapprove of the liquidation of the Receivables and wish to continue having Principal Receivables transferred to the Trust as before the occurrence of such Liquidation Event then the Trustee shall promptly sell, dispose of or otherwise liquidate the Receivables, or cause to be sold, disposed of or otherwise liquidated, in a commercially reasonable manner and on commercially reasonable terms, which shall include the solicitation of competitive bids. The Trustee may obtain and conclusively rely upon a prior determination from any applicable conservator, receiver or liquidator that the terms and manner of any proposed sale, disposition or liquidation are commercially reasonable. The provisions of Section 9.01 hereof and this Section 9.02 shall not be deemed to be mutually exclusive. (b) A "Liquidation Event" shall occur if any Early Amortization Event specified in Section 9.01(a), (b) or (d) of this Agreement occurs with respect to the Servicer or the Depositor. (c) The proceeds from the sale, disposition or liquidation of the Receivables pursuant to subsection (a) above (the "Trust Liquidation Proceeds") shall be immediately deposited in the Collection Account. The Trustee shall determine conclusively the amount of the Trust Liquidation Proceeds which are deemed to be Finance Charge Receivables and Principal Receivables. The Trust Liquidation Proceeds shall be allocated and distributed to Certificateholders in accordance with Article IV hereof and the terms of each Supplement, and the Trust shall terminate immediately thereafter. ARTICLE X SERVICER DEFAULTS SECTION 10.01. Servicer Defaults. If any one of the following events (a "Servicer Default") shall occur and be continuing with respect to the Servicer: (a) any failure by the Servicer to make any payment, transfer or deposit, or to give instructions or notice to the Trustee to make such payment, transfer or deposit, or to give notice to the Trustee as to any action to be taken under any Enhancement Agreement, in any case on or before the date occurring two (2) Business Days after receipt of written notice of such failure; (b) failure on the part of the Servicer duly to observe or perform its covenant not to create any lien on any Receivable, which failure has a material adverse effect on the Certificateholders and which continues unremedied for a period of thirty (30) days; provided, however, that a Servicer Default shall not be deemed to have occurred if the Depositor shall have repurchased the affected Receivables or, if applicable, all of the Receivables during such period in accordance with the provisions of this Agreement; (c) failure on the part of the Servicer duly to observe or perform any covenants or agreements of the Servicer set forth in this Agreement, including the delivery of any annual report or certificate pursuant to Sections 3.05 or 3.06 hereof, which failure has a material adverse effect on the Certificateholders and which continues uncured for a period of thirty (30) days (or, upon delivery to the Trustee and to Certificateholders of a Servicer Default Certificate, such longer period as may be reasonably necessary to effect a cure) after the receipt by the Servicer of written notice of such failure; (d) any representation, warranty or certification made by the Servicer in this Agreement or in any certificate delivered pursuant to this Agreement (including any certificates or statements delivered pursuant to the requirements of Section 3.04 and Section 3.05) shall prove to have been materially incorrect when made and which continues to be incorrect in any material respect for a period of thirty (30) days after receipt of written notice thereof and as a result of which the interests of the Certificateholders are materially and adversely affected; provided, however, that a Servicer Default shall not be deemed to have occurred if the Depositor shall have repurchased the affected Receivables or, if applicable, all of the Receivables during such period in accordance with the provisions of this Agreement; or (e) the Servicer shall consent to the appointment of a conservator or receiver or liquidator or other similar official in any bankruptcy, insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to all or substantially all of its property, or a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator or receiver or liquidator or other similar official in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer; or the Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, make any assignment for the benefit of its creditors or voluntarily suspend payment of its obligations (any such event, an "Insolvency Event"). In the event of any Servicer Default, so long as such Servicer Default shall not have been remedied, the Trustee or the Holders pursuant to a Consent of Certificateholders, by notice then given in writing to the Servicer (a Termination Notice), may terminate all but not less than all of the rights and obligations (other than its obligations that have accrued up to the time of such termination) of the Servicer as Servicer under this Agreement and in and to the Receivables and the proceeds thereof. The Trustee shall give prompt written notice of any such event to the Rating Agencies, as well as any waivers or cures of any such event promptly after receipt of written notice thereof. After receipt by the Servicer of a Termination Notice, and on the date that a Successor Servicer shall have been appointed by the Trustee pursuant to Section 10.02 hereof, all authority and power of the Servicer under this Agreement shall pass to and be vested in a Successor Servicer (a "Service Transfer") and, without limitation, the Trustee is hereby authorized and empowered (upon the failure of the Servicer to cooperate) to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments upon the failure of the Servicer to execute or deliver such documents or instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such Service Transfer; provided, however, that in no event shall the Servicer incur any liability for any such action taken by the Trustee. The Servicer agrees to cooperate with the Trustee and such Successor Servicer in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing hereunder, including the transfer to such Successor Servicer of all authority of the Servicer to service the Receivables provided for under this Agreement, including all authority over all Collections which shall on the date of transfer be held by the Servicer for deposit, or which have been deposited by the Servicer, in the Collection Account, or which shall thereafter be received with respect to the Receivables. The Servicer shall promptly transfer its electronic records relating to the Receivables to the Successor Servicer in such electronic form as the Successor Servicer may reasonably request, and shall promptly transfer to the Successor Servicer all other records, correspondence and documents necessary for the continued servicing of the Receivables in the manner and at such times as the Successor Servicer shall reasonably request. Gottschalks, as Servicer also agrees to provide such access, computer time and personnel to the Successor Servicer as shall be necessary in order to assist the Successor Servicer in assuming its duties hereunder. To the extent that compliance with this Section 10.01 shall require the Servicer to disclose to the Successor Servicer information of any kind which the Servicer reasonably deems to be confidential, the Successor Servicer shall be required to enter into such customary licensing and confidentiality agreements as the Servicer shall deem necessary to protect its interest. Notwithstanding the foregoing, a delay in or failure of performance under subsection (a) of this Section 10.01 for a period of up to five (5) Business Days after the applicable grace period, or a delay in or failure of performance (or the continuance of any such delay or failure) under subsection (b), (c) or (d) of this Section 10.01 for a period of up to thirty (30) Business Days (or, upon delivery to the Trustee and Certificateholders of a Servicer Default Certificate, such longer period as is reasonably necessary to effect a cure) shall not constitute a Servicer Default if such delay or failure or continuance was caused by an act of God or the public enemy, acts of declared or undeclared war, public disorder, rebellion or sabotage, epidemics, landslides, lightning, fire, hurricanes, earthquakes, floods or similar causes. The preceding sentence shall not relieve the Servicer of its obligation to use its best efforts to perform its respective obligations in a timely manner in accordance with the terms of this Agreement and the Servicer shall provide the Trustee, any Enhancement Providers and the Depositor with an Officer's Certificate giving prompt notice of such failure or delay by it, together with a description of its efforts so to perform its obligations. The Servicer shall immediately notify the Trustee in writing of any Servicer Default. Section 10.02. Trustee to Act; Appointment of Successor. (a) On and after the receipt by the Servicer of a Termination Notice pursuant to Section 10.01 hereof, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Termination Notice or otherwise specified by the Trustee in writing or, if no such date is specified in such Termination Notice, or otherwise specified by the Trustee, until a date mutually agreed upon by the Servicer and Trustee. The Trustee shall, as promptly as possible after the giving of a Termination Notice, appoint an Eligible Servicer as a successor servicer (the "Successor Servicer"), and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Trustee. In the event that a Successor Servicer has not been appointed or has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Trustee, without further action, shall automatically be appointed the Successor Servicer. The Trustee may delegate any of its servicing obligations to an Affiliate or agent in accordance with Section 3.01 and Section 8.07 hereof. Notwithstanding the above, the Trustee shall, if it is legally unable or unwilling so to act, petition a court of competent jurisdiction to appoint any established institution satisfying the definition of Eligible Servicer as the Successor Servicer hereunder. The Trustee shall immediately give notice to the Rating Agencies, any Enhancement Providers, the Depositor and the Certificateholders upon the appointment of a Successor Servicer. No party serving as Trustee hereunder shall be obligated to serve as Successor Servicer after such party ceases to serve as Trustee hereunder. (b) Upon its appointment, the Successor Servicer shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof and all references in this Agreement to the Servicer shall be deemed to refer to the Successor Servicer; provided, however, that (i) the Successor Servicer shall not be deemed to have assumed any liability for any duties, responsibilities or obligations of any predecessor Servicer, (ii) Section 3.03(c) and (d) hereof shall not apply to any Successor Servicer, and (iii) the Successor Servicer shall not be required to advance funds hereunder or under any Supplement. Any Successor Servicer, by its acceptance of its appointment, will automatically agree to be bound by the terms and provisions of any Enhancement Agreement. (c) In connection with any Termination Notice, the Trustee will review any bids which it obtains from Eligible Servicers and shall be permitted to appoint any Eligible Servicer submitting such a bid as a Successor Servicer for servicing compensation not in excess of the Servicing Fee (provided that if all such bids exceed the Servicing Fee the Depositor, at its own expense, shall pay when due the amount of any compensation in excess of the Servicing Fee provided such excess fee shall have been determined by the Trustee in good faith to be necessary in order to appoint the Successor Servicer); provided, however, that the Depositor shall be responsible for payment of the Depositor's portion of the Servicing Fee as determined pursuant to this Agreement and all other amounts in excess of the aggregate of the Monthly Servicing Fees specified in the Supplements and that no such monthly compensation paid out of Collections shall be in excess of such aggregate of the Monthly Servicing Fees. (d) All authority and power granted to the Successor Servicer under this Agreement shall automatically cease and terminate upon termination of the Trust pursuant to Section 12.01 hereof, and shall pass to and be vested in the Depositor and, without limitation, the Depositor is hereby authorized and empowered to execute and deliver, on behalf of the Successor Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Successor Servicer agrees to cooperate with the Depositor in effecting the termination of the responsibilities and rights of the Successor Servicer to conduct servicing on the Receivables. The Successor Servicer shall transfer its electronic records relating to the Receivables to the Depositor in such electronic form as the Depositor may reasonably request and shall transfer all other records, correspondence and documents to the Depositor in the manner and at such times as the Depositor shall reasonably request. To the extent that compliance with this Section 10.02 shall require the Successor Servicer to disclose to the Depositor information of any kind which the Successor Servicer deems to be confidential, the Depositor shall be required to enter into such customary licensing and confidentiality agreements as the Successor Servicer shall deem necessary to protect its interests. ARTICLE XI THE TRUSTEE SECTION 11.01. Duties of Trustee. (a) The Trustee, prior to the occurrence of any Servicer Default of which a Responsible Officer of the Trustee has actual knowledge and after the curing of all Servicer Defaults which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or duties shall be read into this Agreement against the Trustee. If, to the actual knowledge of a Responsible Officer of the Trustee, a Servicer Default has occurred (and such Servicer Default has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs; provided, however, that if the Trustee shall assume the duties of the Servicer pursuant to Section 8.05 or Section 10.02 hereof, the Trustee, in performing such duties, shall use the degree of skill and attention customarily exercised by a servicer with respect to comparable receivables that it services for itself or others. (b) The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments that are specifically required to be furnished to it pursuant to any provision of this Agreement, shall, subject to Section 11.02, examine each of the foregoing to determine whether they conform substantially to the requirements of this Agreement. (c) Subject to subsection (a) above, no provision of this Agreement shall be construed to relieve the Trustee of liability for its own negligent action, its own negligent failure to act or its own willful misconduct; provided, however, that: (i) the Trustee shall not be personally liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (ii) the Trustee shall not be charged with knowledge of any Servicer Default or the failure by the Servicer to comply with the obligations of the Servicer referred to in subsections (a), (b) and (c) of Section 10.01 hereof unless a Responsible Officer of the Trustee obtains actual knowledge of such failure; (iii) the Trustee shall not be charged with knowledge of an Early Amortization Event unless a Responsible Officer of the Trustee obtains actual knowledge thereof; and (iv) the Trustee shall not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of Certificateholders aggregating more than 66- 2/3% of the Invested Amount of any Series relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee with respect to such Series, or exercising any trust or power conferred upon the Trustee with respect to such Series, under this Agreement. (d) The Trustee shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it, and none of the provisions contained in this Agreement shall, in any event, require the Trustee to perform, or be responsible for the manner of performance of, any obligations of the Servicer under this Agreement except during such time, if any, as the Trustee shall be the successor to, and be vested with the rights, duties, powers and privileges of, the Servicer in accordance with the terms of this Agreement. Notwithstanding the foregoing, the Trustee is entitled to indemnification under Section 7.03 and Section 8.03 hereof while acting as Successor Servicer. (e) Except as expressly provided in this Agreement, the Trustee shall have no power to vary the corpus of the Trust including the power to (i) accept any substitute obligation for a Receivable initially assigned to the Trust under Section 2.01 or Section 2.05 hereof, (ii) add any other investment, obligation or security to the Trust or (iii) withdraw from the Trust any Receivables. (f) If, to the actual knowledge of a Responsible Officer of the Trustee, the Transfer Agent and Registrar shall fail to perform any obligation, duty or agreement in the manner or on the day required to be performed under this Agreement, the Trustee shall be obligated promptly after a Responsible Officer of the Trustee acquires actual knowledge thereof to perform such obligation, duty or agreement in the manner so required. (g) Notwithstanding any other provision contained in this Agreement, the Trustee is not acting as, and shall not be deemed to be, a fiduciary for any Enhancement Provider in its capacity as such or as a Beneficiary, and the Trustee's sole responsibility with respect to said parties shall be to perform those duties with respect to said parties as are specifically set forth herein and no implied duties or obligations shall be read into this Agreement against the Trustee with respect to any such party. Section 11.02. Certain Matters Affecting the Trustee. Except as otherwise provided in Section 11.01 hereof: (a) the Trustee may conclusively rely on and shall be fully protected in acting on, or in refraining from acting in accordance with, any resolution, Officers Certificate, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document believed by it to be genuine and to have been signed or presented to it pursuant to this Agreement by the proper party or parties; (b) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (c) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement or any Enhancement, or to institute, conduct or defend any litigation hereunder or in relation hereto, at the request, order or direction of any of the Certificateholders or any Enhancement Provider, pursuant to the provisions of this Agreement, unless such Certificateholders or Enhancement Providers shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (d) the Trustee shall not be personally liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement or any Enhancement; (e) the Trustee shall not be bound to make any investigation into the facts of matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document; (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian, and the Trustee shall not be responsible for the supervision of or any misconduct or negligence on the part of any such agent, attorney or custodian appointed with due care by it hereunder except when such appointment was made in the capacity of Successor Servicer; (g) except as may be required by Section 11.01(a) hereof, the Trustee shall not be required to make any initial or periodic examination of any documents or records related to the Receivables or the Accounts for the purpose of establishing the presence or absence of defects, the compliance by the Depositor with its representations and warranties or for any other purpose; (h) whenever in the administration of this Agreement the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may in the absence of bad faith on its part, request and conclusively rely upon all Officer's Certificates received by it; and (i) the right of the Trustee to perform any discretionary act enumerated in this Agreement or any Supplement not otherwise required in the performance of its obligations hereunder shall not be construed as a duty, and the Trustee shall not be answerable for performance of any such act. Section 11.03. Trustee Not Liable for Recitals in Certificates. The Trustee assumes no responsibility for the correctness of the recitals contained herein and in the Certificates (other than the certificate of authentication on the Certificates). Except as set forth in Section 11.14 hereof, the Trustee makes no representations as to the validity or sufficiency of this Agreement or of the Certificates (other than the certificate of authentication on the Certificates) or of any Receivable or related document or any security interest of the Trust therein. The Trustee shall not be accountable for the use or application by the Depositor of any of the Certificates or of the proceeds of such Certificates, or for the use or application of any funds paid to the Depositor in respect of the Receivables or deposited in or withdrawn from the Collection Account or any Series Account. The Trustee shall have no responsibility for filing any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or Lien granted to it hereunder (unless the Trustee shall have become the Successor Servicer) or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Supplement. Section 11.04. Trustee May Own Certificates. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Investor Certificates and may deal with the Depositor, the Servicer and any Enhancement Provider with the same rights as it would have if it were not the Trustee. The Trustee in its capacity as Trustee shall exercise its duties and responsibilities hereunder independent of and without reference to its investment, if any, in Certificates. Section 11.05. The Servicer to Pay Trustee's Fees and Expenses. The Servicer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to receive reasonable compensation (which shall not be limited by any provision of law in regard to compensation of a Trustee of an express trust) for all services rendered by the Trustee in the execution of the trust hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and, subject to Section 8.04 hereof, the Servicer will pay or reimburse the Trustee (without reimbursement from any Collection Account or and Series Account) upon its request for all reasonable expenses (including, without limitation, expenses in connection with all notices or other communications to Certificateholders), disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Agreement (including the reasonable fees and expenses of its agents, any co-trustee and counsel) except any such expense, disbursement or advance as may arise from its negligence, willful misconduct, breach of fiduciary duty or bad faith and except as provided in the second following sentence. The Servicer's covenants to pay the expenses, disbursements and advances provided for in the preceding sentence shall survive the termination of this Agreement or the earlier removal or resignation of the Trustee. If the Trustee is appointed Successor Servicer pursuant to Section 10.02 hereof, the provisions of this Section 11.05 shall not apply to expenses, disbursements and advances made or incurred by the Trustee in its capacity as Successor Servicer, which shall be paid with amounts distributed as Servicing Fee or as otherwise agreed upon by the parties hereto in writing. To the extent, if any, that any federal, state or local taxes (including income and franchise taxes) are payable by the Trust, such taxes shall be payable solely out of Trust Assets and not out of the personal assets of the Trustee and the Servicer shall not be obligated to pay the amount of any such tax. Section 11.06. Eligibility Requirements for Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state thereof authorized under such laws to exercise corporate trust powers, which shall be, or shall be directly or indirectly wholly-owned by, an Eligible Institution, and which shall have a combined capital and surplus of at least $100,000,000 and be subject to supervision or examination by Federal or state authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then, for the purpose of this Section 11.06, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 11.06, the Trustee shall resign immediately in the manner and with the effect specified in Section 11.07 hereof. Section 11.07. Resignation or Removal of Trustee. (a) The Trustee may at any time resign and be discharged from the trust hereby created by giving written notice thereof to the Depositor and the Servicer. Upon receiving such notice of resignation, the Depositor shall promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee. (b) If at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 11.06 hereof and shall fail to resign after written request therefor by the Servicer, or if at any time the Trustee shall be legally unable to act, or shall be adjudged a bankrupt or insolvent, or if a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Servicer may with the Consent of Certificateholders (not to be unreasonably withheld), but shall not be required to, remove the Trustee and promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee. (c) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 11.07 shall not become effective until acceptance of appointment by the successor trustee as provided in Section 11.08 hereof. (d) The Trustee shall not be liable for any acts or omissions of any Successor Trustee. Section 11.08. Successor Trustee. (a) Any successor trustee appointed as provided in Section 11.07 hereof shall execute, acknowledge and deliver to the Depositor and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Trustee herein. The predecessor Trustee shall deliver to the successor trustee all documents or copies thereof, at the expense of the Servicer, and statements held by it hereunder; and the Depositor and the predecessor Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully and certainly vesting and confirming in the successor trustee all such rights, power, duties and obligations. The Servicer shall immediately give notice to each Rating Agency and the Certificateholders upon the appointment of a successor trustee. (b) No successor trustee shall accept appointment as provided in this Section 11.08 unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 11.06 hereof and shall have been approved by a Consent of Certificateholders, which consent shall not be unreasonably withheld. (c) Upon acceptance of appointment by a successor trustee as provided in this Section 11.08, such successor trustee shall mail notice of such succession hereunder to all Certificateholders at their addresses as shown in the Certificate Register. Section 11.09. Merger or Consolidation of Trustee. Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such corporation shall be eligible under the provisions of Section 11.06 hereof, anything herein to the contrary notwithstanding. Section 11.10. Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust may at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Certificateholders, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 11.10, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co- trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 11.06 hereof and no notice to Certificateholders of the appointment of any co-trustee or separate trustee shall be required under Section 11.08 hereof. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed (whether as Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article XI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Servicer. (d) Any separate trustee or co-trustee may at any time constitute the Trustee, its agent or attorney-in-fact, with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. Section 11.11. Tax Returns. Notwithstanding Section 3.07 hereof, in the event that the Trust shall be required to file tax returns, the Servicer shall at its expense prepare or cause to be prepared any tax returns required to be filed by the Trust and, to the extent possible, shall remit such returns to the Trustee for signature at least five (5) days before such returns are due to be filed. The Trustee is hereby authorized to sign any such return on behalf of the Trust. The Servicer, in accordance with the terms of any Supplement, shall prepare or shall cause to be prepared all tax information required by law to be distributed to Certificateholders. The Trustee will distribute or cause to be distributed such information to the Certificateholders. The Trustee, upon request, will furnish the Servicer with all such information in the possession of the Trustee as may be reasonably required in connection with the preparation of all tax returns of the Trust and shall, upon request, execute such return. In no event shall the Trustee be liable for any liabilities, costs or expenses of the Trust or the Certificateholders arising under any tax law, including without limitation federal, state, local or foreign income or excise taxes or any other tax imposed on or measured by income (or any interest or penalty or addition with respect thereto or arising from a failure to comply therewith). Section 11.12. Trustee May Enforce Claims Without Possession of Certificates. All rights of action and claims under this Agreement or the Certificates may be prosecuted and enforced by the Trustee without the possession of any of the Certificates or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee. Any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of any Series of Certificateholders in respect of which such judgment has been obtained. Section 11.13. Suits for Enforcement. If a Servicer Default of which a Responsible Officer of the Trustee has actual knowledge shall occur and be continuing, the Trustee, in its discretion may, subject to the provisions of Section 10.01 hereof, proceed to protect and enforce its rights and the rights of any affected Certificateholders under this Agreement by suit, action or proceeding in equity or at law or otherwise, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the execution of any power granted in this Agreement or for the enforcement of any other legal, equitable or other remedy as the Trustee, being advised by counsel, shall deem most effectual to protect and enforce any of the rights of the Trustee or any affected Series of Certificateholders. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Certificateholder any plan of reorganization, arrangement, adjustment or composition affecting the Certificates or the rights of any Holder thereof, or authorize the Trustee to vote in respect of the claim of any Certificateholder in any such proceeding. Section 11.14. Representations and Warranties of Trustee. The Trustee represents and warrants that: (i) the Trustee is a banking corporation organized, existing and in good standing under the laws of the State of New York; (ii) the Trustee has full power, authority and right to execute, deliver and perform this Agreement and each Supplement, and has taken all necessary action to authorize the execution, delivery and performance by it of this Agreement and each Supplement; and (iii) this Agreement and each Supplement has been, or will be, as applicable, duly executed and delivered by the Trustee and constitutes a legal, valid and binding obligation of the Trustee enforceable against the Trustee in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights generally and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity) and the availability of equitable remedies. Section 11.15. Maintenance of Office or Agency. The Trustee will maintain at its expense in The City of New York, an office or offices or agency or agencies where notices and demands to or upon the Trustee in respect of the Certificates and this Agreement may be served. The Trustee initially designates its Corporate Trust Office as its office for such purposes in New York. The Trustee will give prompt written notice to the Servicer and to Certificateholders of any change in the location of the Certificate Register or any such office or agency. Section 11.16. Rights of Trustee Upon the Occurrence of an Early Amortization Event.. Notwithstanding any provision to the contrary herein or in any Series Supplement, upon the occurrence of any Early Amortization Event, in no event shall the Trustee be required to exercise any of its rights or powers on behalf of any or all of the Certificateholders (including, but not limited to, the institution of any legal proceedings or any action in connection therewith), whether or not requested by such Certificateholders, unless the Trustee has first been indemnified to its reasonable satisfaction against all expenses, claims, liabilities, losses, damages or injuries before exercising any such right or power. This Section 11.16 shall not be modified, supplemented or amended without the prior written consent of the Trustee. ARTICLE XII TERMINATION SECTION 12.01. Termination of Trust. The Trust and the respective obligations and responsibilities of the Depositor, the Servicer and the Trustee created hereby (other than the obligation of the Trustee to make payments to Certificateholders as hereafter set forth) shall terminate, except with respect to the duties described in Section 7.03, Section 8.03 and Section 12.02(b) hereof, upon the earlier of (such date the Trust Termination Date), (i) the day following the Distribution Date on which the Invested Amount for all Series and the Exchangeable Amount (as defined in the applicable Supplements) is zero (ii) the time provided in Section 9.02(c) hereof, and (iii) twenty one (21) years less one day after the death of the last survivor of any of the descendants living on the date hereof of Joseph P. Kennedy, father of John Fitzgerald Kennedy. The Servicer shall give the Rating Agencies prompt notice of the termination of the Trust. Section 12.02. Final Distribution. (a) The Servicer shall give the Trustee at least thirty (30) days prior notice of the Distribution Date on which the respective Certificateholders of any Series or Class or the holder of the Exchangeable Certificate may surrender their respective Certificates for payment of the final distribution on and cancellation of such Certificates (or, in the event of a final distribution resulting from the application of Section 2.03 or Section 9.01 hereof, notice of such Distribution Date promptly after the Servicer has determined that a final distribution will occur, if such determination is made less than thirty (30) days prior to such Distribution Date). Such notice shall be accompanied by an Officer's Certificate setting forth the information specified in Section 3.05 hereof covering the period during the then-current calendar year through the date of such notice. Except as otherwise provided in any Supplement, not later than the fifth day of the month in which the final distribution in respect of such Series or Class or Exchangeable Certificate is payable to Certificateholders or the holder of the Exchangeable Certificate, as applicable, the Trustee shall provide notice to the respective Certificateholders specifying (i) the date upon which final payment thereof will be made upon presentation and surrender of the related Certificates at the office or offices therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such payment date is not applicable, payments being made only upon presentation and surrender of the related Certificates at the office or offices therein specified. The Trustee shall give such notice to the Transfer Agent and Registrar and the Rating Agencies at the time such notice is given to the respective Certificateholders. (b) Notwithstanding a final distribution to the Certificateholders of any Series or Class or the holder of the Exchangeable Certificate (or the termination of the Trust), except as otherwise provided in this subsection (b) and in any Supplement, all funds then on deposit in the Collection Account and any Series Account allocated to such Certificateholders or the Holder of the Exchangeable Certificate shall continue to be held in trust for the benefit of such Certificateholders or the Holder of the Exchangeable Certificate, as applicable, and the Trustee shall pay such funds to such Certificateholders upon surrender of the related Certificates (and any excess shall be paid in accordance with the terms of any Enhancement Agreement). Except as provided in any Supplement, in the event that all such Certificateholders shall not surrender their Certificates for cancellation within six months after the date specified in the notice from the Trustee described in subsection (a) above, the Trustee shall give a second notice to the remaining such Certificateholders to surrender their Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all such Certificates shall not have been surrendered for cancellation, the Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining such Certificateholders concerning surrender of their Certificates, and the cost thereof shall be paid out of the funds in the Collection Account or, if applicable, any Series Account held for the benefit of such Certificateholders. The Trustee shall pay to the Depositor any monies held by it for the payment of principal or interest that remain unclaimed for two years. After payment to the Depositor, Certificateholders entitled to the money must look to the Depositor for payment as general creditors unless an applicable abandoned property law designates another Person. (c) In the event that (i) the Invested Amount with respect to any Series is greater than zero on its Termination Date or (ii) the Exchangeable Amount is greater than zero on the Termination Date with respect to the Exchangeable Certificate, in each case after giving effect to deposits and distributions otherwise to be made on such Termination Date, the Trustee will use its best efforts to sell or cause to be sold on such Termination Date Receivables (or interests therein) in an amount equal to the interest in the Pool Balance represented by such Certificates. The net proceeds (the Termination Proceeds) from such sale shall be immediately deposited into the Collection Account for the benefit of the Certificateholders of such Series and the holder of the Exchangeable Certificate and Subordinated Certificate, as applicable. The Termination Proceeds shall be allocated and distributed to the Holders of Investor Certificates of such Series and the holder of the Exchangeable Certificate, as applicable, in accordance with the terms of the applicable Supplement. Section 12.03. Depositor's Termination Rights. Upon termination of the Trust pursuant to Section 12.01 hereof and the surrender of the Exchangeable Certificate, the Trustee shall transfer, assign and convey to the Depositor or its designee, without recourse, representation or warranty, all right, title and interest of the Trust in the Receivables, whether then existing or thereafter created, all monies due or to become due and all amounts received with respect thereto and all proceeds thereof, except for amounts held by the Trustee pursuant to Section 12.02(b) hereof, and all of the Depositor's rights, remedies, powers and privileges with respect to such Receivables under the Receivables Purchase Agreement. The Trustee shall execute and deliver such instruments of transfer and assignment, in each case without recourse, as shall be reasonably requested by the Depositor to vest in the Depositor or its designee all right, title and interest that the Trust had in all such property. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Amendment. (a) This Agreement or any Supplement may be amended from time to time by the Servicer, the Depositor, the Trustee and (if the Seller is not the Servicer) the Seller, upon satisfaction of the Rating Agency Condition, without the consent of any of the Certificateholders: (i) to add to the covenants of the Depositor for the benefit of the Certificateholders, or to surrender any right or power herein conferred upon the Depositor; or (ii) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or in the Certificates provided, that such action shall not, as evidenced by an Opinion of Counsel for the Depositor, addressed and delivered to the Trustee, adversely affect in any material respect the interests of any Certificateholder or the Holder of the Exchangeable Certificate. Notwithstanding anything contained herein to the contrary, the Trustee may at any time and from time to time amend, modify or supplement the form of Distribution Date Statement. (b) This Agreement or any Supplement may also be amended from time to time by the Servicer, the Depositor and the Trustee, upon satisfaction of the Rating Agency Condition, with the consent of (i) the Holder of the Exchangeable Certificate, if it would be adversely affected by such amendment, and (ii) the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of each adversely affected Series, for the purpose of adding any provisions to or changing in any manner or eliminating or waiving any of the provisions of this Agreement or any Supplement or of modifying in any manner the rights of the Certificateholders; provided, however, that no such amendment shall: (i) reduce in any manner the amount or delay the timing of any distributions to be made to Certificateholders or deposits of amounts to be so distributed; (ii) change the definition or the manner of calculating the interest of any Certificateholder without the consent of each affected Certificateholder; (iii) reduce the amount available under any Enhancement without the consent of each affected Certificateholder; (iv) reduce the aforesaid percentage required to consent to any such amendment without the consent of each affected Certificateholder; or (v) adversely affect the rating of any Series or Class by any Rating Agency without the consent of the Holders of Investor Certificates of such Series or Class evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of such Series or Class. Any amendment to be effected pursuant to this subsection (b) shall be deemed to adversely affect all outstanding Series, other than any Series with respect to which such action shall not, as evidenced by an Opinion of Counsel for the Depositor, addressed and delivered to the Trustee, adversely affect in any material respect the interests of any Holder of Investor Certificates of such Series. The Trustee may, but shall not be obligated to, enter into any such amendment which affects the Trustee's rights, duties or immunities under this Agreement or otherwise. (c) Promptly after the execution of any such amendment or consent, the Trustee shall furnish notification of the substance of such amendment to each Certificateholder and the Servicer shall furnish notification of the substance of such amendment to each Rating Agency and each Enhancement Provider. (d) It shall not be necessary for the consent of Certificateholders under this Section 13.01 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by the Certificateholders shall be subject to such reasonable requirements as the Trustee may prescribe. (e) Notwithstanding anything in this Section 13.01 to the contrary, no amendment may be made to this Agreement or any Supplement that would adversely affect in any material respect the interests of any Enhancement Provider without the consent of such Enhancement Provider. (f) Notwithstanding the foregoing, and subject to clause (c) above, any amendment may be made without satisfaction of the Rating Agency Condition with the Consent of Certificateholders of each affected Series if the notice proposing such amendment specifies that the Rating Agency Condition will not be satisfied and that the rating of the affected Series may be downgraded or withdrawn as a result thereof. (g) Any Supplement executed in accordance with the provisions of Section 6.03 hereof shall not be considered an amendment to this Agreement for the purposes of this Section 13.01. Section 13.02. Protection of Right, Title and Interest to Trust. (a) The Servicer shall cause this Agreement, all amendments hereto and/or all financing statements and continuation statements and any other necessary documents covering the Certificateholders and the Trustee's right, title, and interest in and to the Trust to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Certificateholders and the Trustee hereunder to all property comprising the Trust. The Servicer shall deliver to the Trustee file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. The Depositor shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this Section 13.02(a). (b) Within thirty (30) days after the Depositor or the Servicer makes any change in its name, identity or corporate structure that would make any financial statement or continuation statement filed in accordance with subsection (a) of this Section 13.02 seriously misleading within the meaning of Section 9-402(7) of the UCC as in effect in California, the Depositor shall give the Trustee notice of any such change and shall file such financing statements or amendments as may be necessary to continue the perfection of the Trust's security interest in the Receivables and the proceeds thereof. (c) The Depositor and the Servicer shall give the Trustee prompt written notice of any relocation of any office from which it services Receivables or keeps records concerning the Receivables or of its principal executive office and whether, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement and shall file such financing statements or amendments as may be necessary to perfect or to continue the perfection of the Trust's ownership interest or security interest in the Receivables and the proceeds thereof. The Depositor and the Servicer shall at all times maintain each office from which it services Receivables and its principal executive office within the United States of America. (d) The Servicer shall deliver to the Trustee and any Enhancement Provider, upon the execution and delivery of each amendment of this Agreement or any Supplement, an Opinion of Counsel to the effect that such amendment was duly authorized, executed and delivered in compliance with Section 13.01. Section 13.03. Limitation on Rights of Certificateholders. (a) The death or incapacity of any Certificateholder shall not operate to terminate this Agreement or the Trust, nor shall such death or incapacity entitle such Certificateholders' legal representatives or heirs to claim an accounting or to take any action or commence any proceeding in any court for a partition or winding-up of the Trust, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. (b) No Certificateholder shall have any right to vote (except as expressly provided in this Agreement) or in any manner otherwise control the operation and management of the Trust, or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Certificates, be construed so as to constitute the Certificateholders from time to time as partners or members of an association, nor shall any Certificateholder be under any liability to any third person by reason of any action taken by the parties to this Agreement pursuant to any provision hereof. (c) No Holder of Investor Certificates shall have any right by virtue of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of all Investor Certificates (or, with respect to any such action, suit or proceeding that does not relate to all Series, 50% of the aggregate unpaid principal amount of the Investor Certificates of all Series to which such action, suit or proceeding relates) shall have made a request to the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as the Trustee may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for sixty (60) days after such request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding. No Holder of an Exchangeable Certificate shall have any right by virtue of any provisions of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder may be adversely affected but for the institution of any such suit, action or proceeding and shall have made a request to the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as the Trustee may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for sixty (60) days after such request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding. It is understood and intended, and expressly covenanted by each Certificateholder with every other Certificateholder and the Trustee, that no one or more Certificateholders shall have any right in any manner whatever by virtue or by availing itself or themselves of any provisions of this Agreement to affect, disturb or prejudice the rights of the holders of any other of the Certificates, or to obtain or seek to obtain priority over or preference to any other such Certificateholder, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Certificateholders except as otherwise expressly provided in this Agreement. For the protection and enforcement of the provisions of this Section 13.03, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or inequity. Section 13.04. No Petition. The Servicer, the Seller (if it is no longer the Servicer) and the Trustee, by entering into this Agreement, each Holder of Investor Certificates, by accepting an Investor Certificate, the holder of the Exchangeable Certificate, by accepting the Exchangeable Certificate or the pledge of the Exchangeable Certificate, as the case may be, and any Successor Servicer and each other Beneficiary, by accepting the benefits of this Agreement, hereby covenants and agrees that they will not at any time institute or join in instituting against the Depositor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or similar law. Section 13.05. Governing Law. This agreement shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 13.06. Notices. (a) All demands, notices, instructions, directions and communications (collectively, Notices) under this Agreement shall be in writing (including telegraphic, telecopy, telex or cable communications) and shall be deemed to have been duly given if personally delivered or mailed by registered mail, return receipt requested, or telegraphed, telecopied, telexed, cabled or delivered, to: (i) in the case of Depositor, 7 River Park Place East, Fresno, California 93720, Attention: Warren Williams, Esq., facsimile number (559) 434-4804; (ii) in the case of the Servicer, 7 River Park Place East, Fresno, California 93720, Attention: Michael S. Geele, facsimile number (559) 434-4804; and (iii) in the case of the Trustee, Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention: Corporate Trust & Agency Group, Structured Finance Team, facsimile number (212) 250-6439; or as to each party, at such other address as shall be designated by such party in a written notice to each other party. (b) Any Notice required or permitted to be given to a Certificateholder shall be given by first-class mail, postage prepaid, at the address of such Certificateholder as shown in the Certificate Register. Any Notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Certificateholder receives such Notice. (c) The Trustee shall provide written notice to the Rating Agencies of the events listed in Section 2.04(b), 2.05(m) and (n), 3.03(b), 9.01(e), 10.01(a) and 10.01(e) promptly upon receipt by a Responsible Officer of the Trustee of written notice of the occurrence of such events. Section 13.07. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the certificates or rights of the Certificateholders. Section 13.08. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Section 8.04 hereof, this Agreement may not be assigned by the Servicer. Section 13.09. Certificates Nonassessable and Fully Paid. It is the intention of the parties to this Agreement that no Certificateholder shall be personally liable for obligations of the Trust, that the interests in the Trust represented by the Investor Certificates and the Exchangeable Certificate shall be nonassessable for any losses or expenses of the Trust or for any reason whatsoever and that Investor Certificates and the Exchangeable Certificate upon authentication thereof by the Trustee are and shall be deemed fully paid. Section 13.10. Further Assurances. Each of the Depositor, the Servicer and the Trustee agrees to do and perform, from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by one or more of the other parties hereto more fully to effect the purposes of this Agreement, including the execution of any financing statements or continuation statements relating to the Receivables for filing under the provisions of the UCC of any applicable jurisdiction. Section 13.11. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Trustee, the Certificateholders, the Depositor or the Servicer, as the case may be, any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided under this Agreement are cumulative and not exhaustive of any rights, remedies, powers and privileges provided by law. Section 13.12. Counterparts. This Agreement may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. Section 13.13. Third-Party Beneficiaries. This Agreement will inure to the benefit of and be binding upon the parties hereto, the Certificateholders and the other Beneficiaries and their respective successors and permitted assigns. Except as otherwise expressly provided in this Agreement, no other Person will have any right or obligation hereunder. Section 13.14. Actions by Certificateholders. Any request, demand, authorization, direction, notice, consent, waiver or other act by a Certificateholder shall bind such Certificateholder and every subsequent Holder of any Certificate issued upon the registration of transfer of the Certificates of such Certificateholder or in exchange therefor or in lieu thereof in respect of anything done or omitted to be done by the Trustee or the Servicer in reliance thereof, whether or not notation of such action is made upon any such Certificate. Section 13.15. Rule 144A Information. For so long as any of the Investor Certificates of any Series or Class are restricted securities within the meaning of Rule 144(a)(3) under the 1933 Act, each of the Depositor, the Trustee, the Servicer and any Enhancement Providers agree to cooperate with each other to provide to any Certificateholders of such Series or Class and to any prospective purchaser of Investor Certificates designated by such Certificateholder, upon the request of such Certificateholder or prospective purchaser, any information required to be provided to such holder or prospective purchaser to satisfy the condition set forth in Rule 144A(d))4) under the 1933 Act. Section 13.16. Merger and Integration. Except as specifically stated otherwise herein, this Agreement, the Supplements and the Receivables Purchase Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and all prior understandings, written or oral, are superseded by this Agreement. This Agreement may not be modified, amended, waived, or supplemented except as provided herein. Section 13.17. Headings. The headings herein are for purposes of reference only and shall not otherwise affect the meaning or interpretation or any provision hereof. IN WITNESS WHEREOF, the Depositor, the Servicer and the Trustee have caused this Pooling and Servicing Agreement to be duly executed by their respective officers as of the day and year first above written. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, Depositor By: \s\ Michael Geele Title: President GOTTSCHALKS INC., Servicer By: \s\ Jim Famalette Title: President BANKERS TRUST COMPANY, Trustee By: \s\ Lillian Perros Title: Vice President EXHIBIT A FORM OF EXCHANGEABLE CERTIFICATE THIS CERTIFICATE MAY NOT BE ACQUIRED OR HELD BY OR FOR THE ACCOUNT OF AN ERISA PLAN (AS DEFINED BELOW). THE GOTTSCHALKS CREDIT CARD MASTER TRUST HAS NOT BEEN REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THE TRANSFER, ASSIGNMENT, EXCHANGE, PLEDGE OR OTHER CONVEYANCE OF THIS CERTIFICATE IS NOT PERMITTED EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT UNDER WHICH THIS CERTIFICATE IS ISSUED (COPIES OF WHICH ARE AVAILABLE FROM THE TRUSTEE UPON REQUEST). ANY TRANSFEREE OF THIS CERTIFICATE IS DEEMED AS OF THE DATE OF SUCH TRANSFER TO MAKE CERTAIN REPRESENTATIONS RELATING TO ERISA AND OTHER MATTERS. GOTTSCHALKS CREDIT CARD MASTER TRUST EXCHANGEABLE CERTIFICATE This certifies that GOTTSCHALKS CREDIT RECEIVABLES CORPORATION (the "Exchangeable Certificateholder") is the registered owner of a fractional undivided interest not allocated to the Investors' Interest or the interest of the Holders of the Subordinated Certificates, if any, in certain assets of a trust (the "Trust") created pursuant to the Pooling and Servicing Agreement, dated as of ________ __, 1999 (the "Pooling and Servicing Agreement"), as amended, supplemented or otherwise modified from time to time, among Gottschalks Credit Receivables Corporation, as depositor (the "Depositor"), Gottschalks Inc., as servicer (the "Servicer"), and Bankers Trust Company, as trustee (the "Trustee"). Capitalized terms used but not otherwise defined herein shall have the respective meanings provided for such terms in the Pooling and Servicing Agreement. The corpus of the Trust includes (i) all Receivables sold, transferred, assigned, set over and otherwise conveyed to the Trust pursuant to Section 2.01 of the Pooling and Servicing Agreement, (ii) all monies due or to become due and all amount received with respect thereto and all proceeds thereof (including "proceeds", as defined in Section 9- 306 of the UCC as in effect in the State of California, and Recoveries), (iii) all monies on deposit in, and Eligible Investments credited to, the Collection Account or any Series Account and (iv) all monies as are from time to time available under any Enhancements. This Certificate is issued under and subject to the terms, provisions and conditions of the Pooling and Servicing Agreement. By acceptance hereof, the Exchangeable Certificateholder assents to and is bound by the terms, provisions and conditions of the Pooling and Servicing Agreement, as such may be amended, supplemented or otherwise modified from time to time. This Certificate does not purport to summarize the Pooling and Servicing Agreement and reference is made to the Pooling and Servicing Agreement for information with respect to the interests, rights, benefits, obligations, proceeds and duties evidenced hereby and the rights, duties and obligations of the Trustee. A copy of the Pooling and Servicing Agreement (without schedules) may be requested from the Trustee by writing to the Trustee at Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention: Corporate Trust & Agency Group, Structured Finance Team. The transfer of this Certificate shall be registered in the Certificate Register upon surrender of this Certificate for registration of transfer at any office or agency maintained by the Transfer Agent and Registrar accompanied by a written instrument of transfer, in a form satisfactory to the Trustee or the Transfer Agent and Registrar, duly executed by the Exchangeable Certificateholder or such Exchangeable Certificateholder's attorney-in-fact, and duly authorized in writing with such signature guaranteed, and thereupon one or more new Exchangeable Certificates in authorized denominations of like aggregate amount will be issued to the designated transferee or transferees. The Pooling and Servicing Agreement and the Series Supplement may be amended from time to time, in certain circumstances, by the Servicer, the Depositor, the Trustee and (if the Seller is not the Servicer) the Seller without the consent of any of the Certificateholders. The Pooling and Servicing Agreement and the Series Supplement may also be amended from time to time by the Servicer, the Depositor and the Trustee, with the consent of (i) the Holder of the Exchangeable Certificate, if it would be adversely affected by such amendment, and (ii) the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of all adversely affected Series, for the purpose of adding any provisions to or changing in any manner or eliminating or waiving any of the provisions of the Pooling and Servicing Agreement or any Supplement or of modifying in any manner the rights of the Certificateholders. Any such amendment and any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued in exchange hereof or in lieu hereof whether or not notation thereof is made upon this Certificate. This Certificate may not be acquired or held by or for the account of any employee benefit plan or individual retirement account subject to Title I of ERISA or Section 4975 of the Internal Revenue Code, or any trust established under any such employee benefit plan or individual retirement account (or established to hold the assets thereof), or any "governmental plan" (as defined in section 3(32) of ERISA or Section 414(d) of the Internal Revenue Code) organized in a jurisdiction having prohibitions on transactions with such governmental plan similar to those contained in Section 406 of ERISA or Section 4975 of the Internal Revenue Code (each such employee benefit plan, individual retirement account and trust, an "ERISA Plan"). No part of the funds used by any Person to acquire or hold this Certificate may constitute assets (within the meaning of ERISA and any applicable rules and regulations) of an ERISA Plan. By accepting and holding this Certificate, the Holder hereof shall be deemed to have represented and warranted that it is not an ERISA Plan and that this Certificate was not acquired with the assets of an ERISA Plan. THIS CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the Depositor has caused this Certificate to be duly executed. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Depositor Name: \s\ Michael Geele Title: President CERTIFICATE OF AUTHENTICATION This is the Gottschalks Credit Card Master Trust Exchangeable Certificate referred to in the Pooling and Servicing Agreement. BANKERS TRUST COMPANY, not in its individual capacity, but solely in its capacity as Trustee Name: \s\ Lillian Perros Title: Vice President Dated: EXHIBIT B [RESERVED] EXHIBIT C OFFICER'S CERTIFICATE GOTTSCHALKS INC. Officer's Certificate We, the undersigned, each duly authorized officers of Gottschalks Inc., a Delaware corporation (the "Servicer"), DO HEREBY CERTIFY that: 1. This certificate is furnished pursuant to Section 3.05 of the Pooling and Servicing Agreement, dated as of even date herewith (the "Pooling and Servicing Agreement"), among Gottschalks Credit Receivables Corporation, a Delaware corporation, as depositor, the Servicer, and Bankers Trust Company, a New York banking corporation, as trustee. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Pooling and Servicing Agreement. 2. The Servicer is, as of the date hereof, the servicer under the Pooling and Servicing Agreement. 3. The undersigned are duly authorized by the Servicer to execute and deliver this Certificate to the Trustee. 4. A review of the activities of the Servicer during the calendar year ended December __, 200_ and of its performance under the Pooling and Servicing Agreement was conducted under our supervision. 5. Based on such review, the Servicer has, to the best of our knowledge, performed in all material respects its obligations under the Pooling and Servicing Agreement and there has been no default in the performance of any such obligations [except as set forth in paragraph 6 below]. 6. [The following is a description of each default in the performance of the Servicer's obligations under the provisions of the Pooling and Servicing Agreement known to us to have been made by the Servicer during the calendar year ended December __, 200_, which sets forth in detail the (i) nature of each such default, (ii) the action taken by the Servicer, if any, to remedy each such default and (iii) the current status of each default.] IN WITNESS WHEREOF, the undersigned have hereunto set their hands this ____ day of ______________, ____. Name:\s\ Michael Geele Title: Executive VP/CFO EXHIBIT E FORM OF REASSIGNMENT REASSIGNMENT No. ____ OF RECEIVABLES, dated as of ____________, ___ (this "Reassignment"), among GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, a Delaware corporation (the "Depositor"), GOTTSCHALKS INC., a Delaware corporation (the "Servicer"), and BANKERS TRUST COMPANY, a New York banking corporation, not in its individual capacity, but solely in its capacity as trustee (the "Trustee"). Capitalized terms used but not otherwise defined herein shall have the respective meanings provided for such terms in the Pooling and Servicing Agreement. W I T N E S S E T H: WHEREAS, the Depositor, the Servicer and the Trustee are parties to the Pooling and Servicing Agreement, dated as of ________ __, 1999 (the "Pooling and Servicing Agreement"); WHEREAS, pursuant to the Pooling and Servicing Agreement, the Depositor desires to remove all Receivables arising in certain designated Accounts (the "Removed Accounts") from the Trust and to cause the Trustee to reconvey the Receivables arising in such Removed Accounts, whether now existing or hereafter created, from the Trust to the Depositor; and WHEREAS, the Trustee is willing to accept such designation and to reconvey the Receivables arising in the Removed Accounts subject to the terms and conditions hereof; NOW, THEREFORE, the Depositor, the Servicer and the Trustee hereby agree as follows: 1. Designation of Removed Accounts. Attached hereto as Exhibit 1 is a true and complete list of all Removed Accounts specifying for each such Removed Account, as of the Removal Notice Date, its account number, the aggregate amount of Receivables outstanding in such Removed Account and the aggregate amount of Principal Receivables in such Removed Account. 2. Conveyance of Receivables. The Trustee does hereby sell, transfer, assign, set over and otherwise convey, without recourse or warranty of any kind whatsoever, to the Depositor, all of the Trust's right, title and interest in, to and under the Receivables owned by the Trust at the close of business on the Removal Date now existing and hereafter created in the Removed Accounts, all monies due or to become due and all amounts received with respect thereto and all proceeds thereof (including "proceeds", as defined in Section 9306 of the UCC as in effect in the State of California, and Recoveries). 3. Representations and Warranties of the Depositor. The Depositor hereby represents and warrants to the Trustee, on behalf of the Trust, as of the date of this Reassignment and as of the Removal Date, that: (a) the Depositor believes that the process used to select the Removed Accounts listed on Schedule 1 hereto (x) is not materially adverse to the interests of the Certificateholders, and (y) was conducted on a random basis; (b) the Depositor reasonably believes that the removal of the Removed Account from the Trust will not result in the occurrence of an Early Amortization Event; (c) after giving effect to the removal of Removed Accounts, the Series Pool Balance shall not be less than 5% in excess of the sum of the Required Series Pool Balance and the Required Exchangeable Certificate Amount; and (d) after giving effect to the proposed action, there will be no material adverse change in the average yield on the Pool Balance, average age of Accounts remaining within the Pool or the rate of delinquencies experienced by the Pool, in each case as a result of the proposed action. 4. Governing Law. THIS REASSIGNMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICTS OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. IN WITNESS WHEREOF, the undersigned have caused this Reassignment to be duly executed and delivered by their respective duly authorized officers on the day and year first above written. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Depositor Name: \s\ Michael Geele Title: President GOTTSCHALKS INC., as Servicer Name: \s\ Jim Famalette Title: President BANKERS TRUST COMPANY, not in its individual capacity, but solely in its capacity as Trustee Name: \s\ Lillian Perros Title: Vice President EXHIBIT F OFFICER'S CERTIFICATE GOTTSCHALKS CREDIT RECEIVABLES CORPORATION I, the undersigned, _______________ of Gottschalks Credit Receivables Corporation, a Delaware corporation (the "Company"), DO HEREBY CERTIFY that: 1. This certificate is furnished pursuant to Section 2.08(d)(ii) of the Pooling and Servicing Agreement, dated as of March 1, 1999 (the "Pooling and Servicing Agreement"), among the Company, as depositor, Gottschalks Inc., a Delaware corporation, as servicer and Bankers Trust Company, a New York banking corporation, as trustee. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Pooling and Servicing Agreement. 2. The process used to select the Supplemental Accounts listed in the notice, dated ________ __, ____, delivered pursuant to Section 2.08(d) of the Pooling and Servicing Agreement, (x) is not materially adverse to the interests of the Certificateholders, and (y) was conducted on a random basis. IN WITNESS WHEREOF, I have hereunto set my hand this __ day of ____________, ____. Name: Title: EXHIBIT G OFFICER'S CERTIFICATE GOTTSCHALKS CREDIT RECEIVABLES CORPORATION I, the undersigned, _______________ of Gottschalks Credit Receivables Corporation, a Delaware corporation (the "Company"), DO HEREBY CERTIFY that: 1. This certificate is furnished pursuant to Section 2.06(b)(ii) of the Pooling and Servicing Agreement, dated as of ________ __, 1999 (the "Pooling and Servicing Agreement"), among the Company, as depositor, Gottschalks Inc., a Delaware corporation, as servicer and Bankers Trust Company, a New York banking corporation, as trustee. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Pooling and Servicing Agreement. 2. After giving effect to the removal of Removed Accounts, the Series Pool Balance shall not be less than 5% in excess of the sum of the Required Series Pool Balance and the Required Exchangeable Certificate Amount. 3. The process used to select the Removed Accounts listed in the notice, dated ________ __, ____, delivered pursuant to Section 2.06(b)(ii) of the Pooling and Servicing Agreement (x) is not materially adverse to the interests of the Certificateholders, and (y) was conducted on a random basis. 4. The Company reasonably believes that the removal of the Removed Account from the Trust will not result in the occurrence of an Early Amortization Event. 5. After giving effect to the proposed action, there will be no material adverse change in the average yield on the Pool Balance, average age of Accounts remaining within the Pool or the rate of delinquencies experienced by the Pool, in each case as a result of the proposed action. IN WITNESS WHEREOF, I have hereunto set my hand this __ day of ____________, ____. Name: Title: EXHIBIT H FORM OF REPRESENTATION LETTER [date] Gottschalks Credit Receivables Corporation 7 River Place East Fresno, California 93729 Bankers Trust Company as Trustee Four Albany Street New York, New York 10006 Gentlemen: Reference is made to that certain [describe purchase agreement or assignment] (the "Certificate Purchase Agreement") between [name of transferor] ("Transferor") and [name of transferee] ("Transferee") pursuant to which Transferee, upon the terms and conditions set therein set forth, purchased a [ %] Fixed Base Certificate, Series 1999- 1, in the original face amount of $[amount] (the "Trust Certificate"). Capitalized terms used herein and not defined have the meaning given in that certain Pooling and Servicing Agreement, dated as of March 1_, 1999, among Gottschalks Credit Receivables Corporation ("Depositor"), Gottschalks Inc. ("Service") and Bankers Trust Company ("Trustee") as amended and modified through the date hereof. In connection with such purchase, Transferee represents and warrants that (i) it is acquiring its Trust Certificate solely for its own account (or for accounts as to which to exercise investment discretion) for the purpose of investment only and not with a view to distribution in violation of the Securities Act of 1933 (the "Act"), and will not sell or otherwise transfer such Trust Certificate in the absence of registration under the Act or an exemption therefrom, provided that the disposition of its property shall at all time be and remain within its control and (ii) it is a corporation, partnership or other entity having such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in its Trust Certificate and it is (or any account for which it is purchasing referred to in (i) above is) an institutional accredited investor within the meaning of Rule 501 of the Act able to bear the economic risk of investment in its Trust Certificate, including a complete loss, while maintaining adequate means of providing for its current needs and foreseeable contingencies. Sincerely yours, [name of transferee] By: Name: Title: EXHIBIT H-1 FORM OF SECURITIES ACT LEGEND THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT AND THE SERIES ______ SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT UNDER WHICH THIS CERTIFICATE IS ISSUED (COPIES OF WHICH ARE AVAILABLE FROM THE TRUSTEE UPON REQUEST). EXHIBIT H-2 FORM OF ERISA LEGEND THIS CERTIFICATE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION IN RELIANCE ON EXEMPTIONS PROVIDED BY THE SECURITIES ACT AND SUCH STATE OR FOREIGN SECURITIES LAWS. THE CERTIFICATES ARE ELIGIBLE FOR PURCHASE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT. NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS SUCH RESALE OR TRANSFER (A) IS MADE IN ACCORDANCE WITH SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN AND (B) IS MADE EITHER (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (ii) IN A TRANSACTION (OTHER THAN A TRANSACTION IN CLAUSE (iv) BELOW) EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE AND FOREIGN SECURITIES LAWS, (iii) TO GOTTSCHALKS CREDIT RECEIVABLES CORPORATION (THE "DEPOSITOR") OR (iv) TO A PERSON WHO THE TRANSFEROR OF THIS CERTIFICATE REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT THAT IS AWARE THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR TO AN INSTITUTIONAL "ACCREDITED INVESTOR" UNDER RULE 501(a)(1),(2),(3) OR (7) UNDER THE SECURITIES ACT. IN THE EVENT THAT THE TRANSFER OF A CERTIFICATE IS TO BE MADE AS DESCRIBED IN CLAUSE (ii) OF THE PRECEDING SENTENCE, THE PROSPECTIVE INVESTOR IS REQUIRED TO DELIVER AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE AND THE DEPOSITOR TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE OR FOREIGN SECURITIES LAWS. THE PROSPECTIVE TRANSFEREE IN A TRANSFER OF A CERTIFICATE TO BE MADE AS DESCRIBED IN CLAUSES (ii) AND (iv) ABOVE MUST DELIVER TO THE TRUSTEE A REPRESENTATION LETTER REQUIRED BY SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. PROSPECTIVE PURCHASERS OF THE CERTIFICATES ARE HEREBY NOTIFIED THAT THE SELLER OF ANY CERTIFICATES MAY BE RELYING ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE ACT PROVIDED BY RULE 144A UNDER THE ACT. THIS CERTIFICATE OR A BENEFICIAL INTEREST HEREIN MAY NOT BE TRANSFERRED UNLESS THE TRUSTEE HAS RECEIVED (I) A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), OR A GOVERNMENTAL PLAN DEFINED IN SECTION 3(32) OF ERISA OR SECTION 414(d) OF THE CODE, SUBJECT TO ANY FEDERAL STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE ("SIMILAR LAW") (EACH, A "BENEFIT PLAN") AND IS NOT AN ENTITY INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR AN INSURANCE COMPANY GENERAL ACCOUNT IF THE ASSETS IN ANY SUCH ACCOUNTS CONSTITUTE "PLAN ASSETS" FOR PURPOSES OF REGULATION SECTION 2510.3-101 OF ERISA, WHOSE UNDERLYING ASSETS INCLUDE BENEFIT PLAN ASSETS BY REASON OF A BENEFIT PLAN'S INVESTMENT IN THE ENTITY (SUCH BENEFIT PLAN OR ENTITY, A "BENEFIT PLAN INVESTOR") AND (II) A CERTIFICATE TO THE EFFECT THAT IF THE TRANSFEREE IS A PARTNERSHIP, GRANTOR TRUST OR S CORPORATION FOR FEDERAL INCOME TAX PURPOSES (A "FLOW-THROUGH ENTITY"), ANY CERTIFICATES OWNED BY SUCH FLOW-THROUGH ENTITY WILL REPRESENT LESS THAN 50% OF THE VALUE OF ALL THE ASSETS OWNED BY SUCH FLOW-THROUGH ENTITY AND NO SPECIAL ALLOCATION OF INCOME, GAIN, LOSS, DEDUCTION OR CREDIT FROM SUCH CERTIFICATES WILL BE MADE AMONG THE BENEFICIAL OWNERS OF SUCH FLOW-THROUGH ENTITY. IN ADDITION, NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE PERMITTED UNLESS IMMEDIATELY AFTER GIVING EFFECT TO SUCH RESALE OR OTHER TRANSFER, THERE WOULD BE FEWER THAN 100 CERTIFICATEHOLDERS. EXHIBIT J RECEIVABLES PURCHASE AGREEMENT EXHIBIT K FORM OF DEPOSIT ACCOUNT AGREEMENT ________ __, 1999 [Name of Local Bank] Re: Acct. No.: (the Local Deposit Account) Dear : Reference is hereby made to (a) that certain Receivables Purchase Agreement, dated as of ________ __, 1999 (the "Receivables Purchase Agreement"), between Gottschalks Inc., a Delaware corporation ("Gottschalks"), and Gottschalks Credit Receivables Corporation, a Delaware corporation ("GCRC"); (b) that certain Pooling and Servicing Agreement, dated as of ________ __, 1999 (the "Pooling and Servicing Agreement"), among GCRC, as depositor, Gottschalks, as servicer and Bankers Trust Company, a New York banking corporation, as trustee (the "Trustee"); and (c) that certain ____-_ Supplement to the Pooling and Servicing Agreement, dated as of ________ __, ____ (the "____-1 Supplement") among GCRC, Gottschalks and the Trustee (collectively, the "Transaction Documents"). Capitalized terms used but not otherwise defined herein shall have the meanings provided for such terms in the Pooling and Servicing Agreement. In connection with the above- referenced transactions, Gottschalks will act as the servicer of Receivables that have been sold to the Trust for the benefit of the Beneficiaries. During the normal course of its servicing operation, individual store locations owned by Gottschalks will receive In- Store Payments. Under the terms of the Transaction Documents, Gottschalks is required to deposit each day all Collections received in respect of In-Store Payments in a deposit account maintained by a local bank (the "Local Deposit Account"). GCRC has established account number [number] with your institution to serve as the Local Deposit Account. This letter agreement (this "Letter Agreement") defines certain rights and obligations of the parties hereto in respect of the Local Deposit Account maintained with your institution. GCRC hereby appoints [name of bank] as a Local Deposit Account Bank to maintain the Local Deposit Account. [Name of bank] hereby agrees to maintain the Local Deposit Account and serve as Local Deposit Account Bank on the terms and subject to the conditions set forth in this Letter Agreement. 1.1. The Local Deposit Account shall at all times be maintained in the name of the Trustee on behalf of the Trust. The Trustee on behalf of the Trust shall have exclusive dominion and control over, and the sole right of withdrawal from, the Local Deposit Account. The Trustee on behalf of the Trust shall possess all right, title and interest in all of the items from time to time on deposit in the Local Deposit Account and all proceeds thereof. 1.2. The Local Deposit Account Bank shall, at the end of each Business Day, transfer, in same day funds, all available funds on deposit (other than amounts retained for returned checks in the ordinary course of business) in the Local Deposit Account to Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention Corporate Trust & Agency Group, Structured Finance Team, ABA 021001033, Account [account number] for deposit to the Gottschalks Credit Card Master Trust Collection Account [number] (the "Collection Account"). The Local Deposit Account Bank shall, immediately thereafter, provide the Trustee with telephonic advice of such transfer. The Local Deposit Account Bank shall, each Business Day, deliver to Gottschalks all returned checks previously deposited in the Local Deposit Account at P.O. Box 26480, Fresno, California 93729-6480, Attention: Returned Check Desk. 1.3. The Local Deposit Account Bank shall respond promptly to all reasonable inquiries made by Gottschalks in respect of the Local Deposit Account. The Local Deposit Account shall furnish Gottschalks and the Trustee with monthly statements, in the form typical for the Local Deposit Account Bank, listing all amounts deposited in, withdrawn from, and transferred in and/or out of the Local Deposit Account during such monthly period. 1.4. For purposes of this Letter Agreement, any officer of the Trustee, and any other employee of the Trustee designated by an officer thereof, shall be authorized to act, and to give instructions and notice, on behalf of the Trustee and the Local Deposit Account Bank shall be entitled to rely on such act, instruction or notice without further inquiry. Gottschalks acknowledges that the Local Deposit Account Bank shall incur no liability to Gottschalks as a result of any action taken pursuant to an instruction given by or on behalf of the Trustee. 1.5. The fees for the services of the Local Deposit Account Bank shall be mutually agreed upon between Gottschalks and the Local Deposit Account Bank and paid by Gottschalks. Neither GCRC nor the Trustee on behalf of the Trust shall have any responsibility or liability for the payment of any such fee. 1.6. The Local Deposit Account Bank may perform any of its duties hereunder by or through its officers, employees or agents and shall be entitled to rely upon the advice of counsel as to its duties. The Local Deposit Account Bank shall not be liable to the Trustee or Gottschalks for any action taken or omitted to be taken by it in good faith, nor shall the Local Deposit Account Bank be responsible to the Trustee or Gottschalks for the consequences of any oversight or error of judgment or be answerable to the Trustee or Gottschalks for the same unless the oversight or error of judgment is attributable to its negligence or willful misconduct. 1.7. The Local Deposit Account Bank may resign at any time as Local Deposit Account Bank hereunder by delivery to the Trustee and Gottschalks of written notice of resignation not less than 30 days prior to the effective date of such resignation. The Trustee may close the Local Deposit Account at any time upon delivery of notice to the Local Deposit Account Bank at its address appearing below. This Letter Agreement shall terminate upon receipt of such notice of closing, or delivery of such notice of resignation and the expiration of the 30 day notice period, except that the Local Deposit Account Bank shall immediately transfer to the Collection Account all funds, if any, then on deposit in, or otherwise to the credit of, the Local Deposit Account (other than amounts retained for returned checks in the ordinary course of business). 1.8. All notices and communications hereunder shall be in writing (except where telephonic instructions or notices are authorized herein) and shall be deemed to have been received and shall be effective on the day on which delivered (including delivery by telecopy) (i) in the case of the Trustee, to Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention Corporate Trust & Agency Group, Structured Finance Team, (ii) in the case of the Local Deposit Account Bank, to [name of bank] at the address listed above and (iii) in the case of Gottschalks, to Gottschalks Inc., 7 River Park Place East, P.O. Box 26920, Fresno, California 93729, to the attention of Michael S. Geele, Senior Vice President and Chief Financial Officer. 1.9. The Local Deposit Account Bank shall not assign or transfer any of its rights or obligations hereunder (other than to the Trustee) without the prior written consent of the Trustee. This Letter Agreement may be amended only by a written instrument executed by Gottschalks, GCRC, the Trustee and the Local Deposit Account Bank, acting by their respective officers thereunto duly authorized. The Local Deposit Account Bank hereby irrevocably waives (so long as any Investor Certificate remains outstanding) any rights to setoff against, or otherwise deduct from, any funds held in any Local Deposit Account for any indebtedness or other claim owed by GCRC, Gottschalks or any other person or entity to the Local Deposit Account Bank. To the extent that the Local Deposit Account Bank ever has any such rights, it hereby expressly subordinates all such rights to the rights of the Trustee. THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. 1.10. This Letter Agreement (i) shall inure to the benefit of, and be binding upon, Gottschalks, GCRC, the Trustee, the Local Deposit Account Bank and their respective successors and assigns and (ii) may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 1.11. Bankers Trust Company, in its capacity as trustee under the Pooling and Servicing Agreement, is entering into this Letter Agreement solely as trustee and not in its individual capacity and in no case whatsoever shall Bankers Trust Company be personally liable on, or for any loss in respect of, any representations, warranties, agreements or obligations of the Trustee or Gottschalks hereunder. GOTTSCHALKS INC. By: \s\ Jim Famalette Title: President BANKERS TRUST COMPANY, not in its individual capacity, but solely in its capacity as Trustee By: \s\ Lillian Perros Title: Vice President [Name of Bank] By: Title: SCHEDULE I LIST OF ACCOUNTS The list of all Accounts specifying for each Account, (i) its account number (ii) the aggregate amount of Receivables outstanding in such Account, and (iii) the aggregate amount of Principal Receivables in such Account has been delivered in the form of computer tape. Such tape is incorporated herein by this reference. SCHEDULE II COLLECTION ACCOUNT BANKERS TRUST COMPANY: ABA No. 021001033 Account No. [1419647] Gottschalks Credit Card Master Trust Collection Account No. 11873 Four Albany Street New York, New York 10006 SCHEDULE III List of Local Deposit Accounts UNION BANK OF CALIFORNIA: Account No. 04730240 Location 0-01 Payment Processor (Pre-encoded) 7032 North First Street Fresno, California 93720 BANK OF AMERICA NT & SA: 14821-019-19 5292 N. Palm Avenue Fresno, CA 93704 ARTICLE I DEFINITIONS Section 1.01. Definitions 1 Section 1.02. Other Definitional Provisions. 19 ARTICLE II CONVEYANCE OF RECEIVABLES Section 2.01. Conveyance of Receivables 20 Section 2.02. Acceptance by Trustee 21 Section 2.03. Representations and Warranties of the Depositor Relating to the Depositor and this Agreement 22 Section 2.04. Representations and Warranties of the Depositor Relating to the Receivables; Reassignment 25 Section 2.05. Covenants of the Depositor 27 Section 2.06. Removal of Accounts 30 Section 2.07. Discount Option 31 Section 2.08. Block Period; Supplemental Accounts 32 ARTICLE III ADMINISTRATION AND SERVICING OF RECEIVABLES Section 3.01. Acceptance of Appointment and Other Matters Relating to the Servicer 33 Section 3.02. Servicing Compensation 35 Section 3.03. Representations, Warranties and Covenants of the Servicer 35 Section 3.04. Reports and Records for the Trustee 39 Section 3.05. Annual Servicer's Certificate 39 Section 3.06. Independent Public Accountants' Servicing Report 39 Section 3.07. Tax Treatment 41 Section 3.08. Notices to the Seller 41 Section 3.09. Adjustments 41 Section 3.10. Fidelity Bond and Errors and Omissions Insurance 42 ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS Section 4.01. Rights of Certificateholders 42 Section 4.02. Establishment of the Collection Account 42 Section 4.03. Collections Arrangements 43 Section 4.04. Collection Allocations 43 ARTICLE V DISTRIBUTIONS AND REPORTS TO CERTIFICATEHOLDERS Section 5.01. Distributions. 44 Section 5.02. Reports and Statements to Certificateholders. 44 ARTICLE VI THE CERTIFICATES Section 6.01. The Certificates. 45 Section 6.02. Authentication of Certificates 45 Section 6.03. New Issuances 46 Section 6.04. Registration of Transfer and Exchange of Certificates 48 Section 6.05. Mutilated, Destroyed, Lost or Stolen Certificates 50 Section 6.06. Persons Deemed Owners 50 Section 6.07. Access to List of Registered Certificateholders' Names and Addresses 51 ARTICLE VII OTHER MATTERS RELATING TO THE DEPOSITOR Section 7.01. Liability of the Depositor 51 Section 7.02. Limitation on Liability of the Depositor 51 Section 7.03. Depositor Indemnification 52 ARTICLE VIII OTHER MATTERS RELATING TO THE SERVICER Section 8.01. Liability of the Servicer 52 Section 8.02. Limitation on Liability of the Servicer 53 Section 8.03. Servicer Indemnification of the Trust and the Trustee 53 Section 8.04. Merger or Consolidation of, or Assumption of, the Obligations of the Servicer 54 Section 8.05. The Servicer Not to Resign 54 Section 8.06. Access to Certain Information Regarding the Receivables; Meet and Confer 54 Section 8.07. Delegation of Duties 55 Section 8.08. Examination of Records 55 ARTICLE IX EARLY AMORTIZATION EVENTS Section 9.01. Early Amortization Events 55 Section 9.02. Additional Rights Upon the Occurrence of Certain Events 56 ARTICLE X SERVICER DEFAULTS Section 10.01. Servicer Defaults 57 Section 10.02. Trustee to Act; Appointment of Successor 59 ARTICLE XI THE TRUSTEE Section 11.01. Duties of Trustee 60 Section 11.02. Certain Matters Affecting the Trustee 62 Section 11.03. Trustee Not Liable for Recitals in Certificates 63 Section 11.04. Trustee May Own Certificates 63 Section 11.05. The Servicer to Pay Trustee's Fees and Expenses 64 Section 11.06. Eligibility Requirements for Trustee 64 Section 11.07. Resignation or Removal of Trustee 64 Section 11.08. Successor Trustee 65 Section 11.09. Merger or Consolidation of Trustee 65 Section 11.10. Appointment of Co-Trustee or Separate Trustee 66 Section 11.11. Tax Returns 67 Section 11.12. Trustee May Enforce Claims Without Possession of Certificates 67 Section 11.13. Suits for Enforcement 67 Section 11.14. Representations and Warranties of Trustee 68 Section 11.15. Maintenance of Office or Agency 68 Section 11.16. Rights of Trustee Upon the Occurrence of an Early Amortization Event. 68 ARTICLE XII TERMINATION Section 12.01. Termination of Trust 68 Section 12.02. Final Distribution 69 Section 12.03. Depositor's Termination Rights 70 ARTICLE XIII MISCELLANEOUS PROVISIONS Section 13.01. Amendment 70 Section 13.02. Protection of Right, Title and Interest to Trust 72 Section 13.03. Limitation on Rights of Certificateholders 73 Section 13.04. No Petition 74 Section 13.05. Governing Law 74 Section 13.06. Notices 74 Section 13.07. Severability of Provisions 75 Section 13.08. Assignment 75 Section 13.09. Certificates Nonassessable and Fully Paid 75 Section 13.10. Further Assurances 75 Section 13.11. No Waiver; Cumulative Remedies 75 Section 13.12. Counterparts 75 Section 13.13. Third-Party Beneficiaries 75 Section 13.14. Actions by Certificateholders 76 Section 13.15. Rule 144A Information 76 Section 13.16. Merger and Integration 76 Section 13.17. Headings 76 EXHIBITS EXHIBIT A FORM OF EXCHANGEABLE CERTIFICATE EXHIBIT B [RESERVED] EXHIBIT C OFFICER'S CERTIFICATE EXHIBIT D [RESERVED] EXHIBIT E FORM OF REASSIGNMENT EXHIBIT F OFFICER'S CERTIFICATE EXHIBIT G OFFICER'S CERTIFICATE EXHIBIT H FORM OF REPRESENTATION LETTER EXHIBIT H-1 FORM OF SECURITIES ACT LEGEND EXHIBIT H-2 FORM OF ERISA LEGEND SCHEDULE I LIST OF ACCOUNTS EXHIBIT J RECEIVABLES PURCHASE AGREEMENT EXHIBIT K FORM OF DEPOSIT ACCOUNT AGREEMENT SCHEDULE II COLLECTION ACCOUNT SCHEDULE III LIST OF LOCAL DEPOSIT ACCOUNTS EX-10.40 7 LA1:817659 GOTTSCHALKS CREDIT RECEIVABLES CORPORATION Depositor GOTTSCHALKS INC. Servicer and BANKERS TRUST COMPANY Trustee SERIES 1999-1 SUPPLEMENT Dated as of March 1, 1999 to POOLING AND SERVICING AGREEMENT Dated as of March 1, 1999 GOTTSCHALKS CREDIT CARD MASTER TRUST TABLE OF CONTENTS ARTICLE I CREATION OF THE SERIES 1999-1 CERTIFICATES SECTION 1.1.Designation. 1 ARTICLE II DEFINITIONS SECTION 2.1.Definitions. 1 ARTICLE III SERVICING FEE SECTION 3.1.Servicing Compensation 12 ARTICLE IV RIGHTS OF CERTIFICATEHOLDERS AND ALLOCATION AND APPLICATION OF COLLECTIONS SECTION 4.1.Allocations and Distributions 13 SECTION 4.2.Determination of FBC Monthly Interest 23 SECTION 4.3.Determination of FBC Monthly Principal. 24 SECTION 4.4.Series Accounts. 24 SECTION 4.5.Capitalized Interest Account 27 SECTION 4.6.Retained Amount Account. 27 SECTION 4.7.Spread Account 28 SECTION 4.8.Deficiency Amount. 30 SECTION 4.9.Investor Charge-Offs. 30 SECTION 4.10.Trustee Expenses Associated with Servicing Assumption 31 ARTICLE V DISTRIBUTIONS AND REPORTS SECTION 5.1.Distributions 32 SECTION 5.2.Other Notices to Holders. 32 ARTICLE VI THE CERTIFICATES SECTION 6.1.The Fixed Base Certificates. 32 SECTION 6.2.Transfer Restrictions. 32 SECTION 6.3.The Subordinated Certificate 35 SECTION 6.4.The Exchangeable Certificate 36 ARTICLE VII EARLY AMORTIZATION EVENTS; SERVICER DEFAULTS; MERGER OF SERVICER SECTION 7.1.Additional Early Amortization Events. 36 SECTION 7.2.Waiver 37 SECTION 7.3.Additional Servicer Defaults 38 SECTION 7.4.Merger or Consolidation of, or Assumption of, the Obligations of the Servicer 39 ARTICLE VIII OPTIONAL REPURCHASE SECTION 8.1.Optional Repurchase 39 ARTICLE IX FINAL DISTRIBUTIONS SECTION 9.1.Final Distributions 39 ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1. Ratification of Agreement 41 SECTION 10.2. Counterparts 41 SECTION 10.3. Governing Law 41 SECTION 10.4. Rating Agency Notice 41 SECTION 10.5. Additional Document Delivery on First Distribution Date 41 EXHIBITS EXHIBIT A-1 Form of Fixed Based Certificate EXHIBIT A-2 Form of Subordinated Certificate EXHIBIT B Form of Distribution Date Statement EXHIBIT C Form of Rule 144A Transferee Certificate EXHIBIT D Form of Non Rule 144A Representation Letter SCHEDULES SCHEDULE I List of Series Accounts SERIES 1999-1 SUPPLEMENT dated as of March 1, 1999 (the Series Supplement), among GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, a Delaware corporation, as Depositor, GOTTSCHALKS INC., a Delaware corporation, as Servicer, and BANKERS TRUST COMPANY, a New York banking corporation, not in its individual capacity but solely as Trustee. RECITALS Section 6.03 of the Pooling and Servicing Agreement, dated as of March 1, 1999, among the Depositor, the Servicer and the Trustee (the Agreement), provides, among other things, that the Depositor may from time to time direct the Trustee to authenticate and deliver, on behalf of the Trust, one or more new Series of Investor Certificates representing fractional undivided interests in the Trust and in connection therewith to enter into Series Supplements with the Servicer and the Trustee to provide for the issuance, authentication and delivery of a new Series of Investor Certificates and to specify the Principal Terms thereof. Pursuant to this Series Supplement, the Depositor and the Trustee on behalf of the Trust shall hereby create a new Series of Investor Certificates and specify the Principal Terms thereof. ARTICLE I Creation of the Series 1999-1 Certificates SECTION 1.1. Designation. There is hereby created a Series of Investor Certificates to be issued pursuant to the Agreement and this Series Supplement to be known as the Gottschalks Credit Card Master Trust, Series 1999-1 Certificates. The Series 1999-1 Certificates will be issued in two certificated Classes, the first of which shall be known as the 7.664% Fixed Base Credit Card Certificates, Series 1999-1; and the second of which shall be known as the Subordinated Certificate, Series 1999-1. (a) In the event that any term or provision contained herein shall conflict with or be inconsistent with any term or provision contained in the Agreement, the terms and provisions of this Series Supplement shall govern. ARTICLE II Definitions SECTION 2.1. Definitions. (a) Whenever used in this Series Supplement, the following words and phrases shall have the following meanings. Accelerated Payment shall mean any FBC Principal Collections that are paid to the Fixed Base Certificateholders during the Controlled Amortization Period (in excess of any then current Controlled Amortization Amount) or otherwise prior to the Expected Final Distribution Date due to the commencement of an Early Amortization Period on any date other than as a result of the occurrence of a Servicer Default pursuant to clauses (d) and (f) of Section 7.3. Adjusted Invested Amount shall mean, as of any date, an amount equal to the Required Series Pool Balance. Allocation Day shall have the meaning specified in Section 4.1(b) hereof. Applicable Interest Rate shall mean, as of any date of determination and for any Investor Certificate, the per annum interest rate applicable to such Investor Certificate as of such date. Capitalized Interest Account shall have the meaning specified in Section 4.4 and Section 4.5 hereof. Deposits into and withdrawals from the Capitalized Interest Account shall be made in accordance with the provisions of Section 4.5 hereof. Certificates shall mean, collectively, the Fixed Base Certificates and the Subordinated Certificate. Closing Date shall mean March 1, 1999. Controlled Amortization Amount means one-twelfth of the Fixed Base Invested Amount on the Controlled Amortization Date. Controlled Amortization Date means August 1, 2003. Controlled Amortization Period shall mean, unless an Early Amortization Period shall have commenced prior thereto, the period commencing on the day immediately following the last day of the Revolving Period, and ending upon the first to occur of (a) the commencement of an Early Amortization Period, (b) the payment in full to the Fixed Base Certificateholders of the Fixed Base Invested Amount and any unreimbursed FBC Investor Charge-Offs and (c) the Expected Final Distribution Date. Credit Watch shall mean the publication by the Rating Agency of a report indicating that the Fixed Base Certificates are being monitored for possible upgrade or downgrade, and Credit Watch with negative implications shall mean the publication by the Rating Agency of a report indicating that the Fixed Base Certificates are being monitored for possible downgrade. Default Amount with respect to any Collection Period, means the aggregate amount of Receivables which become Defaulted Receivables during such Collection Period. Default Rate with respect to any Collection Period, means the annualized percentage equivalent of a fraction, the numerator of which is the Default Amount for such month and the denominator of which is the Pool Balance as of the first day of such month. Deficiency Amount shall mean, with respect to any Distribution Date, the amount, if any, by which (i) the sum of (A) the Monthly Senior Servicing Fee for the Related Distribution Date, (B) the FBC Monthly Interest for the Related Interest Period, (C) all FBC Carryover Interest for the Related Interest Period, and (D) the Investor Default Amount, if any, for the Related Collection Period, exceeds (ii) the sum of (A) the Investor Finance Charge Collections retained in the Collection Account during the Related Collection Period pursuant to Section 4.1(c)(ii), (B) the Investor Finance Charge Collections retained in the Collection Account pursuant to Section 4.1(c)(iii) during the Related Collection Period, (C) the Investor Finance Charge Collections retained in the Collection Account pursuant to Section 4.1(c)(iv) during the Related Collection Period and (D) the Investor Investment Proceeds on deposit in the Collection Account on such Determination Date. Delinquency Rate with respect to any Collection Period, means the percentage equivalent of a fraction, the numerator of which is the aggregate of the balances of Eligible Receivables that are 60 or more days Contractually Delinquent as of the last day of such month, and the denominator of which is the Pool Balance as of the last day of such month. Distribution Date shall mean the fifteenth day of each month (or, if such day is not a Business Day, the next succeeding Business Day), commencing April 15, 1999. Early Amortization Event for Series 1999-1 shall mean any Early Amortization Event specified in Section 9.01 of the Agreement, together with any additional Early Amortization Event specified in Section 7.1 hereof. Eligible Past Due Receivables shall mean any Receivable that is 120 or more days Contractually Delinquent but has not been classified as a Defaulted Receivable such that, but for the operation of clause (h) of the definition of Eligible Receivables, it would be classified as an Eligible Receivable. Excess Spread means the annualized percentage equivalent of a fraction, (a) the numerator of which is Investor Finance Charge Collections for such month less (i) the amount of accrued Monthly Senior Servicing Fees for such month, (ii) interest accrued on the Fixed Base Certificates during such month and (iii) the Investor Default Amount for such month, and (b) the denominator of which is the Required Series Pool Balance as of the close of business on the Distribution Date during such month. Exchangeable Component shall mean, as of any time of determination, in the case of the Retained Amount Account, the amount set forth as of such time on the ledger maintained by the Servicer in accordance with Section 4.4(e) hereof as representing the net balance of deposits made to the Retained Amount Account pursuant to Section 4.6(a)(i) hereof less amounts withdrawn therefrom in accordance with Section 4.6. Exchangeable Holder's Interest means, for purposes of making allocations of Series Finance Charge Collections, Series Principal Collections or Default Amounts allocated to any Series, the difference (but not less than zero) between the Series Pool Balance and the Required Series Pool Balance. Exchangeable Holder's Percentage means, for purposes of making any allocation as to which the Floating Allocation Percentage is applicable, 100% minus the Floating Allocation Percentage, and for purposes of making any allocation as to which the Fixed/Floating Allocation Percentage is applicable, 100% minus the Fixed/Floating Allocation Percentage, provided that in any case the Exchangeable Holder's Percentage shall not be less than zero. Expected Final Distribution Date means the August 2004 Distribution Date. FBC Additional Interest shall have the meaning specified in Section 4.2 hereof. FBC Allocation Percentage shall mean, with respect to any Collection Period, the percentage equivalent of a fraction, the numerator of which is the Fixed Base Invested Amount and the denominator of which is the Required Series Pool Balance, in each case, as of the first day of such Collection Period. FBC Carryover Interest shall mean, for any Collection Period, an amount equal to the sum of (a) the amount of any FBC Monthly Interest previously due but not distributed on the Fixed Base Certificates on a prior Distribution Date, (b) to the extent permitted under applicable law, the amount of any FBC Additional Interest to accrue during the Related Interest Period and (c) the amount of any FBC Additional Interest previously due but not distributed on the Fixed Base Certificates on a prior Distribution Date. FBC Interest Rate shall mean, with respect to any Interest Period and the Fixed Base Certificates, a fixed interest rate per annum equal to 7.664, and, upon a downgrade or a withdrawal of the ratings of the Fixed Base Certificates, 8.414%. FBC Interest Shortfall shall have the meaning specified in Section 4.2 hereof. FBC Investor Charge-Off shall have the meaning specified in Section 4.9 hereof. FBC Investor Default Amount shall mean, with respect to each Distribution Date, an amount equal to the portion of the Investor Default Amount for the Related Collection Period that will be allocated to the Fixed Base Invested Amount as set forth in Section 4.9 hereof. FBC Monthly Interest shall have the meaning specified in Section 4.2 hereof. FBC Monthly Principal shall have the meaning specified in Section 4.3 hereof. FBC Principal Allocation Percentage shall mean, (a) with respect to any Collection Period commencing during the Revolving Period, the percentage equivalent of a fraction, the numerator of which is the Fixed Base Invested Amount and the denominator of which is the Required Series Pool Balance, in each case, as of the first day of such Collection Period and after giving effect to any distributions made as of such date, or (b) with respect to any Collection Period commencing during the Controlled Amortization Period or an Early Amortization Period, the percentage equivalent of a fraction, the numerator of which is the Fixed Base Invested Amount as of the first day of the last Collection Period commencing during the Revolving Period, and the denominator of which is the Required Series Pool Balance as of the first day of the last Collection Period commencing during the Revolving Period. FBC Principal Collections shall mean, for any Allocation Day, an amount equal to the Series Principal FBC Collections for such day minus the product of (a) the amount of Series Principal Collections distributed to the Holder of the Exchangeable Certificate on such day in accordance with Section 4.1(b) (ii) hereof and (b) the FBC Principal Allocation Percentage in effect on such Allocation Day. Fixed Base Certificate Balance shall mean the aggregate principal amount of the Fixed Base Certificates, which as of any date of determination, will be the Initial Fixed Base Invested Amount reduced to the extent that principal payments are made to the Holders of the Fixed Base Certificates. Fixed Base Certificates shall have the meaning specified in Section 6.1 hereof. Fixed Base Certificateholder shall mean, with respect to any Fixed Base Certificate on any date, the Person in whose name such Fixed Base Certificate is registered on such date. Fixed Base Invested Amount shall mean, as of any date of determination, an amount equal to (a) the Initial Fixed Base Invested Amount, minus, (b) the amount of principal payments made to the Fixed Base Certificateholders in respect of the Fixed Base Invested Amount prior to such date, and minus, (c) the aggregate amount of FBC Investor Charge-Offs previously allocated and not reimbursed. Fixed/Floating Allocation Percentage shall mean, with respect to any Collection Period during the Controlled Amortization Period or an Early Amortization Period, the percentage equivalent (which percentage shall never exceed 100%) of a fraction, the numerator of which is the Required Series Pool Balance as of first day of the last Collection Period to commence during the Revolving Period and the denominator of which is the Series Pool Balance as of the first day of such current Collection Period. Floating Allocation Percentage shall mean, with respect to any Collection Period, the percentage equivalent (which percentage shall never exceed 100%) of a fraction, the numerator of which is the Required Series Pool Balance and the denominator of which is the Series Pool Balance, in each case, as of the first day of such Collection Period; provided, however, that, with respect to the first Collection Period, the Floating Allocation Percentage shall mean the percentage equivalent of a fraction, the numerator of which is the sum of the Initial Fixed Base Invested Amount and the Initial Subordinated Invested Amount, and the denominator of which is the Series Pool Balance as of the Closing Date. Initial Fixed Base Invested Amount shall mean $53,000,000. Initial Subordinated Invested Amount shall mean $6,550,562. Interest Period shall mean, with respect to any Distribution Date, the period from and including the Distribution Date immediately preceding such Distribution Date (or, in the case of the first Distribution Date, from and including the Closing Date) to but excluding such Distribution Date. Investor Component shall mean, as of any time of determination, the amount set forth as of such time on the ledger maintained by the Servicer in accordance with Section 4.4(e) hereof as representing the net balance of deposits made to the Retained Amount Account pursuant to Sections 4.1(d) (i) (A) (3), 4.1(d) (i) (B) (4), 4.1(d)(ii)(A)(5) and 4.1(d)(ii)(B)(5) hereof less amounts withdrawn therefrom in accordance with Section 4.6. Investor Default Amount shall mean, (i) with respect to any Distribution Date, an amount equal to the product of (a) the Default Amount for the Related Collection Period, (b) the Floating Allocation Percentage for the Related Collection Period and (c) the Series 1999-1 Allocation Percentage for the Related Collection Period and, (ii) with respect to any day during a Collection Period, an amount equal to the product of (a) the Default Amount recognized by the Servicer through such day of such Collection Period, (b) the Floating Allocation Percentage for the Related Collection Period and (c) the Series 1999-1 Allocation Percentage for the Related Collection Period. Investor Default Holdback Amount shall mean, with respect to (a) any Collection Period (other than the initial Collection Period), the greater of (A) the Investor Default Amount which the Servicer reasonably anticipates for such Collection Period or (B) the average of the Investor Default Amounts for each of the twelve consecutive Collection Periods preceding such Collection Period (or, for the initial twelve Collection Periods, for as many Collection Periods as have occurred since the Closing Date), and (b) the initial Collection Period, $300,000. Investor Finance Charge Collections shall mean, as of any Allocation Day, the product of the amount of Series Finance Charge Collections received since the beginning of the preceding Business Day and (a) for any Collection Period commencing prior to the commencement of an Early Amortization Period, the Floating Allocation Percentage for the current Collection Period or (b) for any Collection Period commencing during an Early Amortization Period, the Fixed/Floating Allocation Percentage for the current Collection Period. Investor Investment Proceeds shall mean, with respect to any Distribution Date, all interest and other investment earnings (net of losses and investment expenses) on funds on deposit in the Series Accounts, together with an amount equal to the Series Allocation Percentage of the interest and other investment earnings (net of losses and investment expenses) on funds held in the Collection Account credited as of such date to the Collection Account pursuant to Section 4.02 of the Agreement. Investor Principal Collections shall mean, as of any Allocation Day, the sum of (a) the FBC Principal Collections and (b) the Subordinated Principal Collections, in each case, determined for such day. Make Whole Premium shall mean, with respect to any Accelerated Payment, the aggregate of the present values calculated in accordance with standard financial practices and discounted at the Reinvestment Yield of the amount of the positive difference, if any, of (a) the amount of interest that would have accrued on such Accelerated Payment had it been paid as all or a portion of the next possible payment or payments of one or more Controlled Amortization Amounts (taking into account any previous payments of Controlled Amortization Amounts or Accelerated Payments) rather than being paid currently, over (b) the amount of interest that would accrue on such Accelerated Payment if it were reinvested currently in one or more instruments in amounts and having maturities corresponding to the one or more next possible payments described in clause (a) and bearing interest at the Reinvestment Yield. The Make Whole Premium shall never be less than zero. Monthly Payment Rate with respect to any Collection Period, shall mean the percentage equivalent of a fraction, the numerator of which is the aggregate amount of all Collections in respect of Eligible Receivables received during such month, and the denominator of which is the Pool Balance as of the first day of such month. Monthly Senior Servicing Fee shall mean, (i) with respect to any Distribution Date relating to a Collection Period during which Gottschalks, Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is the Servicer, five-sixths of the Monthly Servicing Fee for the Related Collection Period and (ii) with respect to any Distribution Date relating to a Collection Period during which Gottschalks, Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is not the Servicer, 100% of the Monthly Servicing Fee for the Related Collection Period. Monthly Servicing Fee shall mean, with respect to any Distribution Date, an amount equal to one-twelfth of 3.00% per annum of the Required Series Pool Balance as of the first day of the Related Collection Period. Monthly Subordinated Servicing Fee shall mean, (i) with respect to any Distribution Date relating to a Collection Period during which Gottschalks, Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is the Servicer, one-sixth of the Monthly Servicing Fee for the Related Collection Period and (ii) with respect to any Distribution Date relating to a Collection Period during which Gottschalks, Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is not the Servicer, 0% of the Monthly Servicing Fee for the Related Collection Period. Optional Purchase Price shall mean, with respect to any Distribution Date, after giving effect to any deposits and distributions otherwise to be made on such Distribution Date, the sum of (a) the Fixed Base Certificate Balance on such Distribution Date, (b) accrued and unpaid interest on the outstanding Fixed Base Certificate Balance (including any FBC Carryover Interest), and (c) any due but not distributed Make Whole Premium (including any interest accrued thereon, to the extent lawful, at the FBC Interest Rate). Portfolio Yield shall mean, with respect to any Collection Period, the annualized percentage equivalent of a fraction (a) the numerator of which is Series Finance Charge Collections for such Collection Period less Series Default Amounts for such Collection Period and (b) the denominator of which is the Series Pool Balance as of the first day of such Collection Period. Rating Agency shall mean Duff & Phelps Credit Rating Company or its successors. Reinvestment Yield shall mean, with respect to any Accelerated Payment, the yield to maturity implied by (a) the yields reported, as of 10:00 a.m. New York City time on the Business Day next preceding the Distribution Date on which such Accelerated Payment is to be made, on the display designated as Page 678 on the Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal or closest to the Remaining Average Life of such Accelerated Payment as of such Distribution Date, plus 1.0% per annum, or (b) if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day preceding the Distribution Date on which such Accelerated Payment is to be made, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Accelerated Payment as of such Distribution Date, plus 1.0% per annum. Such implied yield shall be determined, if necessary, by (x) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (y) interpolating linearly between reported yields. The Servicer shall calculate the Reinvestment Yield with respect to any Accelerated Payment. Related Collection Period shall mean, with respect to (a) any Distribution Date, the preceding Collection Period and (b) any Allocation Day, the Collection Period during which such Allocation Day occurs. Related Distribution Date shall mean, with respect to any Collection Period or Determination Date or Allocation Day, the Distribution Date following, as applicable, such Collection Period or Determination Date or the calendar month in which such Allocation Day occurs. Related Interest Period shall mean, with respect to (a) any Distribution Date, the Interest Period ended on the preceding day and (b) any Collection Period, the Interest Period which commences during such Collection Period. Remaining Average Life shall mean, at any time of determination after the commencement of an Early Amortization Period, the number of years obtained by dividing the then Remaining Dollar-Years of the Fixed Base Certificates by the Fixed Base Invested Amount at such time. The term Remaining Dollar-Years means the amount obtained by (a) multiplying (i) the amount of each remaining payment with respect to the Fixed Base Certificates, assuming that such payments are made in the Controlled Amortization Amounts (using the Fixed Base Invested Amount at the time an Early Amortization Period commenced in order to calculate such Controlled Amortization Amounts) over the number of months comprising the Controlled Amortization Period, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between the date as of which the calculation is made and each Distribution Date during the notional Controlled Amortization Period and (b) totaling all the products obtained in clause (a). Required Exchangeable Certificate Amount means, for any date of determination, the product of (i) the Required Series Pool Balance as of such date of determination and the greater of (A) 7.00% and (B) the percentage equivalent of a fraction: (1) the numerator of which is the net amount of charge account refunds or return credits that were given to account holders by Gottschalks during the calendar month of the prior calendar year corresponding to the current calendar month in which such determination is being made (the Anniversary Month); and (2) the denominator of which is the aggregate amount of net sales credited to Charge Accounts and recognized by Gottschalks during such Anniversary Month. Required Series Pool Balance shall mean, as of any date of determination, the sum of (a) the Fixed Base Invested Amount on such date and (b) the Subordinated Invested Amount on such date. Retained Amount Account shall have the meaning specified in Section 4.4 hereof. Deposits into and withdrawals from the Retained Amount Account shall be made in accordance with the provisions of Section 4.6 hereof. Retained Exchangeable Amount has the meaning specified in Section 4.6(a)(ii). Revolving Period shall mean the period beginning at the opening of business on the Closing Date and ending on the earlier of (a) the last day of the Related Collection Period for the Distribution Date that is to occur in August, 2003 and (b) the close of business on the Business Day immediately preceding the day on which an Early Amortization Period commences. Series Accounts shall have the meaning specified in Section 4.4 hereof. Series Cut-Off Date shall mean the Cut-Off Date. Series Default Amount shall mean, with respect to any Distribution Date, an amount equal to the product of (a) the Default Amount for the Related Collection Period, and (b) the Series 1999-1 Allocation Percentage for the Related Collection Period. Series Finance Charge Collections shall mean, with respect to the aggregate amount of Finance Charge Collections received on any Business Day, the product of such Finance Charge Collections and the Series 1999- 1 Allocation Percentage for the Related Collection Period. Series Issuance Date shall mean March 1, 1999. Series 1999-1 shall mean the Series of Investor Certificates and the Subordinated Certificate created pursuant to this Series Supplement. Series 1999-1 Allocation Percentage shall mean, for any Collection Period, the Series Allocation Percentage for Series 1999-1 as calculated for such Collection Period in accordance with the Agreement. Series Pool Balance shall mean, as of any date of determination, the product of (a) the Pool Balance as of such date and (b) the Series 1999-1 Allocation Percentage for such date. Series Principal Collections shall mean, with respect to the aggregate amount of Principal Collections received since the beginning of the preceding Business Day, the product of such Principal Collections and the Series 1999-1 Allocation Percentage for the Related Collection Period. Series Principal FBC Collections shall mean, for each Allocation Day, an amount equal to the product of (a) the amount of the Series Principal Collections received on any Business Day and (b) the FBC Principal Allocation Percentage in effect on such Allocation Day. Series Principal SC Collections shall mean, for each Allocation Day, an amount equal to the product of (a) the amount of the Series Principal Collections received on any Business Day and (b) the Subordinated Principal Allocation Percentage in effect on such Allocation Day. Series Termination Date shall mean the August 2006 Distribution Date. Servicing Fee Rate shall mean 3.0% per annum. Spread Account shall have the meaning specified in Section 4.4 hereof. Deposits into and withdrawals from the Spread Account shall be made in accordance with the provisions of Section 4.7 hereof. Spread Account Requirement as of any date of determination means zero, unless a Spread Account Trigger occurs, in which case Spread Account Requirement shall mean (i) the sum of (a) the Fixed Base Certificate Balance, (b) the amount by which the accrued and unpaid Monthly Servicing Fee payable on the next Distribution Date exceeds Investor Finance Charge Collections allocable thereto through such date, (c) the amount by which accrued and unpaid interest on the Fixed Base Certificates (including FBC Carryover Interest) payable on the next Distribution Date exceeds Investor Finance Charge Collections allocable thereto through such date and (d) the amount by which the Investor Default Amount through such date exceeds Investor Finance Charge Collections allocated therefor through such date as the Investor Default Holdback Amount, minus (ii) the sum of (a) the amount of Investor Principal Collections then on deposit in the Collection Account and available for the payment of principal on the Fixed Base Certificates and (b) the Investor Component of the amount on deposit in the Retained Amount Account. Spread Account Trigger shall mean the occurrence of any of the following events; (1) the rating of the Fixed Base Certificates are put on Credit Watch with negative implications by the Rating Agency or (2) any of the following conditions is true, taken as an average of the relevant calculation for each of the three preceding consecutive calendar months; (i) the Portfolio Yield is less than 14.5%; (ii) the Default Rate exceeds 8.5%; (iii) the Excess Spread is less than 3.00%; (iv) the Delinquency Rate exceeds 2.00%; or (v) the Monthly Payment Rate is less than 22.5%. Standby Servicer shall mean Bankers Trust Company or such other party as may be appointed by the Trustee to stand ready to act as a Successor Servicer in the event that Gottschalks is removed as Servicer. Subordinated Allocation Percentage shall mean, with respect to any Collection Period, the percentage equivalent of a fraction the numerator of which is the Subordinated Invested Amount and the denominator of which is the Required Series Pool Balance, in each case, as of the first day of such Collection Period. Subordinated Certificate means the Certificate issued pursuant to Section 6.3 hereof, substantially in the form of Exhibit A-2. Subordinated Invested Amount shall mean, as of any date of determination, an amount equal to (a) the Initial Subordinated Invested Amount, minus, (b) the amount, if any, by which the aggregate amount of Subordinated Investor Charge-Offs exceeds the Subordinated Investor Charge-Offs reimbursed pursuant to Section 4.1(c)(vi), and minus (c) the amount of principal payments made to the holder of the Subordinated Certificate in respect of the Subordinated Invested Amount pursuant to Section 4.1(d)(ii)(C)(7) prior to such date, provided that at no time shall the Subordinated Invested Amount be less than zero. Subordinated Investor Charge-Offs shall have the meaning specified in Section 4.9(b) hereof. Subordinated Principal Allocation Percentage shall mean, (a) with respect to any Collection Period commencing during the Revolving Period, the percentage equivalent of a fraction, the numerator of which is the Subordinated Invested Amount and the denominator of which is the Required Series Pool Balance, in each case, as of the first day of such Collection Period, or (b) with respect to any Collection Period commencing during the Controlled Amortization Period or any Early Amortization Period, the percentage equivalent of a fraction, the numerator of which is the Subordinated Invested Amount as of the first day of the last Collection Period to commence during the Revolving Period, and the denominator of which is the Required Series Pool Balance as of the first day of the last Collection Period commencing during the Revolving Period. Subordinated Principal Collections shall mean, for any Allocation Day, an amount equal to the Series Principal SC Collections for such day minus the product of (a) the amount of Series Principal Collections distributed to the holder of the Exchangeable Certificate on such day in accordance with Section 4.1(b)(ii) hereof and (b) the Subordinated Principal Allocation Percentage in effect on such Allocation Day. Subordinated Reduction shall have the meaning specified in Section 4.9(a) hereof. (b) Notwithstanding anything to the contrary in this Series Supplement or the Agreement, the term Rating Agency shall mean, whenever used in this Series Supplement or the Agreement with respect to the Certificates, Duff & Phelps. (c) All capitalized terms used herein and not otherwise defined herein have the meanings ascribed to them in the Agreement. The definitions in this Section 2.1 are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (d) The words hereof, herein and hereunder and words of similar import when used in this Series Supplement shall refer to this Series Supplement as a whole and not to any particular provision of this Series Supplement; references to any Article, Section or Exhibit are references to Articles, Sections and Exhibits in or to this Series Supplement unless otherwise specified; and the term including means including without limitation. (e) References herein to Collections received shall be deemed to include Collections received and processed as to principal and finance charges and shall not include unprocessed Collections (i.e., Collections which have been received but for which the Servicer in the ordinary course of its business has not yet identified in its computer records the principal and finance charge components). ARTICLE III Servicing Fee SECTION 3.1. Servicing Compensation. The Monthly Servicing Fee shall be payable to the Servicer, in arrears, on each Distribution Date occurring prior to the earlier of the first Distribution Date following the Series Termination Date and the first Distribution Date on which the Fixed Base Invested Amount and the Subordinated Invested Amount are both zero. In no event shall the Trust, the Trustee, the Fixed Base Certificateholders or the holder of the Subordinated Certificate be liable for any other servicing fee. The Monthly Servicing Fee shall be payable to the Servicer solely to the extent amounts are available for distribution in accordance with the terms of this Series Supplement. Amounts payable in respect of the Monthly Servicing Fee will be allocable from Investor Finance Charge Collections (and from amounts reallocated as Investor Finance Charge Collections) pursuant to the priorities set forth in Section 4.1 hereof. In the event that Gottschalks Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is no longer the Servicer, the Monthly Senior Servicing Fee for any calendar month (or portion thereof) following such servicing transfer shall equal 100% of the Monthly Servicing Fee for such calendar month (or portion thereof) during which the successor servicer is acting in such capacity. So long as Gottschalks Inc. (or any successor entity resulting from a transaction meeting the requirements of Section 8.04 of the Agreement or Section 7.4 hereof) is the Servicer, that portion of the Monthly Senior Servicing shall equal five-sixths of the Monthly Servicing Fee, with the remaining Monthly Servicing Fee for such Servicer being payable in the form of Monthly Subordinated Servicing Fee. The Monthly Senior Servicing Fee and the Monthly Subordinated Servicing Fee shall be allocated to the Servicer pursuant to Section 4.1(c)(ii). ARTICLE IV Rights of Certificateholders and Allocation and Application of Collections SECTION 4.1. Allocations and Distributions. (a) General. Series Finance Charge Collections, Series Principal Collections and Series Default Amounts, as they relate to the Certificates and the Exchangeable Certificate, shall be allocated and distributed as set forth in this Article IV. (b) Distribution of Collections to the Holder of the Exchangeable Certificate. At the beginning of each Business Day (an Allocation Day), the Servicer shall direct the Trustee in writing to withdraw from the Collection Account and distribute to the holder of the Exchangeable Certificate (i) an amount equal to the product of (A) the Exchangeable Holder's Percentage in effect on such day and (B) the amount of Series Finance Charge Collections received on the preceding Business Day, and (ii) an amount equal to the product of (A) the Exchangeable Holders Percentage in effect on such day and (B) the amount of Series Principal Collections received on the preceding Business Day. On each Distribution Date, the Servicer shall allocate to the Holder of the Exchangeable Certificate an amount equal to the product of (x) the Exchangeable Holder's Percentage in effect on such date and (y) the amount of Series Default Amount for the Related Collection Period. (c) Allocation of Investor Finance Charge Collections. At the beginning of each Allocation Day, the Servicer shall allocate Investor Finance Charge Collections received on the preceding Business Day as follows and in the following priorities: (i) first, if an Early Amortization Event has occurred, resulting in the assumption of servicing duties by the Trustee or causing the Trustee to incur extraordinary expenses in connection with the performance of its duties as a result of such Early Amortization Event, unless an amount equal to the reasonable costs and expenses of the Trustee related to such assumption of servicing duties or its performance of such duties in connection with such Early Amortization Event (such amount not to exceed $200,000 less any amounts paid to the Trustee in respect thereof from any letter of credit or surety bond maintained for such purpose pursuant to Section 4.10) is then on deposit in the Collection Account for the benefit of the Trustee and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (ii) second, unless an amount equal to the Monthly Senior Servicing Fee for the current Interest Period, plus any previously unpaid Monthly Senior Servicing Fee (but only with respect to the then current Servicer) is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (iii) third, unless an amount equal to the sum of the FBC Monthly Interest to accrue during the Related Interest Period, plus the amount of any FBC Carryover Interest for the Related Collection Period is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amounts are then on deposit; (iv) fourth, unless an amount equal to the Investor Default Holdback Amount for the current Collection Period is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (v) fifth, unless all unreimbursed FBC Investor Charge-Offs as of such Allocation Day have been reallocated as FBC Principal Collections, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be reallocated as FBC Principal Collections until the amounts reallocated equal all unreimbursed FBC Investor Charge-Offs; (vi) sixth, unless all unreimbursed Subordinated Investor Charge-Offs as of such Allocation Day have been reallocated as Subordinated Principal Collections, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be reallocated as Subordinated Principal Collections until the amounts reallocated equal all unreimbursed Subordinated Investor Charge-Offs; (vii) seventh, unless the amount then on deposit in the Spread Account is equal to the Spread Account Requirement on such Allocation Day, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be withdrawn from the Collection Account in an amount equal to such insufficiency and shall be deposited in the Spread Account; (viii) eighth, if such Allocation Day falls within an Early Amortization Period that commenced as a result of the occurrence of any Early Amortization Event other than the occurrence of a Servicer Default pursuant to clauses (d) and (f) of Section 7.3, then, unless an amount equal to the Make Whole Premium for the Related Collection Period (together with any Make Whole Premium previously due but not paid on a prior Distribution Date and any interest thereon at the FBC Interest Rate) is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit and allocated therefor; (ix) ninth, unless an amount equal to the Monthly Subordinated Servicing Fee for the current Interest Period, plus any previously unpaid Monthly Subordinated Servicing Fee, is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (x) tenth, unless an amount equal to the amount necessary to reimburse any draws made on any letter of credit or surety bond used to cover expenses incurred pursuant to Section 4.1(c)(i) is on is then on deposit in the Collection Account and allocated therefor, Investor Finance Charge Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (xi) eleventh, the balance, if any, of the Investor Finance Charge Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (i) through (x) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement. (d) Allocation of Principal Collections. (i) At the beginning of each Allocation Day, the Servicer shall allocate the FBC Principal Collections for such day as follows and in the following priorities: (A) if such Allocation Day occurs during the Revolving Period: (1) first, unless an amount equal to the amount of all unreimbursed FBC Investor Charge- Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or amounts reallocated from Subordinated Principal Collections pursuant to Section 4.1(d)(ii)(A)(2)), FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed FBC Investor Charge-Offs; (2) second, unless an amount equal to the portion of the Investor Default Amount allocable to the Fixed Base Invested Amount is then on deposit in the Collection Account as the Investor Default Holdback Amount or from reallocated Subordinated Principal Collections pursuant to Section 4.1(d)(ii)(A)(3), FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (3) third, if pursuant to Section 4.6(a) hereof an amount is required to be deposited in the Retained Amount Account on such day, FBC Principal Collections received since the beginning of the preceding Business Day in an amount equal to the lesser of (x) the product of (1) the amount of such required deposit and (2) the FBC Allocation Percentage for such Allocation Day, and (y) the balance, if any, of FBC Principal Collections received since the beginning of the preceding Business Day shall be withdrawn from the Collection Account and deposited in the Retained Amount Account; and (4) fourth, the balance, if any, of FBC Principal Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (1), (2) and (3) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement; or (B) if such Allocation Day occurs during the Controlled Amortization Period: (1) first, unless an amount equal to the Controlled Amortization Amount is then on deposit in the Collection Account and allocated therefor, FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (2) second, unless an amount equal to the amount of all unreimbursed FBC Investor Charge- Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or amounts reallocated from Subordinated Principal Collections pursuant to Section 4.1(d)(ii)(B)(3)), FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (3) third, unless an amount equal to the portion of the Investor Default Amount allocable to the Fixed Base Invested Amount (to the extent not already funded from Investor Finance Charge Collections or amounts reallocated from Subordinated Principal Collections pursuant to Section 4.1(d)(ii)(B)(4), or to be funded from amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7) is then on deposit in the Collection Account and allocated therefor, FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (4) fourth, if pursuant to Section 4.6(a) hereof, an amount is required to be deposited in the Retained Amount Account on such day from Investor Principal Collections, FBC Principal Collections received since the beginning of the preceding Business Day in an amount equal to the lesser of (x) the product of (1) the amount of such required deposit and (2) the FBC Allocation Percentage for such Allocation Day, and (y) the balance, if any, of FBC Principal Collections received since the beginning of the preceding Business Day shall be withdrawn from the Collection Account and deposited in the Retained Amount Account; and (5) fifth, the balance, if any, of FBC Principal Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (1), (2), (3) and (4) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement; or (C) if such Allocation Day occurs during an Early Amortization Period: (1) first, unless an amount equal to the Fixed Base Certificate Balance is then on deposit in the Collection Account and allocated therefor, FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (2) second, unless an amount equal to the Make Whole Premium for the Related Collection Period (together with any Make Whole Premium previously due but not paid on a prior Distribution Date and any interest thereon at the FBC Interest Rate), is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or amounts reallocated from Subordinated Principal Collections pursuant to Section 4.1(d)(ii)(C)(5)), FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; (3) third, unless an amount equal to the Subordinated Invested Amount is then on deposit in the Collection Account and allocated therefor, FBC Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until such amount is then on deposit; and (4) fourth, the balance, if any, of FBC Principal Collections received since the beginning of the preceding Business Day (after making the allocation described in paragraphs (1), (2) and (3) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement. (ii) At the beginning of each Allocation Day, the Servicer shall allocate the Subordinated Principal Collections for such day as follows and in the following priorities: (A) if such Allocation Day occurs during the Revolving Period: (1) first, unless an amount equal to the sum of the FBC Monthly Interest to accrue during the Related Interest Period, plus the amount of any FBC Carryover Interest for the Related Collection Period, is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or to be funded from amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as Investor Finance Charge Collections in the amount of any such deficiency; (2) second, unless an amount equal to the amount of all unreimbursed FBC Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as FBC Principal Collections and retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed FBC Investor Charge-Offs; (3) third, on the last day of each Collection Period, Subordinated Principal Collections will be reallocated as Investor Finance Charge Collections in the amount by which the Investor Default Amount for such Collection Period exceeds the sum of the amounts allocated to the Investor Default Holdback Amount (after giving effect to all allocations of Investor Finance Charge Collections) and amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7; (4) fourth, unless an amount equal to the amount of all unreimbursed Subordinated Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor, Subordinated Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed Subordinated Investor Charge-Offs (to the extent not already funded from Investor Finance Charge Collections); (5) fifth, if pursuant to Section 4.6(a) hereof an amount is required to be deposited in the Retained Amount Account on such day, Subordinated Principal Collections received since the beginning of the preceding Business Day in an amount equal to the lesser of (x) the product of (1) the amount of such required deposit and (2) the Subordinated Principal Allocation Percentage for such Allocation Day, and (y) the balance, if any, of Subordinated Principal Collections received since the beginning of the preceding Business Day shall be withdrawn from the Collection Account and deposited in the Retained Amount Account; and (6) sixth, the balance, if any, of Subordinated Principal Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (1), (2), (3), (4) and (5) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement; or (B) if such Allocation Day occurs during the Controlled Amortization Period: (1) first, unless an amount equal to the sum of the FBC Monthly Interest to accrue during the Related Interest Period, plus the amount of any FBC Carryover Interest for the Related Collection Period is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or to be funded from amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as Investor Finance Charge Collections in the amount of any such deficiency. (2) second, unless an amount equal to the Controlled Amortization Amount is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from FBC Principal Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as FBC Principal Collections in the amount of any such deficiency; (3) third, unless an amount equal to the amount of all unreimbursed FBC Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as FBC Principal Collections and retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed FBC Investor Charge-Offs; (4) fourth, on the last day of each Collection Period, Subordinated Principal Collections will be reallocated as Investor Finance Charge Collections in the amount by which any Investor Default Amounts allocable to the Fixed Base Invested Amount for such Collection Period exceeds the sum of the amount of Investor Finance Charge Collections allocated thereto (i.e. the Investor Default Holdback Amount) and amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7 to fund such deficiency; (5) fifth, if pursuant to Section 4.6(a) hereof an amount is required to be deposited in the Retained Amount Account on such day, Subordinated Principal Collections received since the beginning of the preceding Business Day shall be withdrawn from the Collection Account in an amount equal to the lesser of (x) the product of (1) the amount of such required deposit and (2) the Subordinated Principal Allocation Percentage for such Allocation Day, and (y) the balance, if any, of Subordinated Principal Collections received since the beginning of the preceding Business Day, and deposited in the Retained Amount Account; (6) sixth, unless an amount equal to the amount of all unreimbursed Subordinated Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed Subordinated Investor Charge-Offs; (7) seventh, unless an amount equal to the amount by which the Investor Default Amount for such Collection Period exceeds the sum of the amount of Investor Finance Charge Collections allocated thereto (i.e. the Investor Default Holdback Amount) and amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7 is then on deposit in the Collection Account and allocated therefor (without duplication of reallocations of Subordinated Principal Collections pursuant to clause (4) above), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as Investor Finance Charge Collections in the amount of any such deficiency; and (8) eighth, the balance, if any, of Subordinated Principal Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (1), (2), (3), (4), (5), (6) and (7) above) shall be distributed to the Depositor for application in accordance with the Receivables Purchase Agreement; or (C) if such Allocation Day occurs during an Early Amortization Period: (1) first, Subordinated Principal Collections will be reallocated as Investor Finance Charge Collections in the amount by which the sum of FBC Monthly Interest to accrue during the Related Interest Period, plus the amount of any FBC Carryover Interest for the Related Collection Period exceeds amounts on deposit in the Collection Account in respect thereof (after first giving effect to all allocations of Investor Finance Charge Collections and amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7); (2) second, unless an amount equal to the amount of all unreimbursed FBC Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as FBC Principal Collections and retained in the Collection Account until the sum of such amount equals the amount of all unreimbursed FBC Investor Charge-Offs; (3) third, unless an amount equal to the amount of any Investor Default Amounts allocable to the Fixed Base Invested Amount is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections or to be funded from amounts on deposit in the Spread Account and available for allocation therefor pursuant to Section 4.7), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as Investor Finance Charge Collections in the amount of any such deficiency; (4) fourth, Subordinated Principal Collections will be reallocated as FBC Principal Collections in the amount by which the Fixed Base Certificate Balance exceeds amounts on deposit in the Collection Account in respect thereof (after first giving effect to all allocations of FBC Principal Collections); (5) fifth, if amounts are required to be allocated pursuant to Section 4.1(c)(vi), unless an amount equal to the Make Whole Premium for the Related Collection Period (together with any Make Whole Premium previously due but not paid on a prior Distribution Date, plus interest thereon at the FBC Interest Rate) is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be reallocated as Investor Finance Charge Collections in the amount of any such deficiency; (6) sixth, unless an amount equal to the amount of all unreimbursed Subordinated Investor Charge-Offs is then on deposit in the Collection Account and allocated therefor (to the extent not already funded from Investor Finance Charge Collections), Subordinated Principal Collections received since the beginning of the preceding Business Day shall be retained in the Collection Account until the sum of such amounts equals the amount of all unreimbursed Subordinated Investor Charge-Offs; and (7) seventh, the balance, if any, of Subordinated Principal Collections received since the beginning of the preceding Business Day (after making the allocations described in paragraphs (1), (2), (3), (4), (5) and (6) above) shall (I) so long as the Subordinated Invested Amount is greater than zero, be retained in the Collection Account until an amount equal to the Subordinated Invested Amount is on deposit therein, and (II) if the Subordinated Invested Amount is zero, be distributed to the Depositor. (e) Investor Default Holdback Amount. On the last day of each Collection Period, the Servicer shall direct the Trustee in writing to apply the Investor Default Holdback Amount retained in the Collection Account during such Collection Period as follows: an amount equal to the Investor Default Amount for such Collection Period shall be reallocated as FBC Principal Collections and applied pursuant to Section 4.1(d)(i). To the extent the Investor Default Holdback Amount for the related Collection Period exceeds the related Investor Default Amount for such Collection Period, the excess Investor Default Holdback Amount shall be deemed to be Investor Finance Charge Collections available for application pursuant to Section 4.1(c). (f) Distributions. (i) On or before each Determination Date, the Servicer shall provide written directions to the Trustee directing the Trustee to distribute to the Fixed Base Certificateholders on the following Distribution Date from amounts on deposit in the Collection Account: (A) if such Determination Date relates to a Collection Period that commences during the Revolving Period (and during or prior to which no Early Amortization Event occurs), an amount equal to the sum of the amounts, if any, retained in the Collection Account during the Related Collection Period in respect of the Fixed Base Certificates pursuant to Section 4.1(c)(iii) and 4.1(d)(ii)(A)(1); or (B) if such Determination Date relates to a Collection Period that commences after the termination of the Revolving Period (and during or prior to which no Early Amortization Event occurs), an amount equal to the sum of the amounts, if any, retained in the Collection Account during the Related Collection Period in respect of the Fixed Base Certificates pursuant to Sections 4.1(c)(iii), 4.1(c)(v), 4.1(d)(i)(B)(1), 4.1(d)(i)(B)(2), 4.1(d)(ii)(B)(1), 4.1(d)(ii)(B)(2), 4.1(d)(ii)(B)(3) and 4.1(e) (to the extent allocated to amounts payable to the Fixed Base Certificateholders); or (C) if such Determination Date relates to a Collection Period that commences after the occurrence of an Early Amortization Event or during which an Early Amortization Event occurs, (1) an amount equal to the sum of the amounts, if any, retained in the Collection Account during the Related Collection Period in respect of the Fixed Rate Certificates pursuant to Sections 4.1(c)(iii), 4.1(c)(v), 4.1(c)(viii), 4.1(d)(i)(C)(1), 4.1(d)(i)(C)(2), 4.1(d)(ii)(C)(1), 4.1(d)(ii)(C)(2) and 4.1(d)(ii)(C)(4) and 4.1(e) (to the extent allocated to amounts payable to the Fixed Base Certificateholders); (ii) On or before each Determination Date, the Servicer shall provide written directions to the Trustee directing the Trustee to distribute to the Servicer on the following Distribution Date from amounts on deposit in the Collection Account, an amount equal to the sum of the amounts, if any, retained in the Collection Account during the Related Collection Period pursuant to Sections 4.1(c)(ii) and 4.1(c)(ix); provided, however, so long as Gottschalks is the Servicer, the Trustee shall first deduct from any amount payable to the Servicer pursuant to this paragraph an amount equal to the sum of (i) any accrued but unpaid trustee's fees owed to it pursuant to Section 11.05 of the Agreement and (ii) any accrued but unpaid fees of the Standby Servicer, but in no event in excess of the Monthly Senior Servicing Fee; (iii) On or before each Determination Date that occurs during an Early Amortization Period, the Servicer shall provide written directions to the Trustee directing the Trustee to distribute to the Subordinated Certificateholder on the following Distribution Date from amounts on deposit in the Collection Account an amount equal to the sum of the amounts, if any, retained in the Collection Account during the Related Collection Period in respect of the Subordinated Certificates pursuant to Section 4.1(d)(ii)(C)(7); (iv) On each Distribution Date, the Servicer shall provide written instructions to the Trustee directing the Trustee to distribute all amounts retained in the Collection Account pursuant to Section 4.1(c)(i) or Section 4.1(c)(x) that are necessary to cover any expenses referred to in Section 4.1(c)(i); and (v) On each Distribution Date, the Servicer shall provide written instructions to the Trustee directing the Trustee to distribute all amounts retained in the Collection Account pursuant to Section 4.1(c) and Section 4.1(d) and not required for any other purpose hereunder to the Depositor for application in accordance with the Receivables Purchase Agreement. (g) Other Amounts. The withdrawals to be made from the Collection Account pursuant to this Section 4.1 do not apply to deposits into the Collection Account that do not represent Collections, including proceeds from the sale, disposition or liquidation of Receivables pursuant to Section 9.02 or Section 12.02 of the Agreement, which shall be distributable pursuant to the priorities set forth in Article IX hereof. SECTION 4.2. Determination of FBC Monthly Interest. The amount of monthly interest (FBC Monthly Interest) distributable from the Collection Account (or, in the case of the first Distribution Date, from the Capitalized Interest Account) with respect to the Fixed Base Certificates on any Distribution Date shall be an amount equal to one-twelfth of the product of (i) the Fixed Base Certificate Balance as of the close of business on the first day of the Related Collection Period, and (ii) the FBC Interest Rate; provided that in the case of the initial Interest Period the FBC Monthly Interest shall be $496,456.89. On the Determination Date preceding each Distribution Date, the Servicer shall determine the excess, if any, of (x) the sum of FBC Monthly Interest for the Related Interest Period, plus the amount, if any, of the FBC Interest Shortfall which was due but not paid on the prior Distribution Date (which amount, as of the first Determination Date, shall be zero) over (y) the amount which will be available to be distributed to the Holders of the Fixed Base Certificates on such Distribution Date in respect thereof pursuant to this Series Supplement (such excess, the FBC Interest Shortfall). If, on any Distribution Date, the FBC Interest Shortfall is greater than zero, then an additional amount (FBC Additional Interest) shall be payable as provided herein with respect to Fixed Base Certificates on each Distribution Date following such Distribution Date, to but excluding the Distribution Date on which the FBC Interest Shortfall is paid to the Holders of the Fixed Base Certificates, in an amount equal to the product of (i) such FBC Interest Shortfall (or the portion thereof which has not previously been paid to Fixed Base Certificateholders) and (ii) one-twelfth of the FBC Interest Rate. Notwithstanding anything to the contrary herein, FBC Additional Interest shall be paid or distributed on Fixed Base Certificates only to the extent permitted by applicable law. SECTION 4.3. Determination of FBC Monthly Principal. The amount of monthly principal (FBC Monthly Principal) distributable from the Collection Account with respect to the Fixed Base Certificates on each Distribution Date prior to the Distribution Date relating to the first Collection Period during the Controlled Amortization Period or during which an Early Amortization Event occurs shall be zero. The amount of FBC Monthly Principal distributable from the Collection Account with respect to the Fixed Base Certificates on each Distribution Date commencing with the Distribution Date relating to the first Collection Period during the Controlled Amortization Period or during which an Early Amortization Event occurs shall be the lesser of (a) FBC Principal Collections (including Investor Finance Charge Collections, Subordinated Principal Collections, amounts on deposit in the Spread Account and allocated therefor pursuant to Section 4.7 and amounts on deposit in the Retained Amount Account reallocated as FBC Principal Collections) on deposit in the Collection Account and allocated thereto on such Distribution Date and (b) either (i) prior to the occurrence of an Early Amortization Event during such Related Collection Period, the sum of (A) the Controlled Amortization Amount and (B) the amount of unreimbursed FBC Investor Charge- Offs as of such Distribution Date, or (ii) following the occurrence of an Early Amortization Event during such Related Collection Period, the Fixed Base Certificate Balance. SECTION 4.4. Series Accounts. (a) The Servicer, for the benefit of the Certificateholders, shall establish and maintain in the name of the Trustee, on behalf of the Trust, (i) an Eligible Deposit Account (the Capitalized Interest Account), which shall be identified as the Capitalized Account for Gottschalks Credit Card Master Trust, Series 1999-1, (ii) an Eligible Deposit Account (the Retained Amount Account), which shall be identified as the Retained Amount Account for Gottschalks Credit Card Master Trust, Series 1999-1, and (iii) an Eligible Deposit Account (the Spread Account), which shall be identified as the Spread Account for Gottschalks Credit Card Master Trust, Series 1999-1. Each of the Capitalized Interest Account, the Retained Amount Account and the Spread Account shall bear a designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. The Capitalized Interest Account, the Retained Amount Account and the Spread Account are referred to herein individually as a Series Account and collectively as Series Accounts. (b) At the written direction of the Servicer, funds on deposit in any Series Account shall be invested by the Trustee in Eligible Investments selected by the Servicer that will mature no later than the date on which such funds are expected to be withdrawn from such Series Account. All such Eligible Investments shall be held by the Trustee for the benefit of the Certificateholders. All interest and other investment earnings (net of losses and investment expenses) of funds on deposit in the Series Accounts shall be deposited in the Collection Account and shall be treated by the Servicer as Investor Finance Charge Collections. In no event shall the Trustee be liable for the selection of investments or for investment losses incurred thereon. The Trustee shall have no liability in respect of losses incurred as a result of the liquidation of any such investment prior to its stated maturity or the failure of the party directing such investment to provide timely written investment direction. The Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of such written investment direction. (c) The Capitalized Interest Account shall be maintained until all amounts on deposit therein have been applied in accordance with Section 4.5 hereof. The Retained Amount Account shall be maintained until all amounts on deposit therein have been applied in accordance with Section 4.6(e) or (f) hereof. The Spread Account shall be maintained until all amounts on deposit therein have been applied in accordance with Section 4.7(c) hereof and the Fixed Base Certificate Balance has been reduced to zero. (d) The Trustee shall possess all right, title and interest in and to all funds on deposit from time to time in, and all Eligible Investments credited to, the Series Accounts and in all proceeds thereof. Each Series Account shall be under the sole dominion and control of the Trustee for the benefit of the Certificateholders. If, at any time, any Series Account ceases to be an Eligible Deposit Account the Servicer shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) instruct the Trustee to establish a new Series Account meeting the conditions specified in subsection (a) above as an Eligible Deposit Account and shall transfer any cash and/or any investments to such new Series Account. Neither the Depositor, the Servicer nor any person or entity claiming by, through or under the Depositor, the Servicer or any such person or entity shall have any right, title or interest in, or any right to withdraw any amount from, any Series Account, except as expressly provided herein. Schedule 1 hereto, which is hereby incorporated into and made part of this Series Supplement, identifies the Series Accounts by setting forth for each such account the account number of such account, the account designation of such account and the name of the institution with which such account has been established. If a substitute Series Account is established pursuant to this Section 4.4, the Servicer shall provide to the Trustee an amended Schedule 1, setting forth the relevant information for such substitute Series Account. (e) The Servicer shall maintain a ledger for the Retained Amount Account and shall record in such ledger the Investor Component and the Exchangeable Component of each deposit made by the Trustee to, and each withdrawal by the Trustee from, the Retained Amount Account. The Servicer shall also maintain a ledger for the Spread Account and shall record in such ledger each deposit made by the Trustee to, and withdrawal by the Trustee from, the Spread Account. (f) Pursuant to the authority granted to the Servicer in Section 3.01(a) of the Agreement, the Servicer shall have the power, revocable by the Trustee, to instruct the Trustee to make withdrawals and payments from the Series Accounts for the purposes of carrying out the Servicer's or the Trustee's duties hereunder. (g) The Trustee hereby confirms that (i) the Trustee is acting, with respect to the establishment and maintenance of Series Accounts, as a "securities intermediary" as defined in Section 8-102 of the UCC or the corresponding Section of the UCC in the applicable State (in such capacity, the Securities Intermediary), (ii) has established each Series Account as a "securities account" as such term is defined in Section 8-501(a) of the UCC, (iii) the Securities Intermediary shall, subject to the terms of this Agreement, treat the Trustee as entitled to exercise the rights that comprise any financial asset credited to any Series Account, and (iv) all securities or other property underlying any financial assets credited to any Series Account shall be registered in the name of the Securities Intermediary, endorsed to the Securities Intermediary or in blank and in no case will any financial asset credited to any Series Account be registered in the name of any other person, payable to the order of any other person, or specially endorsed to any other person, except to the extent the foregoing have been specially endorsed by the Depositor to the Trustee. (h) The Trustee hereby agrees that any Series Account and each item of property (whether investment property, financial asset, security or instrument), other than cash, credited to any Series Account shall be treated as a "financial asset" within the meaning of Section 8-102(A)(9) of the UCC or the corresponding Section of the UCC in the applicable State. (i) If at any time the Securities Intermediary shall receive an "entitlement order" (within the meaning of Section 8- 102(A)(8) of the UCC or the corresponding Section of the UCC in the applicable State issued by the Trustee and relating to any Series Account, the Securities Intermediary shall comply with such entitlement order without further consent by any other person. The Trustee hereby agrees only to issue entitlement orders at the written direction of the Servicer. The Securities Intermediary shall have no obligation to act, and shall be fully protected in refraining from acting, in respect of the financial assets credited to any Series Account in the absence of such an entitlement order. (j) In the event that the Securities Intermediary has or subsequently obtains by agreement, operation of law or otherwise a security interest in the Securities Accounts, or any security entitlement credited thereto, the Securities Intermediary hereby agrees that such security interest shall be subordinate to the security interest of the Trustee. The financial assets and other items deposited to the Series Accounts (or any other securities account maintained in the name of the Securities Intermediary for the benefit of the Trustee) will not be subject to deduction, set- off, banker's lien, or any other right in favor of any person other than the Trustee. (k) The Trustee, in such capacity, has not entered into and, until termination of this Agreement, will not enter into, any agreement with any other person relating to any Series Account, or any financial assets credited thereto pursuant to which it has agreed or will agree to comply with entitlement orders (as defined in Section 8-102(a)(8) of the UCC or the corresponding Section of the UCC in the applicable State) of such person. No financial asset will be registered in the name of the Trustee, in such capacity, payable to its order, or specially endorsed to it, except to the extent such financial asset has been endorsed to the Securities Intermediary or in blank. SECTION 4.5. Capitalized Interest Account. On the Closing Date, the Trustee shall deposit in the Capitalized Interest Account from the proceeds of the sale of the Fixed Base Certificates and certain other amounts collected in respect of the Receivables prior to the Cut-Off Date an amount equal to the FBC Monthly Interest that will have accrued and be due and payable to the Holders of the Fixed Base Certificates on the first Distribution Date (as determined by the Servicer). On the first Distribution Date, the Servicer shall direct the Trustee in writing to withdraw from the Capitalized Interest Account for distribution to the Holders of the Fixed Base Certificates an amount equal to the FBC Monthly Interest that is due and payable on such Distribution Date. SECTION 4.6. Retained Amount Account. The Servicer shall direct the Trustee in writing to deposit amounts in, and withdraw amounts from, the Retained Amount Account as follows: (a) Deposits into Retained Amount Account. (i) If on any Business Day before the occurrence of an Early Amortization Event, the Required Series Pool Balance exceeds the Series Pool Balance, as and to the extent set forth in Section 4.1(d) hereof Investor Principal Collections will be deposited into the Retained Amount Account until the sum of the Series Pool Balance and the amount of Investor Principal Collections then on deposit in the Retained Amount Account (the Investor Component of the balance of the Retained Amount Account) equals the Required Series Pool Balance on such date. (ii) If on any Business Day during a Collection period that commences before the occurrence of an Early Amortization Event, the Required Exchangeable Certificate Amount on such day exceeds the sum of the Exchangeable Holder's Interest, the aggregate amount of Eligible Past Due Receivables and Retained Exchangeable Amounts then on deposit in the Retained Amount Account, the Trustee shall, in accordance with the written directions of the Servicer, deposit into the Retained Amount Account from amounts otherwise distributable to the holder of the Exchangeable Certificate the amount of such excess (the aggregate of the amounts so deposited into the Retained Amount Account on any Business Day, the Retained Exchangeable Amount). (b) Withdrawals of Excess Amounts from Retained Amount Account. (i) If on any Business Day before the occurrence of an Early Amortization Event, the sum of the Series Pool Balance and the Investor Component of amounts on deposit in the Retained Amount Account exceeds the Required Series Pool Balance, the Trustee will, in accordance with the written directions of the Servicer, withdraw the Investor Component of funds in the Retained Amount Account up to the amount of such excess and distribute such amount to the Depositor. (ii) If on any Business Day before the occurrence of an Early Amortization Event, the sum of the Exchangeable Holder's Interest, the aggregate amount of Eligible Past Due Receivables and Retained Exchangeable Amounts then on deposit in the Retained Amount Account exceeds the Required Exchangeable Certificate Amount, the Trustee will, in accordance with the written directions of the Servicer, withdraw the Retained Exchangeable Amount up to the amount of such excess and distribute such amount to the holder of the Exchangeable Certificate. (c) Withdrawals Following Termination of Revolving Period. (i) On each Distribution Date relating to a Collection Period that commences after the termination of the Revolving Period (and during or prior to which no Early Amortization Event occurs), the Trustee shall, in accordance with the written directions of the Servicer, withdraw from the Investor Component of amounts on deposit in the Retained Amount Account the portion of any Controlled Amortization Amount or any Investor Default Amount allocable to the Fixed Base Invested Amount pursuant to Section 4.9 that is not funded from Investor Finance Charge Collections, amounts on deposit in the Spread Account and allocated therefor pursuant to Section 4.7, reductions of the Subordinated Invested Amount, or reallocations of Subordinated Principal Collections and shall deposit such amounts in the Collection Account as FBC Principal Collections for application pursuant to Section 4.1(d)(i) to make payment on such Distribution Date of such amounts to the Holders of the Fixed Base Certificates or release to the Depositor for application pursuant to the Receivables Purchase Agreement. On the Distribution Date relating to the first Collection Period during which an Early Amortization Event occurs or which commences after the occurrence of an Early Amortization Event, the Trustee shall withdraw, in accordance with the written directions of the Servicer, the Investor Component of amounts on deposit in the Retained Amount Account and deposit such funds into the Collection Account as FBC Principal Collections for application pursuant to Section 4.1(d) and for distribution on such Distribution Date. (ii) On the earlier of the Distribution Date on which the Fixed Base Certificate Balance in reduced to zero or the August 2006 Distribution Date, the Trustee shall, in accordance with the written directions of the Servicer, withdraw, the Retained Exchangeable Amount on deposit in the Retained Amount Account and distribute such amount to the holder of the Exchangeable Certificate. (d) Withdrawals upon Series Termination or Payment in Full of Fixed Base Certificates. At the close of business of the Servicer on the earlier of (i) the Series Termination Date and (ii) the date on which the Fixed Base Certificate Balance has been reduced to zero, the balance, if any, remaining in the Retained Amount Account shall be withdrawn and transferred to the Depositor. SECTION 4.7. Spread Account. (a) If on any Determination Date the Servicer determines that a Deficiency Amount exists, the Servicer shall direct the Trustee in writing to withdraw from the Spread Account and deposit in the Collection Account on the Related Distribution Date an amount equal to the lesser of (i) the amount of such Deficiency Amount less, during the Controlled Amortization Period, any amounts deposited in the Collection Account pursuant to Section 4.6(c), and (ii) the balance of the Spread Account. Amounts so deposited in the Collection Account shall be set aside therein to fund (in whole or part) the amount of any such Deficiency Amount. In the event that a withdrawal is made from the Spread Account on any Determination Date and the amount of such withdrawal is less than the Deficiency Amount calculated on such Determination Date, then the amount withdrawn shall be applied in the following priority, first, against the amounts described in clause (i)(A) of the definition of Deficiency Amount, second, against the amounts described in clause (i)(B) of the definition of Deficiency Amount, third, against the amounts described in clause (i)(C) of the definition of Deficiency Amount, and fourth, against the amounts described in clause (i)(D) of the definition of Deficiency Amount. (b) On any Determination Date relating to a Collection Period that commences after the termination of the Revolving Period (and during or prior to which no Early Amortization Event occurs), following the applications made pursuant to clause (a) above, the Servicer shall direct the Trustee in writing (i.e. in the Distribution Date Statement and by the following provisions) to reallocate from amounts remaining on deposit in the Spread Account as FBC Principal Collections and deposit into the Collection Account on the related Distribution Date the amount by which the Controlled Amortization Amount due on the Related Distribution Date exceeds amounts allocated therefor pursuant to Sections 4.1(d), 4.1(e), and 4.9. On any Determination Date relating to a Collection Period during which an Early Amortization Event occurs, following the applications made pursuant to clause (a) above, the Servicer shall direct the Trustee in writing (i.e. in the Distribution Date Statement and by the following provisions) to reallocate amounts remaining on deposit in the Spread Account as FBC Principal Collections and deposit into the Collection Account on the related Distribution Date (i) the amount by which the Fixed Base Certificate Balance on the Related Distribution Date exceeds amounts allocated therefor, pursuant to Sections 4.1(d), 4.1(e), and 4.9 and (ii) the amount by which any Make Whole Premium due on the Related Distribution Date (plus interest accrued thereon, to the extent lawful, at the FBC Interest Rate) exceeds amounts allocated therefor, and, thereafter, any remaining amounts on deposit in the Spread Account will be applied to fund the remaining unfunded amounts described in Section 4.1(c), in the order of priorities set forth therein. (c) A Spread Account Trigger shall be cured if no Early Amortization Events have occurred and (i) on or prior to the Distribution Date in August 2002, all Spread Account Triggers have been complied with for three consecutive months or (ii) after the Distribution Date in August 2002, all Spread Account Triggers have been complied with for six consecutive months. Promptly after a Spread Account Trigger has been cured, the Servicer shall give written notice of such cure to the Trustee. (d) If a Spread Account Trigger has been cured, all funds retained in the Spread Account will be reallocated as Investor Finance Charge Collections and applied pursuant to the priorities set forth in Section 4.1(c); provided, however, that (a) if a Spread Account Trigger is cured following the commencement of a Controlled Amortization Period, funds retained in the Spread Account will be transferred to the Collection Account on the related Distribution Date and applied to cover any Deficiency Amount and then in reduction of the Fixed Base Certificate Balance, to the extent of any unpaid Controlled Amortization Amount then due and any unreimbursed Investor Charge-Offs allocated thereto, and then to fund the remaining unfunded amounts described in Section 4.1(c), in the order of priorities set forth therein, and (b) if an Early Amortization Event occurs prior to any such cure, any remaining amounts on deposit in the Spread Account will be transferred to the Collection Account on the related Distribution Date and applied on such date to cover any Deficiency Amount and then in reduction of the Fixed Base Certificate Balance until on such date it is reduced to zero and, thereafter, to fund any accrued and unpaid Make Whole Premium (together with interest thereon, to the extent lawful, at the FBC Interest Rate), and then to fund the remaining unfunded amounts described in Section 4.1(c), in the order of priorities set forth therein. (e) On the earlier of the August 2006 Distribution Date or the Distribution Date on which the Fixed Base Certificate Balance is reduced to zero, any amounts remaining on deposit in the Spread Account after all of the foregoing applications have been made will be applied to cover any accrued and unpaid Make Whole Premium (plus interest thereon at the FBC Interest Rate). Thereafter, any amounts remaining on deposit in the Spread Account will be applied to reduce the Subordinated Invested Amount to zero and the balance, if any, will be released to the Depositor.. SECTION 4.8. Deficiency Amount. On each Determination Date, the Servicer shall determine whether a Deficiency Amount exists. In the event the Deficiency Amount for such Distribution Date is greater than zero, the Servicer shall give the Trustee written notice thereof on the date of computation, and shall give the Trustee the direction specified in Section 4.7. SECTION 4.9. Investor Charge-Offs. (a) On each Distribution Date, the Trustee will, in accordance with the written directions of the Servicer, apply the Investor Default Holdback Amount to fund any Investor Default Amount as set forth in Section 4.1(e). Thereafter, the Trustee will, in accordance with the written directions of the Servicer, fund any Deficiency Amount that represents Investor Default Amounts not funded by the Investor Default Holdback Amount from amounts on deposit in the Spread Account and allocated therefor pursuant to Section 4.7. Thereafter, the Subordinated Invested Amount shall be reduced by the amount of any remaining Investor Default Amount for such Distribution Date (a Subordinated Reduction). In the event that a Subordinated Reduction would cause the Subordinated Invested Amount to be a negative number, the Subordinated Invested Amount shall instead be reduced to zero, and the Fixed Base Invested Amount shall be reduced (not below zero) by the amount which the Subordinated Invested Amount would have been reduced below zero, except to the extent that there are Subordinated Principal Collections available to fund such amount pursuant to Section 4.1(d)(ii) or amounts are available to be withdrawn from the Investor Component of amounts on deposit in the Retained Amount Account and applied thereto (such reduction to the Fixed Base Invested Amount, a FBC Investor Charge-Off). FBC Investor Charge-Offs shall be reimbursed and the Fixed Base Invested Amount shall thereupon be increased during the Revolving Period or any related Distribution Date (but not by an amount in excess of the aggregate FBC Investor Charge-Offs), or the Fixed Base Certificate Balance reduced without corresponding reduction in the Fixed Base Invested Amount to the extent such reimbursements are made by payments of principal to the Holders of the Fixed Base Certificates on any Distribution Date pursuant to Section 4.1(f)(i)(B) or (C), by the amount of Investor Finance Charge Collections reallocated as FBC Principal Collections for that purpose pursuant to Section 4.1(c)(v), from Subordinated Principal Collections retained in the Collection Account pursuant to Sections 4.1(d)(ii)(A)(2), 4.1(d)(ii)(B)(3) and 4.1(d)(ii)(C)(2) hereof, from withdrawals of the Investor Component of amounts on deposit in the Retained Amount Account, and from FBC Principal Collections retained in the Collection Account pursuant to Sections 4.1(d)(i)(A)(1) and 4.1(d)(i)(B)(2). (b) Subordinated Investor Charge-Offs. Subordinated Reductions and amounts withdrawn from Subordinated Principal Collections pursuant to Sections 4.1(d)(ii)(A)(1), 4.1(d)(ii)(A)(2), 4.1(d)(ii)(B)(1), 4.1(d)(ii)(B)(2), 4.1(d)(ii)(B)(3), 4.1(d)(ii)(C)(1), 4.1(d)(ii)(C)(2) and 4.1(d)(ii)(C)(4) are collectively referred to herein as Subordinated Investor Charge-Offs. Subordinated Investor Charge-Offs will result in a reduction in the Subordinated Invested Amount. Subordinated Investor Charge-Offs shall be reimbursed to the extent that Investor Finance Charge Collections are reallocated as Subordinated Principal Collections pursuant to Section 4.1(c)(vi) hereof and (i) the Subordinated Invested Amount increased during the Revolving Period or any related Distribution Date (but not by an amount in excess of the aggregate Subordinated Investor Charge-Offs), or (ii) to the extent such reimbursements are made by payments of principal to the holder of the Subordinated Certificate pursuant to Section 4.1(f)(i)(B) or (C), made without further reduction to the Subordinated Invested Amount. Reimbursements of Subordinated Investor Charge-Offs will not be made in amounts in excess of the aggregate amount of Subordinated Investor Charge-Offs. SECTION 4.10. Trustee Expenses Associated with Servicing Assumption. (a) The Servicer shall maintain a letter of credit or surety bond in amount not to exceed $200,000 (or such other amount as may be agreed to in writing by the Servicer and the Trustee), to be used to cover the reasonable costs and expenses of the Trustee associated with the Trustee's assumption of Servicing duties. The requirements of this Section 4.10(a) shall not be deemed to have been met until the Trustee shall have approved in writing the form and substance of any such letter of credit or surety bond, such approval to not be unreasonably withheld. (b) In the event of the commencement of an Early Amortization Period or a Servicer Default resulting in the assumption of servicing duties by the Trustee, the Trustee may draw upon the letter of credit or surety bond in order to pay the reasonable costs and expenses of the Trustee in connection with the performance of its duties in connection with such event, and shall provide to the Servicer in writing an itemized report of each cost and expense, the related duty and action undertaken and the name of the recipient of the related payment within three Business Days of each such draw. (c) Amounts drawn upon the letter of credit shall be reimbursed from amounts allocated pursuant to Section 4.1(c)(x). (d) The Servicer may replace any then existing letter of credit or surety bond with either a letter of credit or a surety bond with the written the consent of the Trustee, such consent not to be unreasonably withheld. ARTICLE V Distributions and Reports SECTION 5.1. Distributions. On each Distribution Date, the Trustee shall distribute to the Certificateholders of record on the preceding Record Date (other than as provided in Section 12.02 of the Agreement respecting a final distribution) such Certificateholder's pro rata share of the amounts required to be distributed pursuant to Article IV hereof and in accordance with the written direction of the Servicer. Except as provided in Section 12.02 of the Agreement with respect to a final distribution, distributions to Certificateholders hereunder shall be made by wire transfer in immediately available funds. SECTION 5.2. Other Notices to Holders. Notwithstanding any other provision of the Agreement or this Series Supplement to the contrary, the Trustee and the Servicer shall promptly deliver to the initial Holders of the Fixed Base Certificates a copy of each notice, statement or other document received or generated by it pursuant to Sections 3.03(b), 3.04(b), 3.05, 3.06, 9.01 or 10.01 of the Agreement; provided, however, that the Trustee shall not be required to deliver to the initial Holders copies of notices, statements or other documents received from the Servicer and for which the Servicer is required to deliver such notices, statements or other documents directly to the Holders and vice versa. ARTICLE VI The Certificates SECTION 6.1. The Fixed Base Certificates. The __% Fixed Base Credit Card Certificates, Series 1999-1 (the Fixed Base Certificates) upon original issuance, will be issued in registered form in the form of one or more definitive typewritten certificates substantially in the form of Exhibit A-1 hereto, to be executed and delivered by, or on behalf of, the Depositor to the Trustee for authentication. The Trustee shall, upon the written request of the Depositor, authenticate and deliver the Fixed Rate Certificates to the Person or Persons designated in such notice. SECTION 6.2. Transfer Restrictions. (a) The Trustee shall not authenticate and deliver to any Person any Fixed Base Certificate unless it contains a legend in substantially the following form: THIS CERTIFICATE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 1933 ACT), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION IN RELIANCE ON EXEMPTIONS PROVIDED BY THE 1933 ACT AND SUCH STATE OR FOREIGN SECURITIES LAWS. THE CERTIFICATES ARE ELIGIBLE FOR PURCHASE PURSUANT TO RULE 144A UNDER THE 1933 ACT. NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS SUCH RESALE OR TRANSFER (A) IS MADE IN ACCORDANCE WITH SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN AND (B) IS MADE EITHER (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, (ii) IN A TRANSACTION (OTHER THAN A TRANSACTION IN CLAUSE (iv) BELOW) EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND APPLICABLE STATE AND FOREIGN SECURITIES LAWS, (iii) TO GOTTSCHALKS CREDIT RECEIVABLES CORPORATION (THE DEPOSITOR) OR (iv) TO A PERSON WHO THE TRANSFEROR OF THIS CERTIFICATE REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE 1933 ACT THAT IS AWARE THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR TO AN INSTITUTIONAL ACCREDITED INVESTOR UNDER RULE 501(a)(1), (2), (3) OR (7) UNDER THE 1933 ACT. IN THE EVENT THAT THE TRANSFER OF A CERTIFICATE IS TO BE MADE AS DESCRIBED IN CLAUSE (ii) OF THE PRECEDING SENTENCE, THE PROSPECTIVE INVESTOR IS REQUIRED TO DELIVER AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE AND THE DEPOSITOR TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE OR FOREIGN SECURITIES LAWS. THE PROSPECTIVE TRANSFEREE IN A TRANSFER OF A CERTIFICATE TO BE MADE AS DESCRIBED IN CLAUSES (ii) AND (iv) ABOVE MUST DELIVER TO THE TRUSTEE A REPRESENTATION LETTER REQUIRED BY SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. PROSPECTIVE PURCHASERS OF THE CERTIFICATES ARE HEREBY NOTIFIED THAT THE SELLER OF ANY CERTIFICATES MAY BE RELYING ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE ACT PROVIDED BY RULE 144A UNDER THE ACT. THIS CERTIFICATE OR A BENEFICIAL INTEREST HEREIN MAY NOT BE TRANSFERRED UNLESS THE TRUSTEE HAS RECEIVED (I) A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (ERISA), OR SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE CODE), OR A GOVERNMENTAL PLAN DEFINED IN SECTION 3(32) OF ERISA OR SECTION 414(d) OF THE CODE SUBJECT TO ANY FEDERAL STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (SIMILAR LAW) (EACH, A BENEFIT PLAN) AND IS NOT AN ENTITY INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR AN INSURANCE COMPANY GENERAL ACCOUNT IF THE ASSETS IN ANY SUCH ACCOUNTS CONSTITUTE PLAN ASSETS FOR PURPOSES OF REGULATION SECTION 2510.3-101 OF ERISA, WHOSE UNDERLYING ASSETS INCLUDE BENEFIT PLAN ASSETS BY REASON OF A BENEFIT PLAN'S INVESTMENT IN THE ENTITY (SUCH BENEFIT PLAN OR ENTITY, A BENEFIT PLAN INVESTOR) AND (II) A CERTIFICATE TO THE EFFECT THAT IF THE TRANSFEREE IS A PARTNERSHIP, GRANTOR TRUST OR S CORPORATION FOR FEDERAL INCOME TAX PURPOSES (A FLOW-THROUGH ENTITY), ANY CERTIFICATES OWNED BY SUCH FLOW-THROUGH ENTITY WILL REPRESENT LESS THAN 50% OF THE VALUE OF ALL THE ASSETS OWNED BY SUCH FLOW-THROUGH ENTITY AND NO SPECIAL ALLOCATION OF INCOME, GAIN, LOSS, DEDUCTION OR CREDIT FROM SUCH CERTIFICATES WILL BE MADE AMONG THE BENEFICIAL OWNERS OF SUCH FLOW-THROUGH ENTITY. IN ADDITION, NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE PERMITTED UNLESS IMMEDIATELY AFTER GIVING EFFECT TO SUCH RESALE OR OTHER TRANSFER, THERE WOULD BE FEWER THAN 100 CERTIFICATEHOLDERS. (b) No transfer of any Fixed Base Certificates shall be made unless such resale or transfer is made (i) pursuant to an effective registration statement under the 1933 Act, (ii) in a transaction (other than a transaction in clause (iv) below) exempt from the registration requirements of the 1933 Act and applicable state and foreign securities laws, (iii) to the Depositor or (iv) to a Person who the transferor of such Fixed Base Certificate reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the 1933 Act and that is aware that the resale or other transfer is being made in reliance on Rule 144A or to an institutional accredited investor as defined in Rule 501(a)(1), (2), (3) or (7) under the 1933 Act (an Institutional Accredited Investor). In the event that a transfer is to be made as described in clause (ii) of the preceding sentence, the prospective transferee shall deliver or cause to be delivered an Opinion of Counsel in form and substance satisfactory to the Trustee and the Depositor to the effect that such transfer may be made without registration under the 1933 Act or any applicable state or foreign securities laws. In the event that a transfer is to be made to an Institutional Accredited Investor as described in clause (iv) or in a transaction as described in clause (ii), the Trustee shall require that the transferee execute a representation letter acceptable to and in form and substance satisfactory to the Trustee (provided that the form attached as Exhibit C or Exhibit D, as applicable, shall be deemed acceptable if it is completed in a manner acceptable to the Trustee) certifying to the Trustee the facts surrounding such transfer, which representation letter shall not be an expense of the Trustee, the Depositor or the Servicer. In the case of a transfer under either clause (ii) or clause (iv), the Holder of a Fixed Base Certificate desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Depositor and the Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with the 1933 Act and such state and foreign securities laws. Neither the Depositor, the Servicer nor the Trustee is under any obligation to register any Fixed Base Certificates under the 1933 Act or any applicable state or foreign securities laws. Prospective purchasers of Fixed Base Certificates are hereby notified that the seller of any Fixed Base Certificate may be relying on the exemption from the registration requirements of Section 5 of the Act provided by Rule 144A under the Act. (c) Fixed Base Certificates or beneficial interests therein may not be transferred unless the Trustee has received a certificate to the effect that if the transferee is a partnership, grantor trust or S corporation for federal income tax purposes (a Flow-Through Entity), any Fixed Base Certificates owned by such Flow-Through Entity will represent less than 50% of the value of all the assets owned by such Flow-Through Entity and no special allocation of income, gain, loss, deduction or credit from such Fixed Base Certificates will be made among the beneficial owners of such Flow-Through Entity. (d) No Fixed Base Certificate or beneficial interest therein may be transferred to a transferee (other than the Initial Holder) who is an employee benefit plan, trust or account, subject to ERISA, or subject to Section 4975 of the Code, or a governmental plan defined in Section 3(32) of ERISA or Section 414(d) of the Code subject to any federal, state or local law which is, to a material extent, similar to the foregoing provisions of ERISA or the Code, or to an entity, including an insurance company separate account or an insurance company general account if the assets in any such accounts constitute Plan Assets for the purposes of regulation Section 2510-3101 of ERISA, whose underlying assets include Benefit Plan assets by reason of a Benefit Plan's investment in the entity. Unless the Trustee shall have received a certificate from the transferee making the representations with respect to such ERISA matters set forth in Exhibit C hereto, the Trustee shall not permit a transfer of Fixed Base Certificates to such transferee. (e) The Depositor shall, whenever the Trust is not subject to Section 13 or 15(d) of the Exchange Act, make available, upon request, to any holder of such Fixed Base Certificates in connection with any sale thereof and any prospective purchaser of Fixed Base Certificates from such holder the information specified in Rule 144A(d)(4) under the 1933 Act. (f) In addition, no resale or other transfer of the Fixed Base Certificates or any interest therein shall be permitted unless immediately after giving effect to such resale or other transfer, there would be fewer than 100 Fixed Base Certificateholders. (g) Prior to due presentation of a Certificate for registration of transfer, the Trustee, the Certificate Registrar and any of their respective agents may treat the Person in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving distributions and for all other purposes whatsoever, and neither the Trustee, the Certificate Registrar nor any of their respective agents shall be affected by any notice to the contrary. (h) The Trustee may conclusively rely and shall be fully protected in acting upon any certificate or investment representation letter delivered to it under this Article VI or under Article VI of the Agreement. SECTION 6.3. The Subordinated Certificate. The Subordinated Certificate will be issued in definitive registered form, substantially in the form of Exhibit A-2, and shall upon issue, be executed and delivered by the Depositor to the Trustee for authentication. The Trustee shall authenticate and deliver the Subordinated Certificate to the Depositor simultaneously with its delivery of the Fixed Base Certificates. The Subordinated Certificate shall not be transferable. SECTION 6.4. The Exchangeable Certificate. The Exchangeable Certificate will be issued in definitive registered form, and shall be executed, authenticated and delivered as provided in Section 6.02 of the Agreement. The Exchangeable Certificate shall be a single certificate and shall represent the entire Depositor Interest. ARTICLE VII Early Amortization Events; Servicer Defaults; Merger of Servicer SECTION 7.1. Additional Early Amortization Events. If any one or more of the following events shall occur: (a) failure on the part of the Depositor (i) to make any payment or deposit required to be made by the Depositor by the terms of (A) the Agreement or (B) this Series Supplement, within two Business Days of Depositor's receipt of written notice of such nonpayment or (ii) duly to observe or perform in any material respect any covenants or agreements of the Depositor set forth in the Agreement or this Series Supplement, which failure to observe or perform has a material adverse effect on the Certificateholders and which continues unremedied for a period of 30 days after the earlier of (A) the date the Depositor has knowledge thereof and (B) the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Depositor by the Trustee, or to the Depositor and the Trustee by the Holders of Certificates representing more than 50% of the Invested Amount, and continues to affect materially and adversely the interests of the Certificateholders for such period; or (b) the balance of the Investor Component of the Retained Amount Account is required to exceed $3.5 million for 60 consecutive days; or (c) the Subordinated Invested Amount is reduced by a writedown of 33% or more of its initial balance on a day when the Fixed Base Invested Amount is greater than zero; or (d) the Fixed Base Certificate Balance is not reduced to zero on or before the Expected Final Distribution Date, or any Controlled Amortization Amount is not paid in full when due; or (e) any representation or warranty made by the Depositor in the Agreement or this Series Supplement, or any information contained in a computer file or microfiche list or written list required to be delivered by the Depositor pursuant to Section 2.01, 2.06 or 2.08 of the Agreement, (i) shall prove to have been incorrect in any material respect when made or when delivered, which continues to be incorrect in any material respect for a period of 60 days after the earlier of (A) the date the Depositor has knowledge thereof and (B) the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Depositor by the Trustee, or to the Depositor and the Trustee by the Holders of Certificates representing more than 50% of the Invested Amount, and (ii) as a result of which the interests of the Certificateholders are materially and adversely affected and continue to be materially and adversely affected for such period; provided, however, that an Early Amortization Event pursuant to this subsection 7.1(e) shall not be deemed to have occurred hereunder if the Depositor has accepted reassignment of or repurchased the related Receivable, or all of such Receivables, if applicable, during such period in accordance with the provisions of the Agreement; or (f) the rating of the Fixed Base Certificates is withdrawn or downgraded below BBB; (g) the sum of (A) the Exchangeable Holder's Interest and (B) the aggregate principal amount of any Eligible Past Due Receivables and (C) the Retained Exchangeable Amount is reduced below the Required Exchangeable Certificate Amount; (h) the Required Series Pool Balance shall exceed the Series Pool Balance during any Block Period and the Depositor shall fail to (i) designate additional Charge Accounts as Supplemental Accounts as required pursuant to Section 2.08(c) of the Agreement or (ii) convey Receivables in Supplemental Accounts to the Trust within five (5) Business Days after the day on which it is required to convey such Receivables pursuant to the Agreement; (i) taken as an average of the relevant calculation for each of the three preceding calendar months: (i) the Portfolio Yield is less than 12.0%; (ii) the Default Rate exceeds 10.0%; (iii) the Excess Spread is less than 1.0%; (iv) the Delinquency Rate exceeds 3.00%; or (v) the Monthly Payment Rate is less than 17.5%. then, in the case of any such event described in this Section 7.1, subject to applicable law, an Early Amortization Event shall occur without any notice or other action on the part of the Trustee or the Certificateholders (except as otherwise provided in any such subsection), immediately upon the occurrence of such event. SECTION 7.2. Waiver. Notwithstanding the declaration or occurrence of an Early Amortization Period, the Holders of Certificates representing more than 50% of the FBC Invented Amount may, by written notice to the Trustee, waive such Early Amortization Event. Such waiver shall be binding upon all Fixed Base Certificateholders and the other parties to this Series Supplement. In the case of such a waiver, all parties hereto and all such Certificateholders shall be restored to their former positions and rights hereunder and any such Early Amortization Period shall be deemed not to be continuing; provided, however, this Section 7.2 shall not apply in the case that a Servicer Default described in clause (a) or (d) of Section 7.3 results in an Early Amortization Event of the type described in Section 9.01(c) of the Agreement. SECTION 7.3. Additional Servicer Defaults. If any one of the following events shall occur and be continuing with respect to the Servicer, it shall be deemed a Servicer Default, subject to the provisions of Section 10.01 of the Agreement: (a) the replacement for any reason of Gottschalks as the Servicer; provided, however, a Servicer Default shall not be deemed to have occurred if (i) such Successor Servicer, immediately after giving effect to such transaction, has a financial condition, taking into account such elements as (1) liquidity, (2) leverage position and (3) net worth equal to or stronger than Gottschalks, and (ii) such Servicer has been appointed with Consent of Certificateholders, such consent not to be unreasonably withheld in accordance with Section 8.04 of the Agreement. (b) the Servicer shall have received a qualified opinion from its Independent Certified Public Accountants arising from the discovery of an accounting irregularity. (c) the Servicer's Adjusted Net Worth, determined on any day in accordance with generally accepted accounting principles shall be less than the greater of (i) $70.0 million or (ii) the amount stipulated in the Servicer's line of credit agreement with Congress Financial Corporation, Western (or any replacement line of credit). (d) a final judgment, claim, suit, or fine shall have been entered against, or a nonappealable fine imposed upon, the Servicer which creates a liability of more than $1,000,000 in excess of insured amounts and has not been stayed (by appeal or otherwise), vacated, discharged or otherwise satisfied within 60 calendar days of the entry of such final judgement. (e) Gottschalks fails to maintain a credit facility equal to or greater than the lesser of (i) $80 million or (ii) $95 million less any amounts raised subsequent to the Closing Date pursuant to any offerings of equity securities or offerings of subordinated debt whose maturity extends beyond the Distribution Date in August 2004. (f) Jim Famalette (i) has become deceased, (ii) has been rendered unable to work for a period of six consecutive months, (iii) has resigned from Gottschalks or (iv) has otherwise ceased working for Gottschalks and has not been replaced within 150 days (after the initial instance described in (i), (ii), (iii) or (iv) above) with a replacement which is acceptable to the Holders holding more than 50% of the Fixed Base Invested Amount (whose acceptance will not be unreasonably withheld). SECTION 7.4. Merger or Consolidation of, or Assumption of, the Obligations of the Servicer. Subject to section 8.04 of the Agreement, the Servicer shall not consolidate with or merge into any other entity or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (a) immediately after giving effect to such transaction, the financial condition of the Servicer, taking into account such elements as (i) liquidity, (ii) leverage position and (iii) net worth shall be equal to or stronger than Gottschalks; and (b) the Servicer shall have obtained the consent of holders of more than 50% of the Fixed Base Invested Amount (not to be unreasonably withheld in the event the Rating Agency Condition shall have been satisfied). ARTICLE VIII Optional Repurchase SECTION 8.1. Optional Repurchase. On any Distribution Date occurring after the date on which the Fixed Base Invested Amount is reduced to 10% or less of the Initial Fixed Base Invested Amount, the Servicer shall have the option to purchase the entire amount of, but not less than the entire amount of, the Receivables, at a purchase price equal to the Optional Purchase Price for such Distribution Date. (a) The Depositor shall give the Servicer and the Trustee at least ten (10) days' prior written notice of the Distribution Date on which the Depositor intends to exercise such purchase option. Not later than 12:00 noon, New York City time, on such Distribution Date the Servicer shall deposit the Optional Purchase Price into the Collection Account in immediately available funds. Such purchase option is subject to payment in full of the Optional Purchase Price. The Optional Purchase Price shall be distributed as set forth in Section 9.1(a) hereof. ARTICLE IX Final Distributions SECTION 9.1. Final Distributions. (a) The amount to be deposited into the Collection Account by the Depositor with respect to the purchase of the Fixed Base Certificates pursuant to Section 2.03 of the Agreement shall equal the Optional Purchase Price as of the first Distribution Date following the Collection Period in which the obligation arises under the Agreement. The Optional Purchase Price deposited into the Collection Account pursuant to this Section 9.1 or Section 8.1 of this Series Supplement and allocated to Series 1999-1, shall be applied by the Trustee at the written direction of the Servicer (i.e. as set forth in the Distribution Date Statement and below), not later than 2:00 p.m., New York City time, on the Distribution Date on which such amounts are deposited, provided that if such deposit is not made prior to 1:00 p.m., New York City time, the Trustee shall not be required to make such applications until the following Business Day (or, in either case, if such date is not a Distribution Date, on the immediately following Distribution Date). The Optional Purchase Price shall be applied on such Distribution Date to pay following amounts in the following order of priority: (i) accrued and unpaid interest on the unpaid Fixed Base Certificate Balance (including any FBC Carryover Interest), (ii) the Fixed Base Certificate Balance on such Distribution Date and (iii) any accrued and unpaid Make Whole Premium (together with interest thereon, to the extent lawful, at the FBC Interest Rate). (b) Termination Proceeds deposited into the Collection Account pursuant to Section 12.02(c) of the Agreement and allocated to Series 1999-1 and the Certificates, shall be applied by the Trustee at the written direction of the Servicer (i.e. as set forth in the Distribution Date Statement and below), not later than 2:00 p.m., New York City time, on the Distribution Date on which such amounts are deposited, provided that if such deposit is not made prior to 1:00 p.m., New York City time, the Trustee shall not be required to make such applications until the following Business Day (or, in either case, if such date of distribution is not a Distribution Date, on the immediately following Distribution Date). Termination Proceeds shall be applied to pay following amounts in the following order of priority: (i) all accrued and unpaid interest on the unpaid Fixed Base Certificate Balance (including any FBC Carryover Interest), (ii) the Fixed Base Certificate Balance, (iii) any accrued and unpaid Make Whole Premium (together with interest thereon, to the extent lawful, at the FBC Interest Rate), (iv) any unreimbursed Subordinated Investor Charge-Offs and (v) the Subordinated Invested Amount. (c) Trust Liquidation Proceeds deposited into the Collection Account pursuant to Section 9.02(c) of the Agreement and allocated to Series 1999-1 shall be applied by the Trustee at the written direction of the Servicer (i.e. as set forth in the Distribution Date Statement and below), not later than 2:00 p.m., New York City time, on the Distribution Date on which such amounts are deposited, provided that if such deposit is not made prior to 1:00 p.m., New York City time, the Trustee shall not be required to make such applications until the following Business Day (or, in either case, if such date of distribution is not a Distribution Date, on the immediately following Distribution Date). Trust Liquidation Proceeds shall be applied to pay following amounts in the following order of priority: (i) all accrued and unpaid interest on the unpaid Fixed Base Certificate Balance (including any FBC Carryover Interest), (ii) the Fixed Base Certificate Balance, (iii) any accrued and unpaid Make Whole Premium (together with interest thereon, to the extent lawful, at the FBC Interest Rate), (iv) any unreimbursed Subordinated Investor Charge-Offs and (v) the Subordinated Invested Amount. (d) Notwithstanding anything to the contrary contained in this Series Supplement or the Agreement, any distribution made pursuant to this Section 9.1 shall be deemed to be a final distribution pursuant to Section 12.02 of the Agreement with respect to the Certificates. Any such final distribution shall be made no later than the August 2006 Distribution Date. (e) Notwithstanding Section 12.02 of the Agreement, no Certificateholder shall be required to surrender its Investor Certificate(s) in order to receive its final distribution under the Agreement and this Series Supplement. ARTICLE X Miscellaneous Provisions SECTION 10.1. Ratification of Agreement. As amended and supplemented by this Series Supplement, the Agreement is ratified and confirmed and the Agreement as so amended and supplemented by this Series Supplement, shall be read, taken and construed as one and the same instrument. SECTION 10.2. Counterparts. This Series Supplement may be executed in two or more counterparts, each of which when so executed shall be deemed to be an original, but all of which shall together constitute but one and the same instrument. SECTION 10.3. Governing Law. THIS SERIES SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICTS OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 10.4. Rating Agency Notice. No amendment or waiver with respect to any Early Amortization Event shall be effective until such time as the Rating Agency has consented to such waiver. SECTION 10.5. Additional Document Delivery on First Distribution Date. On the Distribution Date in April 1999, the Servicer shall deliver to each Holder that has purchased Fixed Base Certificates directly from the Depositor an agreed upon procedures letter prepared by its Independent Certified Public Accountants which confirms the accuracy of data provided in the Distribution Date Statement delivered on such Distribution Date. IN WITNESS WHEREOF, the Depositor, the Servicer and the Trustee have caused this Series Supplement to be duly executed by their respective officers as of the day and year first above written. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Depositor By: \s\ Michael Geele Title: President GOTTSCHALKS INC., as Servicer By: \s\ Jim Famalette Title: President BANKERS TRUST COMPANY, not in its individual capacity but solely as Trustee By: \s\ Lillian Perros Title: Vice President SCHEDULE I List of Series Accounts Bankers Trust Company ABA # 021001033 ACCT: REF: Gottschalks 1999-1 Attn: Gottschalks Credit Card Master Trust Series 1999-1 Capitalized Interest Account: Gottschalks Credit Card Master Trust Series 1999-1 Retained Amount Account: Gottschalks Credit Card Master Trust Series 1999-1 Spread Account: EXHIBIT A-1 FORM OF FIXED BASE CERTIFICATE THIS CERTIFICATE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 1933 ACT), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION IN RELIANCE ON EXEMPTIONS PROVIDED BY THE 1933 ACT AND SUCH STATE OR FOREIGN SECURITIES LAWS. THE CERTIFICATES ARE ELIGIBLE FOR PURCHASE PURSUANT TO RULE 144A UNDER THE 1933 ACT. NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS SUCH RESALE OR TRANSFER (A) IS MADE IN ACCORDANCE WITH SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN AND (B) IS MADE EITHER (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, (ii) IN A TRANSACTION (OTHER THAN A TRANSACTION IN CLAUSE (iv) BELOW) EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND APPLICABLE STATE AND FOREIGN SECURITIES LAWS, (iii) TO GOTTSCHALKS CREDIT RECEIVABLES CORPORATION (THE DEPOSITOR) OR (iv) TO A PERSON WHO THE TRANSFEROR OF THIS CERTIFICATE REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE 1933 ACT THAT IS AWARE THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR TO AN INSTITUTIONAL ACCREDITED INVESTOR UNDER RULE 501(a)(1), (2), (3) OR (7) UNDER THE 1933 ACT. IN THE EVENT THAT THE TRANSFER OF A CERTIFICATE IS TO BE MADE AS DESCRIBED IN CLAUSE (ii) OF THE PRECEDING SENTENCE, THE PROSPECTIVE INVESTOR IS REQUIRED TO DELIVER AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE AND THE DEPOSITOR TO THE EFFECT THAT SUCH TRANSFER MAY BE MADE WITHOUT REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE OR FOREIGN SECURITIES LAWS. THE PROSPECTIVE TRANSFEREE IN A TRANSFER OF A CERTIFICATE TO BE MADE AS DESCRIBED IN CLAUSES (ii) AND (iv) ABOVE MUST DELIVER TO THE TRUSTEE A REPRESENTATION LETTER REQUIRED BY SECTION 6.2 OF THE SERIES 1999-1 SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. PROSPECTIVE PURCHASERS OF THE CERTIFICATES ARE HEREBY NOTIFIED THAT THE SELLER OF ANY CERTIFICATES MAY BE RELYING ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE ACT PROVIDED BY RULE 144A UNDER THE ACT. THIS CERTIFICATE OR A BENEFICIAL INTEREST HEREIN MAY NOT BE TRANSFERRED UNLESS THE TRUSTEE HAS RECEIVED (I) A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (ERISA), OR SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE CODE), OR A GOVERNMENTAL PLAN DEFINED IN SECTION 3(32) OF ERISA OR SECTION 414(d) OF THE CODE SUBJECT TO ANY FEDERAL STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (SIMILAR LAW) (EACH, A BENEFIT PLAN) AND IS NOT AN ENTITY INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR AN INSURANCE COMPANY GENERAL ACCOUNT IF THE ASSETS IN ANY SUCH ACCOUNTS CONSTITUTE PLAN ASSETS FOR PURPOSES OF REGULATION SECTION 2510.3-101 OF ERISA, WHOSE UNDERLYING ASSETS INCLUDE BENEFIT PLAN ASSETS BY REASON OF A BENEFIT PLAN'S INVESTMENT IN THE ENTITY (SUCH BENEFIT PLAN OR ENTITY, A BENEFIT PLAN INVESTOR) AND (II) A CERTIFICATE TO THE EFFECT THAT IF THE TRANSFEREE IS A PARTNERSHIP, GRANTOR TRUST OR S CORPORATION FOR FEDERAL INCOME TAX PURPOSES (A FLOW-THROUGH ENTITY), ANY CERTIFICATES OWNED BY SUCH FLOW-THROUGH ENTITY WILL REPRESENT LESS THAN 50% OF THE VALUE OF ALL THE ASSETS OWNED BY SUCH FLOW-THROUGH ENTITY AND NO SPECIAL ALLOCATION OF INCOME, GAIN, LOSS, DEDUCTION OR CREDIT FROM SUCH CERTIFICATES WILL BE MADE AMONG THE BENEFICIAL OWNERS OF SUCH FLOW-THROUGH ENTITY. IN ADDITION, NO RESALE OR OTHER TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE PERMITTED UNLESS IMMEDIATELY AFTER GIVING EFFECT TO SUCH RESALE OR OTHER TRANSFER, THERE WOULD BE FEWER THAN 100 CERTIFICATEHOLDERS. No. $ GOTTSCHALKS CREDIT CARD MASTER TRUST 7.664% FIXED BASE CERTIFICATE SERIES 1999-1 This certifies that (the Fixed Base Certificateholder) is the registered owner of a fractional undivided interest in certain assets of a trust (the Trust) created pursuant to the Pooling and Servicing Agreement, dated as of March 1, 1999, among Gottschalks Credit Receivables Corporation, as depositor (the Depositor), Gottschalks Inc., as servicer (the Servicer), and Bankers Trust Company, as trustee (the Trustee) (the Pooling and Servicing Agreement), as supplemented by the Series 1999-1 Supplement dated as of March 1, 1999, among the Depositor, the Servicer and the Trustee (the Series Supplement). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Pooling and Servicing Agreement or the Series Supplement, as applicable. The corpus of the Trust includes (i) all Receivables sold, transferred, assigned, set over and otherwise conveyed to the Trust pursuant to Section 2.01 of the Pooling and Servicing Agreement, (ii) all monies due or to become due and all amount received with respect thereto and all proceeds thereof (including proceeds, as defined in Section 9306 of the UCC as in effect in the State of California), and Miscellaneous Payments, (iii) all monies on deposit in, and Eligible Investments credited to, the Collection Account or any Series Account and (iv) all monies as are from time to time available under any Enhancements. This Certificate is one of a series of Investor Certificates entitled Gottschalks Credit Card Master Trust, 7.664% Fixed Base Credit Card Certificates, Series 1999-l (the Fixed Base Certificates), each of which are issued under and subject to the terms, provisions and conditions of the Pooling and Servicing Agreement and the Series Supplement. By acceptance hereof, the Fixed Base Certificateholder assents to and is bound by the terms, provisions and conditions of the Pooling and Servicing Agreement and Series Supplement, as each may be amended from time to time. Although a summary of certain provisions of the Pooling and Servicing Agreement and the Series Supplement is set forth below, this Certificate does not purport to summarize the Pooling and Servicing Agreement and the Series Supplement and reference is made to the Pooling and Servicing Agreement and the Series Supplement for information with respect to the interests, rights, benefits, obligations, proceeds and duties evidenced hereby and the rights, duties and obligations of the Trustee. A copy of the Pooling and Servicing Agreement and the Series Supplement (without schedules) may be requested from the Trustee by writing to the Trustee at Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention: Corporate Trust & Agency Group, Structured Finance Team. The Depositor has structured the Pooling and Servicing Agreement, the Series Supplement and the Investor Certificates with the intention that the Investor Certificates will qualify under applicable federal, state, local and foreign tax law as indebtedness of the Depositor. The Depositor, the Servicer and each Holder of Investor Certificates agree to treat and to take no action inconsistent with the treatment of the Investor Certificates (or beneficial interest therein) as indebtedness of the Depositor for purposes of federal, state, local and foreign income or franchise taxes and any other tax imposed on or measured by income. Each Holder of Investor Certificates, by acceptance of its Certificate, agrees to be bound by the provisions of Section 3.07 of the Pooling and Servicing Agreement. Interest shall accrue on the Fixed Base Certificate Balance represented by this Certificate from its date of issuance to and including the last day of the first Interest Period and, with respect to each Interest Period thereafter, at the rate of 7.664% per annum or, upon a downgrade, modification or withdrawal of the Rating Agency's rating of the Fixed Base Certificates, 8.414% per annum. Interest shall be payable on each Distribution Date only to the extent that Investor Finance Charge Collections for the Related Collection Period are sufficient to pay such interest after paying all Monthly Senior Servicing Fees then outstanding. Interest that is due but not paid on any Distribution Date shall be payable on the next Distribution Date and interest shall, to the extent permitted by applicable law, accrue on such unpaid amount until paid at the rate of 7.664 per annum. Principal shall be payable in respect of this Certificate commencing on the Distribution Date relating to the Collection Period during which the Controlled Amortization Period commences or an Early Amortization Event occurs, if earlier. During the Controlled Amortization Period, principal shall be payable, as and to the extent provided in Article IV of the Series Supplement, on each Distribution Date (commencing on the Distribution Date in September 2003) in the amount of the Controlled Amortization Amount and any unreimbursed FBC Investor Charge-Offs. During an Early Amortization Period, principal shall be payable, as and to the extent provided in Article IV of the Series Supplement, on each Distribution Date in the amount of the Fixed Base Certificate Balance. In general, payments of principal with respect to the Fixed Base Certificates are limited to the unpaid Fixed Base Invested Amount, which may be less than the unpaid principal balance of the Fixed Base Certificates pursuant to the terms of the Pooling and Servicing Agreement and the Series Supplement. The Expected Final Distribution Date with respect to Fixed Base Certificates is the August 2004 Distribution Date, but principal with respect to the Fixed Base Certificates may be paid earlier or later under certain limited circumstances described in the Pooling and Servicing Agreement and the Series Supplement. If the principal of the Fixed Base Certificates has not been paid in full prior to the August 2006 Distribution Date, as set forth more fully in the Series Supplement, the Trustee will use its best efforts to sell or cause to be sold on such Series Termination Date Receivables (or interests therein) in an amount equal to the interest in the Pool Balance represented by the Certificates, subject to certain limitations, and shall immediately deposit the Termination Proceeds allocable to the Series 1999-1 Certificateholders' Interest in the Collection Account. The Termination Proceeds shall be allocated and distributed to the Fixed Base Certificateholders and the Holder of the Exchangeable Certificate in accordance with the Pooling and Servicing Agreement and the Series Supplement. The Fixed Base Certificates are issuable only in minimum denominations of $l,000,000 and integral multiples of $100,000 in excess thereof. The transfer of this Certificate shall be registered in the Certificate Register upon surrender of this Certificate for registration of transfer at any office or agency maintained by the Transfer Agent and Registrar accompanied by a written instrument of transfer, in a form satisfactory to the Trustee or the Transfer Agent and Registrar, duly executed by the Fixed Base Certificateholder or such Fixed Base Certificateholder's attorney-in-fact, and duly authorized in writing with such signature guaranteed, and thereupon one or more new Fixed Base Certificates in authorized denominations of like aggregate amount will be issued to the designated transferee or transferees. The Pooling and Servicing Agreement and the Series Supplement may be amended from time to time, in certain circumstances, by the Servicer, the Depositor, the Trustee and (if the Seller is not the Servicer) the Seller without the consent of any of the Certificateholders. The Pooling and Servicing Agreement and the Series Supplement may also be amended from time to time as specified by the Pooling and Servicing Agreement by the Servicer, the Depositor and the Trustee, upon satisfaction of the Rating Agency Condition with the consent of (i) the Holder of the Exchangeable Certificate, if it would be adversely affected by such amendment, and (ii) the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of all adversely affected Series, for the purpose of adding any provisions to or changing in any manner or eliminating or waiving any of the provisions of the Pooling and Servicing Agreement or any Supplement or of modifying in any manner the rights of the Certificateholders. Any such amendment and any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued in exchange hereof or in lieu hereof whether or not notation thereof is made upon this Certificate. Other then with respect to the Initial Holder, this Certificate may not be acquired or held by or for the account of any employee benefit plan or individual retirement account subject to Title I of ERISA or Section 4975 of the Internal Revenue Code, or any trust established under any such employee benefit plan or individual retirement account (or established to hold the assets thereof), or any governmental plan (as defined in section 3(32) of ERISA or Section 414(d) of the Code) or subject to any law or regulation similar to those contained in Section 406 of ERISA or Section 4975 of the Internal Revenue Code (each such employee benefit plan, individual retirement account and trust, an ERISA Plan). No part of the funds used by any Person to acquire or hold this Certificate may constitute assets (within the meaning of ERISA and any applicable rules and regulations) of an ERISA Plan. THIS CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the Depositor has caused this Certificate to be duly executed. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Depositor By: \s\ Michael Geele Title: President CERTIFICATE OF AUTHENTICATION This is one of the Gottschalks Credit Card Master Trust % Fixed Base Credit Card Certificates, Series 1999-1 referred to in the Series Supplement. BANKERS TRUST COMPANY, not in its individual capacity, but solely in its capacity as Trustee By: \s\ Lillian Perros Title: Vice President Dated: EXHIBIT A-2 FORM OF SUBORDINATED CERTIFICATE THIS CERTIFICATE MAY NOT BE TRANSFERRED AFTER INITIAL PURCHASE. THIS CERTIFICATE MAY NOT BE ACQUIRED OR HELD BY OR FOR THE ACCOUNT OF AN ERISA PLAN (AS DEFINED BELOW) THE GOTTSCHALKS CREDIT CARD MASTER TRUST HAS NOT BEEN REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THE TRANSFER, ASSIGNMENT, EXCHANGE, PLEDGE OR OTHER CONVEYANCE OF THIS CERTIFICATE IS NOT PERMITTED EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT AND 1999-1 SERIES SUPPLEMENT TO THE POOLING AND SERVICING AGREEMENT UNDER WHICH THIS CERTIFICATE IS ISSUED (COPIES OF WHICH ARE AVAILABLE FROM THE TRUSTEE UPON REQUEST). ANY TRANSFEREE OF THIS CERTIFICATE IS DEEMED AS OF THE DATE OF SUCH TRANSFER TO MAKE CERTAIN REPRESENTATIONS RELATING TO ERISA AND OTHER MATTERS. GOTTSCHALKS CREDIT CARD MASTER TRUST SUBORDINATED CERTIFICATE SERIES 1999-1 This certifies that GOTTSCHALKS CREDIT RECEIVABLES CORPORATION (the Subordinated Certificateholder) is the registered owner of a fractional undivided interest not allocated to the Investors' Interest or the Exchangeable Interest in certain assets of a trust (the Trust) created pursuant to the Pooling and Servicing Agreement, dated as of March 1, 1999, among Gottschalks Credit Receivables Corporation, as depositor (the Depositor), Gottschalks Inc., as servicer (the Servicer), and Bankers Trust Company, as trustee (the Trustee) (the Pooling and Servicing Agreement), as supplemented by the Series 1999-1 Supplement dated as of March 1, 1999, among the Depositor, the Servicer and the Trustee, (the Series Supplement). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Pooling and Servicing Agreement or the Series Supplement, as applicable. The corpus of the Trust includes (i) all Receivables sold, transferred, assigned, set over and otherwise conveyed to the Trust pursuant to Section 2.01 of the Pooling and Servicing Agreement, (ii) all monies due or to become due and all amount received with respect thereto and all proceeds thereof (including proceeds, as defined in Section 9-306 of the UCC as in effect in the State of California), and Miscellaneous Payments, (iii) all monies on deposit in, and Eligible Investments credited to, the Collection Account or any Series Account and (iv) all monies as are from time to time available under any Enhancements. This Certificate is issued under and subject to the terms, provisions and conditions of the Pooling and Servicing Agreement and the Series Supplement. By acceptance hereof, the Subordinated Certificateholder assents to and is bound by the terms, provisions and conditions of the Pooling and Servicing Agreement and the Series Supplement, as each may be amended, supplemented or otherwise modified from time to time. This Certificate does not purport to summarize the Pooling and Servicing Agreement or the Series Supplement and reference is made to the Pooling and Servicing Agreement and the Series Supplement for information with respect to the interests, rights, benefits, obligations, proceeds and duties evidenced hereby and the rights, duties and obligations of the Trustee. A copy of the Pooling and Servicing Agreement and the Series Supplement (without schedules) may be requested from the Trustee by writing to the Trustee at Bankers Trust Company, Four Albany Street, New York, New York 10006, Attention: Corporate Trust & Agency Group, Structured Finance Team. The Pooling and Servicing Agreement and the Series Supplement may be amended from time to time, in certain circumstances, by the Servicer, the Depositor, the Trustee and (if the Seller is not the Servicer) the Seller without the consent of any of the Certificateholders. The Pooling and Servicing Agreement and the Series Supplement may also be amended from time to time as specified in the Pooling and Servicing Agreement by the Servicer, the Depositor and the Trustee, upon satisfaction of the Rating Agency Condition, with the consent of (i) the Holder of the Exchangeable Certificate, if it would be adversely affected by such amendment, and (ii) the Holders of Investor Certificates evidencing more than 50% of the aggregate unpaid principal amount of the Investor Certificates of all adversely affected Series, for the purpose of adding any provisions to or changing in any manner or eliminating or waiving any of the provisions of the Pooling and Servicing Agreement or any Supplement or of modifying in any manner the rights of the Certificateholders. Any such amendment and any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued in exchange hereof or in lieu hereof whether or not notation thereof is made upon this Certificate. THIS CERTIFICATE MAY NOT BE TRANSFERRED AFTER INITIAL PURCHASE. This Certificate may not be acquired or held by or for the account of any employee benefit plan or individual retirement account subject to Title I of ERISA or Section 4975 of the Internal Revenue Code, or any trust established under any such employee benefit plan or individual retirement account (or established to hold the assets thereof), or any governmental plan (as defined in section 3(32) of ERISA or Section 414(d) of the Code) or subject to any law or regulation similar to those contained in Section 406 of ERISA or Section 4975 of the Internal Revenue Code (each such employee benefit plan, individual retirement account and trust, an ERISA Plan). No part of the funds used by any Person to acquire or hold this Certificate may constitute assets (within the meaning of ERISA and any applicable rules and regulations) of an ERISA Plan. THIS CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the Depositor has caused this Certificate to be duly executed. GOTTSCHALKS CREDIT RECEIVABLES CORPORATION, as Depositor By: \s\ Michael Geele Title: President CERTIFICATE OF AUTHENTICATION This is one of the Gottschalks Credit Card Master Trust Subordinated Certificates, Series 1999-1 referred to in the Series Supplement. BANKERS TRUST COMPANY, not in its individual capacity, but solely in its capacity as Trustee By: \s\ Lillian Perros Title: Vice President Dated: EXHIBIT B FORM OF DISTRIBUTION DATE STATEMENT GOTTSCHALKS CREDIT CARD MASTER TRUST (SERIES 1999-1) Reference is made to that certain Pooling and Servicing Agreement, dated as of March 1, 1999, among the Depositor, the Servicer and the Trustee (the Pooling and Servicing Agreement), as supplemented by the Series 1999-1 Supplement dated as of March 1, 1999 (the Series Supplement), among Gottschalks Credit Receivables Corporation, as depositor (the Depositor), Gottschalks Inc., as servicer (the Servicer), and Bankers Trust Company, as trustee (the Trustee). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Pooling and Servicing Agreement or the Series Supplement, as applicable. Under the Pooling and Servicing Agreement, the Servicer is required to prepare certain information for each Distribution Date regarding current distributions to the Holders of the Fixed Base Certificates (the Investor Certificateholders) and the performance of the Gottschalks Credit Card Master Trust (the Trust) during the Related Collection Period. The information which is required to be prepared with respect to the , ____ Distribution Date and with respect to the performance of the Trust during the Related Collection Period for such Distribution Date is set forth below. Certain of the information is presented on the basis of an original principal amount of $1,000 per Certificate. Certain other information is presented based on the aggregate amounts for the Trust as a whole. (A) Information Regarding the Current Monthly Distribution for the Fixed Base Certificates (stated on the basis of $1,000 original principal amount). (1) The total amount of the $ distribution to Series 1999-1 Fixed Base Certificateholders on the current Distribution Date, per $1,000 original principal amount: (2) The total amount of the $ distribution to Series 1999-1 Fixed Base Certificateholders in respect of interest on the current Distribution Date, per $1,000 original principal amount: (3) The total amount of the $ distribution to Series 1999-1 Fixed Base Certificateholders in respect of principal on the current Distribution Date, per $1,000 original principal amount: (4) The total amount of the $ distribution to Series 1999-1 Fixed Base Certificateholders in respect of any Make Whole Premium on the current Distribution Date, per $1,000 original principal amount: (5) Investor Charge-Offs allocated in $ reduction of the Fixed Base Invested Amount for the current Collection Period: (6) Fixed Base Certificate Balance $ before the foregoing distributions and allocations: (7) Fixed Base Certificate Balance $ after the foregoing distributions an allocations: (8) Investor Charge-Offs allocated in $ reduction of the Subordinated Invested Amount for the current Collection Period: (9) Subordinated Invested Amount $ after the foregoing distributions and allocations: ((B) Information Regarding Interest, Carryover Interest, Unpaid Principal and Make Whole Premium for the Fixed Base Certificates. (1) FBC Interest Rate for the related ______% Interest Period (generally 7.664% per annum, but 8.414 if the rating of the Fixed Base Certificates is downgraded, modified or withdrawn): (2) Amount of interest accrued during $ the related Collection Period on the Fixed Base Certificate Balance: (3) Amount of interest (including any $ FBC Carryover Interest) due on the current Distribution Date with respect to the Fixed Base Certificates: (4) Amount of interest distributed on $ the current Distribution Date to the Holders of the Fixed Base Certificates: (a) Portion thereof$ funded from Investor Finance Charge Collections: (b) Portion thereof$ funded from Spread Account: (c) Portion thereof$ funded from Investor Principal Collections allocated to the Subordinated Certificate (d) Portion thereof$ funded from Retained Amount Account: (5) Amount, if any, of FBC Carryover $ Interest that will be due on the next Distribution Date: (6) Amount of principal due on the $ current Distribution Date with respect to the Fixed Base Certificates (i.e., zero, Controlled Amortization Amount or Outstanding Fixed Base Certificate Balance): (7) Amount of principal distributed $ on the current Distribution Date with respect to the Fixed Base Certificates (8) Amount of previously unpaid $ principal to be distributed on the current Distribution Date to the Holders of the Fixed Base Certificates (9) Amount of Make Whole Premium $ (including accrued interest thereon, if any) due on the current Distribution Date with respect to the Fixed Base Certificates (10) Amount of Make Whole Premium $ (including accrued interest thereon, if any) to be distributed on the current Distribution Date to the Holders of the Fixed Base Certificates (11) Amount, if any, of unpaid Make $ Whole Premium (including accrued interest thereon, if any) for the current Interest Period with respect to the Fixed Base Certificates (C) Principal Receivables in the Trust and Allocation Percentages (1) The aggregate amount of Eligible $ Principal Receivables in the Trust (which is net of the Discount Portion thereof) as of the first day of the Related Collection Period: (2) The aggregate amount of Eligible $ Principal Receivables in the Trust (which is net of the Discount Portion thereof) as of the last day of the Related Collection Period: (3) The aggregate amount of Eligible $ Principal Receivables in the Trust (which is net of the Discount Portion thereof) represented by the Invested Amounts of the Certificates of all outstanding Series as of the first day of the related Collection Period (i.e., the sum of the amounts derived by multiplying item C(1) by the product of the Series Allocation Percentage and by the Floating Allocation Percentage (if such Collection period commenced during the Revolving Period) or the Fixed/Floating Allocation Percentage (if such Collection Period commenced after the termination of the Revolving Period) for each outstanding Series): (4) Fixed Base Invested Amount for $ Series 1999-1 as of the first day of the related Collection Period: (5) Subordinated Invested Amount for $ Series 1999-1 as of the first day of the related Collection Period: (6) The Required Series Pool Balance $ for Series 1999-1 as of the first day of the related Collection Period (i.e., the sum of C(4) and C(5)): (7) Series Allocation Percentage for ________% Series 1999-1 (i.e., item C(6) divided by the sum of item C(6) plus the equivalent amount for each outstanding Series): (8) Series 1999-1 Series Pool $ Balance: The amount of Principal Receivables in the Trust represented by Series 1999-1 (i.e., the product of C(1) and item C(7)): (9) Floating Allocation Percentage ________% for Series 1999-1 (i.e., item C(6) divided by item C(8) each as of the first day of the related Collection Period): (10) Fixed/Floating Allocation ________% Percentage for Series 1999-1 (i.e., item C(6) divided by item C(8), each as of the first day of the last Collection Period to commence during the Revolving Period): (11) FBC Principal Allocation _________% Percentage (i.e., item C(4) divided by the sum of item C(4) and item C(5) as of the first day of the related Collection Period or, for any Collection Period commencing after the termination of the Revolving Period, item C(4) divided by the sum of item C(4) and item C(5), each as of the first day of the last Collection Period to commence during the Revolving Period): (12) SC Principal Allocation _________% Percentage (i.e., item C(5) divided by the sum of item C(4) and item C(5) as of the first day of the related Collection Period or, for any Collection Period commencing after the termination of the Revolving Period, item C(5) divided by the sum of item C(4) and item C(5), each as of the first day of the last Collection Period to commence during the Revolving Period): (13) Exchangeable Holder's Interest as $_______________ of the first day of the related ___ Collection Period (i.e., item C(8) minus item C(6)): (D) Information Regarding the Performance of the Trust. (1) Aggregate Collections (a)The aggregate amount of $ payments on Receivables processed for the Related Collection Period: (b)The aggregate amount of $ payments on Receivables comprising Principal Collections processed for the Related Collection Period: (c)The aggregate amount of $ payments on Receivables comprising Finance Charge Collections processed for the Related Collection Period: (2) Principal Collections. (a)The aggregate amount of $ Principal Collections processed during the Related Collection Period allocated to Series 1999-1 (i.e., the product of item D(1)(b) and item C(7)): (b)The aggregate amount of $ Principal Collections processed during the Related Collection Period allocated to Series 1999-1 Investor Certificates (i.e., the product of item D(2)(a) and item C(9), if the related Collection Period commences during the Revolving Period, or the product of item D(2)(a) and item C(10) if such Collection Period commences after the Revolving Period terminates): (c)The aggregate amount of $ Principal Collections processed during the Related Collection Period allocated to the Fixed Base Certificates (i.e., the product of item D(2)(b) and item C(11)): (d)The aggregate amount of $ Principal Collections processed during the Related Collection Period allocated to the Subordinated Certificate (i.e., the product of item D(2)(b) and item C(13)): (e)The aggregate amount of $ Principal Collections processed during the Related Collection Period allocated to the Exchangeable Certificate (i.e., the product of item D(2)(a) and [100% minus item C(9)], if the related Collection Period commences during the Revolving Period, or the product of item D(2)(a) and [100% minus item C(10)],if such Collection Period commences after the Revolving Period terminates ): (3) Finance Charge Collections (a)The aggregate amount of $ Finance Charge Collections processed during the Related Collection Period allocated to Series 1999-1 (i.e., the product of item D(1)(c) and item C(7)): (b)The aggregate amount of $ Finance Charge Collections processed during the Related Collection Period allocated to Series 1999-1 Investor Certificates (i.e., the product of item D(3)(a) and item C(9)): (c)The aggregate amount of $ Finance Charge Collections processed during the Related Collection Period allocated to the Fixed Base Certificates (i.e., the product of item D(3)(b) and [item C(4) divided by item C(6)]): (d)The aggregate amount of $ Finance Charge Collections processed during the Related Collection Period allocated to the Subordinated Certificate (i.e., the product of item D(3)(b) and [item C(5) divided by item C(6)]): (e)The aggregate amount of $ Finance Charge Collections processed during the Related Collection Period allocated to the Exchangeable Certificate (i.e., the product of item D(3)(a) and [100% minus item C(9)]): (4) Defaulted Receivables, Default Amounts and Investor Charge-Offs (a)Default Amount for the $ Related Collection Period: (b)The portion of the Default $ Amount allocable to Series 1999-1 (i.e., the product of item D(4)(a) and item C(7)): (c)Investor Default Amount: The $ portion of the Default Amount allocable to the Series 1999- 1 Investor Certificates (i.e., the product of item D(4)(b) and item C(9)): (d)The portion of the Default $ Amount allocable to the Exchangeable Certificate (i.e., the product of item D(4)(b) and [100% minus item C(9)]): (e)The portion of the Investor $ Default Amount funded from the Investor Default Holdback Amount for the related Collection Period: 1. Investor Default Holdback $ Amount (i.e., the greater of (A) the average of the Investor Default Amount for the preceding twelve Collection Periods and (B) the Servicer's expectation as to the Investor Default Amount for the related Collection Period): 2. Excess of Investor Default $ Holdback Amount over Investor Default Amount (i.e., item D(4)(e)(1) minus item D(4)(c)): 3. Excess of Investor Default $ Amount over Investor Default Holdback Amount (i.e., item D(4)(c) minus item D(4)(e)(1)): (f)The portion of the Investor $ Default Amount funded from the Spread Account for the related Collection Period: (g)The portion of the Investor $ Default Amount funded from reallocations of Investor Principal Collections allocated to the Subordinated Certificate for the related Collection Period: (h)Investor Charge-Offs for the $ Subordinated Certificate: The portion of the Investor Default Amount allocated in reduction of the Subordinated Invested Amount for the related Collection Period: (i)The portion of the Investor $ Default Amount funded from the Investor Component of amounts on deposit in the Retained Amount Account for the related Collection Period: (j) Principal$ Collections allocated to Fixed Base Certificates used to fund Investor Default Amounts allocated to Fixed Base Certificates: (k)Investor Charge-Offs for the $ Fixed Base Certificates: The portion of the Investor Default Amount allocated in reduction of the Fixed Base Invested Amount for the related Collection Period: (l)Investor Finance Charge $ Collections used to reimburse Investor Charge-Offs previously allocated to the Fixed Base Certificates: (m)Amounts withdrawn from Spread $ Account to reimburse Investor Charge-Offs previously allocated to the Fixed Base Certificates: (n) Principal$ Collections allocated to Subordinated Certificate used to fund Investor Charge-Offs previously allocated to Fixed Base Certificates: (o)Amounts withdrawn from $ Retained Amount Account to reimburse Investor Charge- Offs previously allocated to the Fixed Base Certificates: (p) Principal$ Collections allocated to Fixed Base Certificates used to fund Investor Charge-Offs previously allocated to Fixed Base Certificates: (q)Aggregate outstanding $ unreimbursed Investor Charge- Offs allocated to the Fixed Base Certificates as of this Distribution Date: (r)Investor Finance Charge $ Collections used to reimburse Investor Charge-Offs previously allocated to the Subordinated Certificate: (s) Principal$ Collections allocated to Subordinated Certificate used to fund Investor Charge-Offs previously allocated to Subordinated Certificate: (t)Amounts withdrawn from $ Retained Amount Account to reimburse Investor Charge- Offs previously allocated to the Subordinated Certificate: (u)Aggregate outstanding $ unreimbursed Investor Charge- Offs allocated to the Subordinated Certificate as of this Distribution Date: (5) Aging of Receivables. (a)The aging of Principal Receivables as of the last day of the related Collection Period: 1. Current: $ 2. 1-29 days: $ 3. 30-59 days: $ 4. 60-89 days: $ 5. 90-119 days: $ 6. 120-149 days: $ 7. 150-179 days: $ 8. 180+ days: $ 9. Total $ (b) The aging of Principal Receivables as of the last day of the related Collection Period as a percentage of the aggregate amount of Principal Receivables as of such day: 1. Current: % 2. 1-29 days: % 3. 30-59 days: % 4. 60-89 days: % 5. 90-119 days: % 6. 120-149 days: % 7. 150-179 days: % 8. 180+ days: % 9. Total 100 % (6) Extraordinary Trustee Fees/Servicing Transfer (a) Amounts drawn under$_______________ $200,000 letter of credit or surety bond to cover fees___ and expenses of Trustee in performing duties following an Early Amortization Event or costs of transfer of servicing duties: (b) Finance Charge$_______________ Collections applied to cover fees and expenses of___ Trustee in performing duties following an Early Amortization Event or costs of transfer of servicing duties (not in excess of $200,000 less amounts, if any, drawn under item D(6)(a)): (c) Amounts drawn or$_______________ released from the Spread Account to fund amounts___ described in D(6)(a) and not covered by item D(6)(a) and D(6)(b): (d) Finance Charge$_______________ Collections applied to cover premiums or reimbursements___ of amounts drawn under $200,000 letter of credit or surety bond: (7) Servicing Fee (a) Aggregate Monthly$ Servicing Fee accrued during the Related Collection Period (i.e., the product of 1/12, 3.0% per annum and item C(6)): (b) Aggregate Monthly$ Senior Servicing Fee accrued during the Related Collection Period (i.e., the product of D(7)(a) and 5/6, for each Collection Period commencing prior to a transfer of servicing duties, and simply item D(7)(a) for each Collection Period commencing after a transfer of servicing duties): (c) Aggregate Monthly$ Subordinated Servicing Fee accrued during the Related Collection Period (i.e., the product of D(7)(a) and 1/6, for each Collection Period commencing prior to a transfer of servicing duties, and zero for each Collection Period commencing after a transfer of servicing duties): (d) The aggregate amount$ of the Monthly Senior Servicing Fee paid to the Servicer for the Related Collection Period from Finance Charge Collections: (e) The aggregate amount$ of the Monthly Senior Servicing Fee paid to the Servicer for the Related Collection Period from the Spread Account: (f) The aggregate amount$ of the Monthly Senior Servicing Fee not paid to the Servicer for the Related Collection Period: (g) The aggregate amount$ of the Monthly Subordinated Servicing Fee paid to the Servicer for the Related Collection Period from Finance Charge Collections: (h) The aggregate amount$ of the Monthly Subordinated Servicing Fee not paid to the Servicer for the Related Collection Period: (8) Other Applications of Investor Finance Charge Collections: (a) Deposited into$ Spread Account for the related Collection Period: (b) Applied to fund Make$ Whole Premium: (c) Released to$ Depositor for Purchase of Receivables: (9) Other applications of Investor Principal Collections (a) Deposited into$ Retained Amount Account for the related Collection Period: (b) Applied to fund Make$ Whole Premium: (c) Applied to reduce$ Subordinated Invested Amount: (d) Released to$ Depositor for Purchase of Receivables: (10) Aggregate Investor Finance Charge $ Collections and Investor Principal Collections released to Depositor for Purchase of Receivables: (11) Spread Account (a) Was a Spread AccountYes/No Trigger in effect during the related Collection Period? (see item D(12)) (b) Was a Spread AccountYes/No Trigger cured during the related Collection Period? (see item D(12) for the related and 2 preceding Collection Periods or, after the Distribution Date in August 2002, the related and 5 preceding Collection Periods, and no Early Amortization Event has occurred) (if so, all amounts will be released from Spread Account and run through the Investor Finance Charge Collection waterfall): (c) Spread Account$ Requirement as of the last day of the Related Collection Period (i.e., after making all daily calculations of (i) sum of item A(6), plus (ii) [item B(3) minus item B(4)(a)], plus [item D(4)(c) minus item D(4)(e)], plus [item D(4)(k) minus [item D(4)(l) plus item D(4)(r)], minus (ii) Investor Principal Collections on deposit on such day in the Collection Account and available for item B(2) and B(6) in the aggregate, and minus (iii) item D(13)(c) the Investor Component of amounts on deposit in the Retained Amount Account): (d) Amount on deposit in$ the Spread Account as of the Determination Date relating to the preceding Distribution Date: (e) Amounts, if any,$ deposited into the Spread Account for the related Collection Period: (f) The aggregate amount$ on deposit in the Spread Account as of the related Determination Date: (g) The amount of any$_______________ Deficiency Amount for the current Collection Period__ (i.e., ) [item B(3) minus item B(4)(a)], plus [item D(4)(c) minus item D(4)(e)], plus [item D(4)(k) minus [item D(4)(l) plus item D(4)(r)]):.......... ....... (h) The amount, if any,$ to be withdrawn from the Spread Account to cover any Deficiency Amount (i.e., the lesser of item D(11)(e) and item D(11)(f)): (i) The amount, if any,$ to be withdrawn from the Spread Account to fund principal distributions to the Fixed Base Certificates: (j) The amount, if any,$ to be withdrawn from the Spread Account to fund any Make Whole Premium: (k) The balance of the$ Spread Account after making the foregoing distributions (12) Spread Account Triggers (a) Have the Fixed BaseYes/No Certificates been put on credit watch with negative implications by the Rating Agency? Actual Required Yes/N % % o (b) Average of the greater Portfolio Yields for the three preceding months: than 14.50% (c) Average of the less Default Rates for the three preceding months: than 8.50% (d) Average of the greater Excess Spreads for the three preceding months: than 3.00% (e) Average of the less Delinquency Rates for the three preceding months:than 2.00% (f) Average of the greater Monthly Payment Rates for the three preceding months: than 22.50% (13) Retained Amount Account. (a) Balance of the$ Retained Amount Account on the Determination Date relating to the preceding Distribution Date: (b) Balance of the$ Retained Amount Account on the related Distribution Date: 1. Gross increase $ attributable to increase in Investor Component: 2. Gross decrease $ attributable to decrease in Investor Component: 3. Gross increase $ attributable to increase in Retained Exchangeable Amount: 4. Gross decrease $ attributable to decrease in Retained Exchangeable Amount: (c) Investor Component$ of amounts on Deposit in the Retained Amount Account on the related Determination Date: Aggregate of Amounts on deposit in the Retained Amount Account on the related Determination Date because of deposits made because the Required Series Pool Balance exceeded the Series Pool balance and the Investor Component of amounts on deposit therein on one or more days during any preceding Collection Period less amounts thereof withdrawn and applied for following items: (d) Amounts withdrawn$ from the Investor Component of amounts on deposit in the Retained Amount Account to fund any Controlled Amortization Amount: (e) Amounts withdrawn$ from the Investor Component of amounts on deposit in the Retained Amount Account to fund any Investor Default Amounts allocated to the Fixed Base Certificates: (f) Amounts withdrawn$ from the Investor Component of amounts on deposit in the Retained Amount Account to fund any Investor Charge- Offs allocated to the Fixed Base Certificates: (g) Amounts withdrawn$ from the Investor Component of amounts on deposit in the Retained Amount Account to fund any Make Whole Premium (and any interest accrued thereon): (h) Amounts withdrawn$ from the Investor Component of amounts on deposit in the Retained Amount Account to fund any distribution of principal to the holder of the Subordinated Certificate: (i) Retained$ Exchangeable Amounts on deposit in the Retained Amount Account on the related Determination Date: Amounts deposited therein because the Required Exchangeable Certificate Amount exceeded the Exchangeable Holder's Interest, plus the aggregate amount of Eligible Past Due Receivables (item D(5)(a)(6) plus item D(5)(a)(7)), plus the Retained Exchangeable Amount on deposit in the Retained Amount Account on one or more days during any preceding Collection Period less amounts thereof withdrawn pursuant to item and applied for following items: 1. Required Exchangeable $ Certificate Amount (product of [the greater of item D(13)(i)(4) or 7.00%] and item C(6)): 2. Net amount of charge $ account refunds or return credits given by Gottschalks to accountholders during the Anniversary Month (same calendar month as related Collection Period, one year previous): 3. Net sales credited to $ Gottschalks charge accounts during such Anniversary Month: 4. Item D(13)(i)(2) divided by _________% item D(13)(i)(3): (j) Amounts withdrawn$ from the Retained Exchangeable Amount on deposit in the Retained Amount Account and released to the holder of the Exchangeable Certificate: (k) Amounts remaining on$ deposit in the Retained Amount Account after the preceding applications: (l) Investor Component$ of amounts remaining on deposit in the Retained Amount Account after the preceding applications: (m) Retained$ Exchangeable Amount remaining on deposit in the Retained Amount Account after the preceding applications: (14) Early Amortization Events. (a) Numerical Triggers (Article VII of Series Supplement to Pooling and Servicing Agreement) 1.The balance of the Investor Yes/No Component of the Retained Amount Account was required to exceed $3.5 million (i.e., item C(6) exceeded item C(8) by more than $3.5 million) for 60 consecutive days. 2.The Subordinated Invested Yes/No Amount has been written down by more than $2,161,685 (33% of the Subordinated Invested Amount as of the Closing Date) on a day when the Fixed Base Invested Amount was greater than zero. 3.The sum of (A) the Yes/No Exchangeable Holder's Interest (item C(13) if measured on a daily basis), (B) the aggregate principal amount of any Eligible Past Due Receivables (item D(5)(a)(6) plus item D(5)(a)(7) measured on a daily basis), and (C) the Retained Exchangeable Amount (item D(13)(m) measured on a daily basis) was reduced below the Required Exchangeable Certificate Amount (item D(13)(i)(1) measured on a daily basis): Actual Required Yes/N % % o 4. Average of the greater Portfolio Yields for than the three preceding 12.00% months: 5. Average of the less Default Rates for than the three preceding 10.00% months: 6. Average of the greater Excess Spreads for than the three preceding 1.00% months: 7. Average of the less Delinquency Rates than for the three 3.00% preceding months: 8. Average of the greater Monthly Payment than Rates for the three 17.50% preceding months: (b) Non-Numerical Triggers 1. The Depositor has failed to Yes/No make any material payments or transfer of funds for the benefit of Certificateholders within two Business Days of receipt of notice of such failure. 2. The Depositor has Yes/No materially breached any covenant under the Agreement or any Series Supplement or has come to have knowledge that any of its the representations or warranties under the Agreement or the Series Supplement has been breached. 3. The Trust is required to be Yes/No registered as an investment company within the meaning of the Investment Company Act of 1940, as amended. 4. The Depositor is required Yes/No to be registered as an investment company within the meaning of the Investment Company Act of 1940, as amended. 5. A Servicer Default has Yes/No occurred (specify ___________________________ ___________________________ ___________________________ _______________. 6. The Depositor has failed to Yes/No designate Blocked Accounts as Supplemental Accounts on any Determination Date on which the Required Series Pool Balance exceeded the sum of the Series Pool Balance and the Investor Component of the amount on deposit in the Retained Amount Account or has failed to transfer and convey additional Receivables from such Supplemental Accounts within five business days of such Determination Date. 7. The Fixed Base Certificate Yes/No Balance has not been reduced to zero on the August 2004 Distribution Date or any Controlled Amortization Amount was not paid in full when due. 8. The Depositor and the Yes/No Servicer are aware of the occurrence of any events of bankruptcy, insolvency or receivership involving the Depositor or Gottschalks, the occurrence of which would constitute an Early Amortization Event. 9. The rating of the Fixed Yes/No Base Certificate has been reduced below BBB. (E) Discount Rates (a)The Discount Rate in effect % for non-promotional Receivables on the first day of the related Collection Period: (b)Changes, if any, to the % Discount Rate for non- promotional Receivables since the first day of the related Collection Period: (c)The Discount Rate in effect % for promotional Receivables on the first day of the related Collection Period: (d)Changes, if any, to the % Discount Rate for promotional Receivables since the first day of the related Collection Period: IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Certificate this day of , ____. GOTTSCHALKS INC., as Servicer By: \s\ Jim Famalette Servicing Officer EXHIBIT C FORM OF RULE 144A TRANSFEREE CERTIFICATE Gottschalks Credit Receivables Corporation Bankers Trust Company 7 River Place East as Trustee Fresno, California 93729 Four Albany Street New York, New York 10006 Re: Gottschalks Credit Card Master Trust; Fixed Base Credit Card Certificates, Series 1999-1 Ladies and Gentlemen: __________________________ (the Purchaser) is today purchasing in a private resale from ___________________________ (the Seller) $_______ aggregate principal amount of Fixed Base Credit Card Certificates, Series 1999-1 (the Certificates), issued pursuant to the Pooling and Servicing Agreement and the Series 1999-1 Supplement (the Supplement) thereto, each dated as of March 1, 1999 (collectively, the Agreement), between Gottschalks Inc. (the Company), Gottschalks Credit Receivables Corporation (GCRC) and Bankers Trust Company (Bankers Trust), as trustee (the Trustee). The Certificates are securities issued by and evidencing interests in the Gottschalks Credit Card Master Trust (the Trust). In connection with the purchase of the Certificates, the Purchaser hereby represents and warrants to each of you as follows: 1. The Purchaser understands that the Certificates have not been registered under the Securities Act of 1933, as amended (the 1933 Act), or the securities laws of any state or foreign jurisdiction. 2. The Purchaser is acquiring the Certificates for its own account (or for the account of a qualified institutional buyer as defined in Rule 144A under the 1933 Act) only for investment and not for any other person, and not with a view to, or for resale in connection with, a distribution that would constitute a violation of the 1933 Act or any state or foreign securities laws (subject to the understanding that disposition of the Purchaser's property will remain at all times within its control). The Purchaser does hereby agree to indemnify the Trustee, its officers, directors, agents and employees, GCRC and the Company against any liability that may result if the transfer is not so exempt or is not made in accordance with the 1933 Act and such state and foreign securities laws. The Purchaser is not an affiliate of GCRC, the Trustee or any of their respective affiliates. 3. The Purchaser agrees that the Certificates must be held indefinitely by it unless (i) the Certificates are subsequently registered under the 1933 Act or (ii) an exemption from the registration requirements of the 1933 Act is available. 4. The Purchaser agrees that if at some time it wishes to dispose of or exchange any of the Certificates, it will not transfer or exchange any of the Certificates unless such transfer or exchange is in accordance with the provisions of Article VI of the Agreement and Article VI of the Supplement. 5. The Purchaser is a qualified institutional buyer as defined in Rule 144A of the 1933 Act and has completed one of the forms of certification to that effect attached as Annexes hereto, it is aware that the sale to it is being made in reliance on Rule 144A, it is acquiring the Certificates for its own account or for the account of a qualified institutional buyer and it understands that such Certificates may be resold, pledged or transferred by the Purchaser only (i) to a person who the Purchaser reasonably believes is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A or (ii) pursuant to another exemption from registration under the 1933 Act and applicable state and foreign securities laws. 6. Neither the Purchaser nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of any Certificate, any interest in any Certificate or any other similar security of GCRC or the Trust to, or solicited any offer to buy or accept a transfer, pledge or other disposition of any Certificate, any interest in any Certificate or any other similar security of GCRC or the Trust with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, which would constitute a distribution of the Certificates under the 1933 Act or which would render the disposition of any Certificate a violation of Section 5 of the 1933 Act or any state or foreign securities law, require registration or qualification pursuant thereto, or require registration of the Trust or GCRC as an investment company under the Investment Company Act of 1940, as amended, nor will it act, nor has it authorized or will it authorize any person to act, in such manner with respect to the Certificates. 7. The Purchaser understands that there is no market, nor is there any assurance that a market will develop, for the Certificates and that GCRC and the Trust have no obligation to make or facilitate any such market (or to otherwise repurchase the Certificates from the Purchaser) under any circumstances. 8. The Purchaser has consulted with its own legal counsel, independent accountants and financial advisors to the extent it deems necessary regarding the tax consequences to it of ownership of the Certificates, is aware that its taxable income with respect to the Certificates in any accounting period may not correspond to the cash flow (if any) from the Certificates for such period, and is not purchasing the Certificates in reliance on any representations of GCRC or its counsel with respect to tax matters. 9. The Purchaser has reviewed the Private Placement Memorandum with respect to the Certificates dated March 1, 1999 (the Private Placement Memorandum), and has had the opportunity to ask questions and receive answers concerning the terms and conditions of the transaction contemplated by the Private Placement Memorandum and to obtain additional information necessary to verify the accuracy and completeness of any information furnished to the Purchaser or to which the Purchaser had access. 10. The Purchaser understands that the Certificates will bear legends substantially as set forth in the Agreement. 11. The Purchaser hereby further agrees to be bound by all the terms and conditions of the Certificates as provided in the Agreement. 12. The Purchaser is not an employee benefit plan, trust or account subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), or subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the Code), or a governmental plan defined in section 3(32) of ERISA or Section 414(d) of the Code subject to any federal, state or local law which is, to a material extent, similar to the foregoing provisions of ERISA or the Code (Similar Law) (each, a Benefit Plan) and is not an entity, including an insurance company separate account or an insurance company general account if the assets in any such accounts constitute plan assets for purposes of regulation section 2510.3-101 of ERISA, whose underlying assets include Benefit Plan assets by reason of a Benefit Plan's investment in the entity. 13. If the Purchaser (and if the Purchaser is acquiring the Certificates for an account as provided in paragraph 5 above, such account) is a partnership, grantor trust or S corporation for federal income tax purposes (a flow-through entity), any Certificates owned by such flow-through entity will represent less than 50% of the value of all the assets owned by such flow-through entity and no special allocation of income, gain, loss, deduction or credit from such Certificates will be made among the beneficial owners of such flow-through entity. 14. If the Purchaser sells any of the Certificates, the Purchaser will obtain from any subsequent Purchaser the same representations contained in this Representation Letter. Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed thereto in the Agreement. The representations and warranties contained herein shall be binding upon the heirs, executors, administrators and other successors of the undersigned. If there is more than one signatory hereto, the obligations, representations, warranties and agreements of the undersigned are made jointly and severally. Executed at ___________, this_ day of ____. Purchaser's Name (Print) By \s\ Robert A. Smedley Its Vice President Address of Purchaser Purchaser's Taxpayer Identification Number Annex 1 to Exhibit C Qualified Institutional Buyers Status Under Rule 144A (Buyers other than investment companies) Gottschalks Credit Receivables Corporation Bankers Trust Company 7 River Place East as Trustee Fresno, California 93729 Four Albany Street New York, New York 10006 Re: Gottschalks Credit Card Master Trust; Credit Card Certificates, Series 1999-1 Name of Buyer: (Buyer) Dear Sirs: I hereby certify that as indicated below, I am the President, Chief Executive/Financial Officer, Senior Vice President or other executive officer of Buyer. In connection with purchases by Buyer from time to time, I hereby certify to you and, if you act as broker for one or more customers, to such customers, that Buyer is a qualified institutional buyer as defined in Rule 144A under the Securities Act of 1933, as amended (Rule 144A), because (i) Buyer owned and/or invested on a discretionary basis $______ in securitiesi (except for the excluded securities referred to below) as of the end of Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A) and (ii) Buyer satisfies the criteria in the initialed category marked below. Corporation, etc. Buyer is a corporation (other than a bank, savings and loan association or similar institution), Massachusetts or similar business trust, partnership, or charitable organization described in Section 501(c)(3)of the Internal Revenue Code of 1986, as amended. Bank. Buyer (a) is a national bank or banking institution organized under the laws of any State, territory or the District of Columbia the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official or is a foreign bank or equivalent institution, and (b) has an audited net worth of at least $25,000,000 as demonstrated in its latest annual financial statements, a copy of which is attached hereto. Savings and Loan. Buyer (a) is a savings and loan association, building and loan association, cooperative bank, homestead association or similar institution, which is supervised and examined by a State or Federal authority having supervision over any such institution or is a foreign savings and loan association or equivalent institution and (b) has an audited net worth of at least $25,000,000 as demonstrated in its latest annual financial statements, a copy of which is attached hereto. Broker-dealer. Buyer is a dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the 1934 Act). Insurance Company. Buyer is an insurance company whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies and which is subject to supervision by the insurance commissioner or a similar official or agency of a State, territory or the District of Columbia. State or Local Plan. Buyer is a plan established and maintained by a State, its political subdivisions or any agency or instrumentality of a State or its political subdivisions, for the benefit of its employees. ERISA Plan. Buyer is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended. Investment Advisor. Buyer is an investment advisor registered under the Investment Advisers Act of 1940, as amended. The term securities as used herein does not include (i) securities of issuers that are affiliated with Buyer, (ii) securities that are part of an unsold allotment to or subscription by Buyer (if Buyer is a dealer), (iii) securities issued or guaranteed by the United States or any instrumentality thereof, (iv) bank deposit notes and certificates of deposit, (v) loan participations, (vi) repurchase agreements, (vii) securities owned subject to a repurchase agreement and (viii) currency, interest rate and commodity swaps. For purposes of determining the aggregate of securities owned and/or invested on a discretionary basis by Buyer, Buyer used the cost of such securities to Buyer and did not include any of the securities referred to in the preceding paragraph. Further, in determining such aggregate amount, Buyer may have included securities owned by subsidiaries of Buyer, but only if such subsidiaries are consolidated with Buyer in its financial statements prepared in accordance with generally accepted accounting principles and if the investments of such subsidiaries are managed under Buyer's direction. However, such securities were not included if Buyer is a majority-owned, consolidated subsidiary of another enterprise and Buyer is not itself a reporting company under the 1934 Act. Buyer acknowledges that it is familiar with Rule 144A and understands that you and your customers (if you act as a broker for one or more customers) are and will continue to rely on the statements made herein because one or more sales by you for your own account or your customer's account to Buyer may be in reliance on Rule 144A. Will Buyer be purchasing Rule 144A securities only for Buyer's own account? Yes___ No___ If the answer to this question is no, Buyer agrees that, in connection with any purchase of securities sold to Buyer for the account of a third party (including any separate account) in reliance on Rule 144A, Buyer will only purchase for the account of one third party and such third party at the time is a qualified institutional buyer within the meaning of Rule 144A. In addition, Buyer agrees that Buyer will not purchase securities for a third party unless Buyer has obtained a current representation letter from such third party or taken other appropriate steps contemplated by Rule 144A to conclude that such third party independently meets the definition of qualified institutional buyer set forth in Rule 144A. Buyer agrees to notify you of any changes in the information and conclusions herein. Until such notice is given to you, Buyer's purchase of securities from you, or through you from your customers, will constitute a reaffirmation of the foregoing certifications and acknowledgments as of the date of such purchase. Further, if Buyer is a bank or savings and loan as provided above, Buyer agrees that it will furnish you with updated annual financial statements promptly after they become available. Date: ____________________ Very truly yours, Print Name of Buyer By: ___________________________ Name: Title: Annex 2 to Exhibit C Qualified Institutional Buyer Status Under Rule 144A (Buyers that are registered investment companies) Gottschalks Credit Receivables Corporation Bankers Trust Company 7 River Place East as Trustee Fresno, California 93729 Four Albany Street New York, New York 10006 Re: Gottschalks Credit Card Master Trust; Credit Card Certificates, Series 1999-1 Name of Buyer: _____________ (Buyer) Name of Investment Adviser: _____________ (Adviser) I hereby certify that, as indicated below, I am the President, Chief Executive/Financial Officer or Senior Vice President of Buyer or, if Buyer is a qualified institutional buyer as defined in Rule 144A (Rule 144A) under the Securities Act of 1933, as amended, because Buyer is part of a Family of Investment Companies (as defined below) of Adviser. In connection with purchases by Buyer from time to time, I hereby certify to you and, if you act as broker for one or more customers, to such customers, that Buyer is a Squalified institutional buyer as defined in Rule 144A because (i) Buyer is an investment company registered under the Investment Company Act of 1940, as amended, and (ii) as marked below, Buyer alone, or Buyer's Family of Investment Companies, owned at least $100,000,000 in securities (other than the excluded securities referred to below) as of the end of Buyer's most recent fiscal year.1 Buyer owned $ in securities (other than the excluded securities referred to below) as of the end of Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A). Buyer is part of a Family of Investment Companies which owned in the aggregate $ in securities (other than the excluded securities referred to below) as of the end of Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A). For purposes of determining the amount of securities owned by Buyer or Buyer's Family of Investment Companies, I used the cost of such securities and did not include any of the securities referred to below in the second succeeding paragraph. The term Family of Investment Companies as used herein will mean two or more registered investment companies (or series thereof) that have the same investment adviser or investment advisers that are affiliated (by virtue of being majority owned subsidiaries of the same parent or because one investment adviser is a majority owned subsidiary of the other). The term securities as used herein does not include (i) securities of issuers that are affiliated with Buyer or are part of Buyer's Family of Investment Companies, (ii) securities issued or guaranteed by the United States, or any instrumentality thereof, (iii) bank deposit notes and certificates of deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities owned but subject to a repurchase agreement and (vii) currency, interest rate and commodity swaps. On behalf of Buyer, I acknowledge that Buyer is familiar with Rule 144A and understands that you and your customers (if you act as a broker for one or more customers) are and will continue to rely on the statements made herein because one or more sales to Buyer by you for your own account or your customer's account will be in reliance on Rule 144A. In addition, on behalf of Buyer, I agree that, in connection with any purchase of securities sold by or through you in reliance on Rule 144A, Buyer will only purchase for Buyer's own account. Finally, on behalf of Buyer or Adviser (as appropriate), I also agree to notify you of any changes in the information and conclusions herein. Until such notice is given to you, Buyer's purchase from time to time of securities from you, or through you from your customers, will constitute a reaffirmation of the foregoing certifications and acknowledgments by me as of the date of such purchase. Date: _____________________ Very truly yours, Name: Title: On behalf of: Name of Buyer: or Name of Adviser: EXHIBIT D FORM OF NON-RULE 144A REPRESENTATION LETTER Gottschalks Credit Receivables Corporation Bankers Trust Company 7 River Place East as Trustee Fresno, California 93729 Four Albany Street New York, New York 10006 Re: Gottschalks Credit Card Master Trust; Fixed Base Credit Card Certificates, Series 1999-1 Ladies and Gentlemen: The undersigned purchaser (the Purchaser) understands that the purchase of the above-referenced certificates (the Certificates) may be made by institutions which are Accredited Investors under Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the 1933 Act). The undersigned represents on behalf of the Purchaser that the Purchaser is an Accredited Investor within the meaning of such definition. The Purchaser is urged to review carefully the responses, representations and warranties it is making herein. Representations and Warranties The Purchaser makes the following representations and warranties in order to permit Bankers Trust Company, as trustee (the Trustee) of the Gottschalks Credit Card Master Trust (the Trust), Gottschalks Inc. (Gottschalks) and Gottschalks Credit Receivables Corporation (GCRC) to determine its suitability as a purchaser of Certificates and to determine that the private transfer exemption from registration relied upon by GCRC under the 1933 Act is available to it. 1. The Purchaser understands that the Certificates have not been, and throughout their term will not be, registered or qualified under the 1933 Act or the securities laws of any state and may be resold (which resale is not currently contemplated) only if registered pursuant to the provisions of the 1933 Act or if an exemption from registration under the 1933 Act and other applicable state securities laws is available, that neither GCRC nor the Trustee is required to register the Certificates under the 1933 Act or any applicable state securities laws and that any transfer must comply with Article VI of the Pooling and Servicing Agreement between Gottschalks, GCRC and the Trustee and Article VI of the Series 1999-1 Supplement (the Supplement) thereto, each dated as of March 1, 1999 (collectively, the Agreement). The Purchaser does hereby agree to indemnify the Trustee, its officers, directors, agents and employees, GCRC and the Company against any liability that may result if the purchase of the Certificates is not so exempt or is not made in accordance with the 1933 Act and such state securities laws. 2. The Purchaser will comply with all applicable federal and state securities laws in connection with any subsequent resale of the Certificates. 3. The Purchaser is an accredited investor within the meaning of Rule 501(a)(1), (2), (3) or (7) under the 1933 Act and a sophisticated institutional investor and has knowledge and experience in financial and business matters (and, in particular, in such matters related to securities similar to the Certificates) and is capable of evaluating the merits and risk of its investment in the Certificates and is able to bear the economic risks of such investment. The Purchaser has been given such information concerning the Certificates, Gottschalks and GCRC as it has requested. 4. The Purchaser is acquiring the Certificates as principal for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, subject nevertheless to any requirement of law that the disposition of the Purchaser's property shall at all times be and remain within its control. 5. Neither the Purchaser nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of any Certificate, any interest in any Certificate or any other similar security of GCRC to, or solicited any offer to buy or accept a transfer, pledge or other disposition of any Certificate, any interest in any Certificate or any other similar security of GCRC with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, which would constitute a distribution of the Certificates under the 1933 Act or which would render the disposition of any Certificate a violation of Section 5 of the 1933 Act or any state securities law, require registration or qualification pursuant thereto, or require registration of the Trust under the Investment Company Act of 1940, as amended, nor will it act, nor has it authorized or will it authorize any person to act in such manner with respect to the Certificates. 6. The Purchaser has reviewed the Private Placement Memorandum with respect to the Certificates dated March 1, 1999 (the Private Placement Memorandum), and has had the opportunity to ask questions and receive answers concerning the terms and conditions of the transaction contemplated by the Private Placement Memorandum and to obtain additional information necessary to verify the accuracy and completeness of any information furnished to the Purchaser or to which the Purchaser had access. 7. The Purchaser is not an employee benefit plan, trust or account subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), or subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the Code), or a governmental plan defined in section 3 (32) of ERISA or Section 414(d) of the Code subject to any federal, state or local law which is, to a material extent, similar to the foregoing provisions of ERISA or the Code (Similar Law) (each, a Benefit Plan) and is not an entity, including an insurance company separate account or an insurance company general account if the assets in any such accounts constitute plan assets for purposes of regulation section 2510.3-101 of ERISA, whose underlying assets include Benefit Plan assets by reason of a Benefit Plan's investment in the entity. 8. The Purchaser understands that the Certificates will bear a legend substantially as set forth in the form of Certificate included as an Exhibit to the Supplement. 9. The Purchaser understands that there is no market, nor is there any assurance that a market will develop, for the Certificates and that GCRC does not have any obligation to make or facilitate any such market (or to otherwise repurchase the Certificates from the Purchaser) under any circumstances. 10. The Purchaser has consulted with its own legal counsel, independent accountants and financial advisors to the extent it deems necessary regarding the tax consequences to it of ownership of the Certificates, is aware that its taxable income with respect to the Certificates in any accounting period may not correspond to the cash flow (if any) from the Certificates for such period, and is not purchasing the Certificates in reliance on any representations of GCRC or its counsel respect to tax matters. 11. The Purchaser represents, on behalf of itself that if the Purchaser is a partnership, grantor trusts or S corporation for federal income tax purposes (a Flow- Through Entity), any Certificates owned by or on behalf of such Flow-Through Entity will represent less than 50% of the value of all the assets owned by such Flow-Through Entity and no special allocation of income, gain, loss, deduction or credit from such Fixed Base Certificates will be made among the beneficial owners of such Flow-Through Entity. 12. The Purchaser agrees that it will obtain from any subsequent purchaser of the Certificates substantially the same representations, warranties and agreements contained in the foregoing paragraphs 1 through 11 and in this paragraph 12. Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed thereto in the Agreement or the Private Placement Memorandum, as the case may be. The representations and warranties continued herein shall be binding upon the successors of the undersigned. Executed at _________, this___ day of ________, ___. Purchaser's Name (Print) By: \s\ Robert A. Smedley Title: Vice President Address of Purchaser Purchaser's Taxpayer Identification Number SCHEDULE I List of Series Accounts Bankers Trust Company ABA #021001033 ACCT: REF: Gottschalks 19991-1 Attn: Gottschalks Credit Card Master Trust Series 1999-1 Capitalized Interest Account : _____ Gottschalks Credit Card Master Trust Series 1999-1 Retained Amount Account: _____ Gottschalks Credit Card Master Trust Series 1999-1 Spread Account: _______ _______________________________ 1 Buyer must own and/or invest on a discretionary basis at least $100,000,000 in securities unless Buyer is a dealer, and, in that case, Buyer must own and/or invest on a discretionary basis at least $10,000,000 in securities. -----END PRIVACY-ENHANCED MESSAGE-----