The following table sets forth the Company's Statements of Operations as a percent of net sales:
Second Quarter of Fiscal 2008 Compared to Second Quarter of Fiscal 2007
Net Sales
Net sales from operations decreased by approximately $11.3 million to $133.7 million in the second quarter of fiscal
2008 as compared to $145.0 million in the second quarter of fiscal 2007, a decrease of 7.8%. Comparable store sales for the second quarter of
fiscal 2008, which includes sales for stores open for the full period in both years, decreased by 7.3% as compared to the second quarter of
fiscal 2007. The second quarter of fiscal 2008 sales decrease is primarily attributable to the weak economic environment driven by the
mortgage crisis and the rising costs of gasoline and food, with the greatest impact in the Company's California locations, which produce 80%
of sales volume.
The best performing merchandise categories of the second quarter of fiscal 2008, as compared to the comparable
thirteen week quarter of fiscal 2007, were women's better causal sportswear which grew by 13.7%, young men's which grew by 6.2%,
handbags and small leather goods, which was up 4.3%, and small electrics, which was up 3.4%. Merchandise categories with weak
performances were traditional women's sportswear, which was down 18.2%, the Liz Claiborne business, down 19.3%, and bedding and
sheets, down 30.5%.
16
Net Credit Revenues
Net credit revenues related to the Company's proprietary credit cards increased approximately $0.9 million in
the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007. As a percent of net sales, net credit revenues was 1.5% in
the second quarter of fiscal 2008 and 0.8% in the second quarter of fiscal 2007. This increase is attributable to the new Credit Card Program
Agreement with HSBC, which was effective February 3, 2007, which provides for an increase in the percentage of net sales revenue in the
second through sixth years of the agreement. Credit revenue is 250 basis points of net credit sales in fiscal 2008 compared to 136 basis points
of net credit sales in fiscal 2007.
Net Leased Department Revenues
Net rental income generated by the Company's various leased departments in the second quarter of fiscal
2008 was flat at $0.6 million compared to the second quarter of fiscal 2007.
Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the
Company's leased departments in the second quarter of fiscal 2008 consisted primarily of sales in the fine jewelry departments and the beauty
salons. These leased department sales were $4.1 million in the second quarter of fiscal 2008 and $4.4 million in the second quarter of fiscal
2007.
Cost of Sales
Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise,
decreased by approximately $5.4 million to $90.9 million in the second quarter of fiscal 2008 as compared to $96.3 million in the second
quarter of fiscal 2007, a decrease of 5.6%. The decrease is primarily attributable to the reduction in sales volume. The Company's gross
margin percentage was 32.0% in the second quarter of fiscal 2008 and 33.6% in the second quarter of fiscal 2007. The gross margin rate was
160 basis points lower than the second quarter of fiscal 2007 primarily attributable to higher net markdowns owing to the current difficult
economic environment and the inventory liquidation process related to the closure of the Moreno Valley, California store and the consolidation
of our dual East Hills Mall stores in Bakersfield, California into one store.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $3.9 million to $46.5 million in the
second quarter of fiscal 2008 as compared to $50.4 million in the second quarter of fiscal 2007, a decrease of 7.7%. The decrease is primarily
attributable to expense reduction initiatives the Company has implemented to offset the sales and gross margin decline in the weak economy.
Payroll expense is approximately $1.4 million lower than the comparable period in fiscal 2007 owing to staffing adjustments in accordance with
lower sales volume. Associate fringe benefits have decreased by approximately $1.3 million primarily due to the reduced payroll base, lower
unemployment tax rates compared to last year, and a favorable adjustment to the vacation pay reserve. The Company has also achieved
reductions in advertising expense by focusing on more productive spending. Supply amounts have been closely monitored and are down
23.5%, an electricity reduction campaign has led to a 10.0% decrease, and professional fees are down 37.5% due to the fees in the second
quarter of fiscal 2007 related to the strategic review process. Also, debit card pin pads were implemented in all stores in the second quarter of
fiscal 2008, which has decreased bank card fees compared to last year.
As a percent of net sales, selling, general and administrative expenses were flat at 34.8% in the second quarter of
fiscal 2008 as compared to the second quarter of fiscal 2007.
At the beginning of the second quarter of fiscal 2008, the Company completed a reduction in force at its corporate
headquarters, which will generate approximately $1.0 million in annual cost savings.
Depreciation and Amortization
Depreciation and amortization expense, which includes the amortization of intangible assets other than
goodwill, was $4.0 million in the second quarter of fiscal 2008 and $3.7 million in the second quarter of fiscal 2007. The change from last year
is the result of fiscal 2007 capital additions related to the Company's new store in Elk Grove,
17
California and major remodel projects at certain
existing stores, offset by fully depreciated assets. As a percent of net sales, depreciation and amortization expense increased to 3.0% in the
second quarter of fiscal 2008, as compared to 2.6% in the second quarter of fiscal 2007.
The Company reviews goodwill for impairment on an annual basis. However, due to the impact of market volatility on
the Company's market capitalization as compared to its GAAP basis equity, the Company is analyzing the value of goodwill related to its
acquisitions prior to fiscal year end to determine whether the value of goodwill has been impaired. There are many assumptions and estimates
underlying the determination of impairment. Future events could cause management to conclude that the Company's goodwill is impaired,
which would result in an impairment loss. Any potential impairment loss will be a non-cash charge and the Company does not believe any such
loss would have a material adverse impact on financial condition.
New Store Opening Costs
New store opening costs, which are expensed as incurred, typically include costs such as payroll and fringe
benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs
incurred prior to the opening of a store. The Company recognized $139,000 of costs in the second quarter of fiscal 2008 related to a new store
in Bend, Oregon, which is scheduled to open late in the third quarter of fiscal 2008. The Company recognized $15,000 of costs in the second
quarter of fiscal 2007 in connection with a new store in Elk Grove, California, which opened on November 7, 2007.
Interest Expense
Interest expense, which includes the amortization of deferred financing costs, decreased by approximately
$0.4 million to $2.1 million in the second quarter of fiscal 2008 as compared to $2.5 million in the second quarter of fiscal 2007, a decrease of
17.4%. As a percent of net sales, interest expense decreased to 1.5% in the second quarter of fiscal 2008 as compared to 1.7% in the second
quarter of fiscal 2007. These decreases are primarily due to continued decreases in interest rates charged on the Company's variable rate
debt and a favorable fair value adjustment of $152,000 on the Company's $25 million notional amount interest rate swap, compared to a
favorable fair value adjustment of $26,000 in the second quarter of fiscal 2007. The weighted average interest rate applicable to the revolving
credit facility was 4.5% in the second quarter of fiscal 2008 (4.4% at August 2, 2008), as compared to 7.1% in the second quarter of fiscal
2007.
Income Taxes
The Company's interim effective tax rates of 39.4% in the second quarter of fiscal 2008 and 21.6% in the
second quarter of fiscal 2007 relate to the net loss reported in those periods. The final effective tax rate was 39.1% for fiscal 2007. The
increase in the interim effective tax rate in the second quarter of fiscal 2008, compared to the second quarter of fiscal 2007, is primarily due to
the impact of certain federal tax credits in fiscal 2007.
The Company did not adjust its valuation allowance against anticipated future utilization of certain state tax credits in
the second quarter of fiscal 2008. The Company estimates its utilization of these credits based on projected 10-year operating results. The
Company will determine the need for an adjustment to its valuation allowance against these credits after its fiscal 2009 and long-term planning
process, which will take place in late fiscal 2008.
Net Loss
As a result of the foregoing, the Company reported a net loss of approximately $4.4 million in the second
quarter of fiscal 2008, as compared to a net loss of $4.8 million in the second quarter of fiscal 2007. On a per share basis, the net loss was
$0.33 per share (basic and diluted) in the second quarter of fiscal 2008 as compared to a net loss of $0.35 per share (basic and diluted) in the
second quarter of fiscal 2007.
18
First Half of Fiscal 2008 Compared to First Half of Fiscal 2007
Net Sales
Net sales decreased by approximately $27.9 million to $258.8 million in the first half of fiscal 2008 as compared to
$286.7 million in the first half of fiscal 2007, a decrease of 9.7%. The best performing merchandise categories in the first half were better
casual sportswear, which grew by 7.8%, women's activewear, which was up by 8.9% and young men's, up by 1.6%. Merchandise categories
with weak performances were traditional sportswear, down 19.0%, sheets and bedding, down 30.4%, and junior denim, which decreased by
23.9%. Comparable store sales for the first half of fiscal 2008, which includes sales for stores open for the full period in both years, were down
8.9% as compared to the first half of fiscal 2007.
Net Credit Revenues
Net credit revenues related to the Company's proprietary credit cards increased by $1.5 million or 67.7% for
the first half of fiscal 2008 as compared to the first half of fiscal 2007. As a percent of net sales, net credit revenues were 1.5% in the first half
of fiscal 2008 and 0.8% in the first half of fiscal 2007. This increase is attributable to the new Credit Card Program Agreement with HSBC,
effective February 4, 2008, which provides for an enhanced percentage to be paid to the Company based on net sales.
Net Leased Department Revenues
Leased department sales are presented net of the related costs for financial reporting purposes. Net leased
department revenues generated by the Company's various leased departments decreased by $0.1 million to $1.1 million in the first half of
fiscal 2008 as compared to the first half of fiscal 2007.
Sales generated in the Company's leased departments in the first half of fiscal 2008 consisted primarily of sales in the
fine jewelry departments and the beauty salons. These leased department sales were $8.1 million in the first half of fiscal 2008 and $9.0 million
in the first half of fiscal 2007.
Cost of Sales
Cost of sales, which includes costs associated with the buying, handling, storage and distribution of
merchandise, decreased by approximately $16.9 million to $174.6 million in the first half of fiscal 2008 as compared to $191.5 million in the first
half of fiscal 2007, a decrease of 8.8%. The Company's gross margin percentage decreased to 32.5% in the first half of fiscal 2008 as
compared to 33.2% in the first half of fiscal 2007. The decrease is a result of a higher net markdowns rate in the first half of fiscal 2008
compared to the first half of fiscal 2007 attributable to the difficult economic environment, the inventory liquidation process related to the
closure of the Moreno Valley, California store and the consolidation of our dual East Hills Mall stores in Bakersfield, California into one store.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $6.8 million to $92.8 million in the
first half of fiscal 2008 as compared to $99.6 million in the first half of fiscal 2007, a decrease of 6.8%. The decrease is primarily attributable to
expense reduction initiatives the Company has implemented to offset the sales and gross margin decline in the weak economy. Payroll
expense is approximately $3.1 million lower to the comparable period last year due to staffing reductions. Associate fringe benefits decreased
by approximately $2.5 million due to a favorable variance of $0.9 million to the Company's workers' compensation loss development reserve.
Additionally, there were decreases in state unemployment tax rates and various benefit plans as well as a reduction in the payroll expense
base. As a percent of net sales, selling, general and administrative expenses in the first half of fiscal 2008 increased to 35.9% as compared to
34.7% in the first half of fiscal 2007, reflecting the decline in sales volume.
19
Depreciation and Amortization
Depreciation and amortization expense, which includes the amortization (accretion) of intangible assets other
than goodwill, was $8.0 million in the first half of fiscal 2008 as compared to $7.6 million in the first half of fiscal 2007. As a percent of net
sales, depreciation and amortization expense increased to 3.1% in the first half of fiscal 2008 as compared to 2.7% in the first half of fiscal
2007. The dollar increase is a result of the depreciation of capital additions related to the Company's Elk Grove, California store opened in the
fourth quarter of fiscal 2007 and major remodel projects at certain existing stores during the second half of fiscal 2007. The Company also
made substantial upgrades to its point of sale systems which were placed in service at various dates during fiscal 2007 and first half of fiscal
2008.
The Company reviews goodwill for impairment on an annual basis. However, due to the impact of market volatility on
the Company's market capitalization as compared to its GAAP basis equity, the Company is analyzing the value of goodwill related to its
acquisitions prior to fiscal year end to determine whether the value of goodwill has been impaired. There are many assumptions and estimates
underlying the determination of impairment. Future events could cause management to conclude that the Company's goodwill is impaired,
which would result in an impairment loss. Any potential impairment loss will be a non-cash charge and the Company does not believe any such
loss would have a material adverse impact on financial condition.
New Store Opening Costs
New store opening costs, which are expensed as incurred, typically include costs such as payroll and fringe
benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs
incurred prior to the opening of a store. The Company recognized $213,000 of costs in the first half of fiscal 2008 in connection with a new
store in Bend, Oregon, which is scheduled to open late in the third quarter of fiscal 2008. The Company recognized new store opening costs
totaling $15,000 in connection with the opening of a new store in Elk Grove, California in the first half of fiscal 2007. The store opened
November 7, 2007.
Interest Expense
Interest expense, which includes the amortization of deferred financing costs, decreased by approximately
$1.0 million to $4.1 million in the first half of fiscal 2008 as compared to $5.1 million in the first half of fiscal 2007, a decrease of 18.9%. As a
percent of net sales, interest expense decreased to 1.6% in the first half of fiscal 2008 as compared to 1.8% in the first half of fiscal 2007.
These decreases are primarily due to continued decreases in interest rates charged on the Company's variable rate debt and a favorable fair
value adjustment of $0.3 million on the Company's $25 million notional amount interest rate swap, compared to a $0.1 million favorable fair
value adjustment in the first half of fiscal 2007. The weighted average interest rate applicable to the revolving credit facility was 4.5% in the first
half of fiscal 2008 (4.4% at August 2, 2008) as compared to 7.2% in the first half of fiscal 2007.
Income Taxes
The Company's interim effective tax rates of 40.0% in the first half of fiscal 2008 and 29.3% in the first half of
fiscal 2007 relate to the net losses incurred in those periods and represent the Company's best estimates of the annual effective tax rates for
those fiscal periods. The final effective tax rate for fiscal 2007 was 39.1%. The increase in the interim effective tax rate in the first half of fiscal
2008 is primarily due to the impact of certain federal tax credits in fiscal 2007.
The Company did not adjust its valuation allowance against anticipated future utilization of certain state tax credits in
the first half of fiscal 2008. The Company estimates its utilization of these credits based on projected 10-year operating results. The Company
will determine the need for an adjustment to its valuation allowance against these credits after its fiscal 2009 and long-term planning process,
which will take place in late fiscal 2008.
Net Loss
As a result of the foregoing, the Company reported a net loss of approximately $9.5 million in the first half of
fiscal 2008 as compared to a net loss of $9.4 million in the first half of fiscal 2007. On a per share basis (basic and
20
diluted), the net loss was
$0.72 per share in the first half of fiscal 2008 as compared to $0.69 per share in the first half of fiscal 2007.
Liquidity and Capital Resources
As described more fully in the Company's 2007 Annual Report on Form 10-K and Note 6 to the
accompanying financial statements, the Company's working capital requirements are currently met through a combination of cash provided by
operations, borrowings under its senior revolving credit facility, and by short-term trade and factor credit. The Company's liquidity position, like
that of most retailers, is affected by seasonal influences, with the greatest portion of cash from operations generated in the fourth quarter of
each fiscal year.
The Company's cash provided by operations during the first half of fiscal 2008 is primarily the result of decreased
inventory, a decrease in receivables after a build-up from the holiday season at the beginning of the year, and receipt of approximately $1.5
million in federal income tax refunds, offset by a large net loss. Cash provided by operations during the first half of fiscal 2007 is primarily due
to a decrease of inventory and collection of receivables.
Net cash used in investing activities is the result of capital spending in the first half of fiscal 2008 primarily related to the
new store construction in Bend, Oregon, the merger and renovation of dual stores in the East Hills Mall in Bakersfield, California and upgrades
to the Company's point of sale systems. Capital spending during the first half of fiscal 2007 primarily related to renovations of the Clovis,
California store, the Hanford, California store, and upgrades to the Company's point of sale systems.
Net cash provided by financing activities during the first half of fiscal 2008 primarily relates to increased borrowing on
the Company's revolving credit facility to fund the acquisition of inventory and for capital expenditures, partially offset by ongoing payment of
principal on long-term obligations. Net cash used by financing activities during the first half of fiscal 2007 primarily related to fewer outstanding
bank checks at the end of the period and ongoing payment of principal on long-term obligations, offset by increased borrowing on the
Company's revolving credit facility.
Sources of Liquidity
Senior Secured Credit Facility
The Company signed a second Amended and Restated Credit Agreement with General Electric Capital
Corporation to refinance its existing credit facility on September 26, 2007. The new credit facility consists of a $200 million senior secured
revolving credit facility (including a $20 million letter of credit sub-facility). Borrowings under the revolving credit facility are limited to the sum of
(a) a specified percentage of eligible credit card receivables, (b) a specified percentage of the net recovery value of eligible inventory, as
determined by periodic valuation performed by an independent appraiser, and (c) 65% of the fair market value of the Company's real estate.
Such borrowings are further limited by a requirement to maintain a minimum of $15 million of excess availability at all times, and other
reserves. Substantially all of the Company's assets, including its merchandise inventories, are pledged under the credit facility.
As of August 2, 2008, outstanding borrowings under the credit facility totaled $106.0 million, and availability for
additional borrowings under the credit facility, after the deduction of the minimum availability requirement and other reserves, was $25.6
million. Interest charged on amounts borrowed under the credit facility is at the prime rate, or at the Company's option, at the applicable LIBOR
rate plus 1.25% per annum. In addition, the Company pays an unused commitment fee equal to 0.20% per annum on the average unused
daily balance of the credit facility. The interest rate is adjusted upwards or downwards on a quarterly basis based on a pricing matrix, which is
tied to the Company's daily average excess availability for the preceding fiscal quarter (as defined in the agreement). Under the pricing matrix,
the applicable interest rate could range from a rate as low as prime or LIBOR plus 1.25%, to as high as prime plus 0.5%, or LIBOR plus
2.5%.
The credit facility contains restrictive financial and operating covenants, including the requirement to maintain a fixed
charge coverage ratio of 1:1 (as defined in the agreement) if the Company's excess availability (as defined in the agreement) is below $20
million. As of August 2, 2008, the fixed charge coverage ratio requirement was not
21
applicable. As of August 2, 2008, the Company was in
compliance with all covenants applicable to the credit facility. The agreement has a five year term expiring September 26, 2012.
Interest Rate Derivative
The Company is exposed to market risk associated with changes in interest rates. To provide some protection
against potential rate increases associated with its variable-rate facilities, the Company has entered into a derivative financial transaction in the
form of an interest rate swap. This interest rate swap, used to hedge a portion of the underlying credit facility, matures in February 2009.
Subordinated Note Payable to Affiliate
On July 25, 2008, the Company entered into an Allonge to the Subordinated Note that amended the
Subordinated Note to add a required principal payment of $2 million due February 20, 2010 and extend the Subordinated Note's maturity date
for one year due May 30, 2010. The August 20, 2008 due date of the semi-annual interest payment on the Subordinated Note of $647,000 has
also been extended to October 20, 2008.
The Subordinated Note is due at maturity subject to liquidity restrictions under the revolving credit facility. The
Subordinated Note also contains restrictions on new debt obligations that exceed $350,000, excluding indebtedness permitted under the credit
facility, as well as trade credit and lease agreements.
On July 18, 2008, the Company entered into an Amended and Restated Stockholders' Agreement (the "Stockholders'
Agreement") with ECI, Joseph Levy and Bret Levy. The Stockholders' Agreement amends and restates an earlier agreement that was entered
into on August 20, 1998, (and subsequently amended thereafter), in connection with the Harris acquisition. Joseph Levy currently serves as
Chairman emeritus of the Company and Bret Levy is his son. Under the terms of the Stockholders' Agreement, ECI is no longer required to
vote its shares of common stock of the Company in favor of any transaction that would result in a change of control of the Company and which
has been recommended by the Company's Board of Directors and submitted to a vote of the Company's stockholders. The Stockholder's
Agreement also provides that any shares of the Company's common stock that are acquired by ECI after July 18, 2008 and which are in
excess of the number of shares of the Company's common stock that are held by ECI as of July 18, 2008 shall not be governed under the
Stockholders' Agreement. The 2,095,900 shares of Company common stock that are currently held by ECI will remain subject to the
Stockholders' Agreement.
Trade Credit
The success of the Company's business is partially dependent upon the adequacy of trade credit offered by
key factors and vendors, the vendors' ability and willingness to sell their products at favorable prices and terms, and the willingness of vendors
to ship merchandise on a timely basis. The Company has been able to purchase adequate levels of merchandise to support its operations and
expects the level of trade credit to be sufficient to support its operations in the foreseeable future. However, given the current retail and credit
market environment, certain of the Company's trade creditors may seek enhanced credit protections. Restrictions to the amount of trade credit
granted by key factors and vendors can adversely impact the volume of merchandise the Company is able to purchase. Any significant
reduction in the volume of merchandise the Company is able to purchase, or a prolonged disruption in the timing of when merchandise is
received, could have a material adverse affect on the Company's business, liquidity position, and results of operations.
Other Financings
The Company may consider various other sources of liquidity, including but not limited to the issuance of
additional equity or debt securities that might have a dilutive effect on existing shareholders, or incurring additional indebtedness which would
increase the Company's leverage. However, additional funding may not be available at terms acceptable to the Company.
Uses of Liquidity
The Company's primary uses of liquidity are for working capital, debt service requirements and capital
22
expenditures. Capital expenditures during the first half of fiscal 2008 totaling $8.7 million primarily relate to the new store construction in Bend,
Oregon, the merger and renovation of dual stores in the East Hills Mall in Bakersfield, California and upgrades to the Company's point of sale
systems.
As of August 2, 2008, the Company had issued a total of $1.2 million of standby letters of credit and documentary
letters of credit totaling $1.3 million. The standby letters of credit were primarily issued to provide collateral for workers' compensation
insurance policies. Management believes that the likelihood of any draws under the standby letters of credit is remote. Documentary letters of
credit are issued in the ordinary course of business to facilitate the purchase of merchandise from overseas suppliers. The supplier draws
against the documentary letter of credit upon delivery of the merchandise.
Subject to the previously described risks and uncertainties relative to the Company's sources of liquidity, management
currently believes that the described sources of liquidity, including cash generated by operations, liquidity provided by the revolving credit
facility and other financial resources, will be adequate to meet the Company's planned cash requirements for at least the next 12 months.
However, the Company's actual results may differ from the expectations set forth in the preceding sentence. The Company's liquidity and
capital resources may be affected by a number of factors and risks (many of which are beyond the control of the Company), including but not
limited to the availability of adequate borrowing capacity, adequate cash flows generated by operations and the adequacy of factor and trade
credit. In addition, traditional sources of liquidity may be stressed as a result of the difficult retail and credit market environment. For example,
certain of the Company's trade creditors could seek enhanced credit terms or protections. Changes in trade credit terms could cause the
Company to face a need to raise additional capital from the sale of equity or debt securities. If the estimates or assumptions relative to any one
of these sources of liquidity are not realized, or if these sources of liquidity are significantly reduced or eliminated, the Company's liquidity
position, financial condition and results of operations will be materially adversely affected.
Safe Harbor Statement
Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends
that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and
objectives of management for future operations and the future economic performance of the Company that involve risks and uncertainties. In
some instances, such statements may be identified by the use of forward-looking terminology such as "may," "will," "expects," "believes,"
"intends," "projects," "forecasts," "plans," "estimates," "anticipates," "continues," "targets," or similar terms, variations of such terms or the
negative of such terms. Such statements are based on management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those described in the forward-looking statements, including, without
limitation, the Company's ability to meet debt obligations and adhere to the restrictions and covenants imposed under its various debt
agreements; the timely receipt of merchandise and the Company's ability to obtain adequate trade credit from its key factors and vendors; risks
arising from general economic and market conditions (including uncertainties arising from future acts of terrorism or war); the ability to modify
operations in order to minimize the adverse impact of rising costs, including but not limited to health care, workers' compensation, property and
casualty insurance, unemployment insurance, and utilities costs; the effects of seasonality and weather conditions, changing consumer trends
and preferences, competition, consumer credit; the Company's dependence on its key personnel; and general labor conditions, all of which are
described in more detail under the caption "Risk Factors" in Part I, Item 1A. in the Company's 2007 Annual Report on Form 10-K and other
reports filed by the Company with the Securities and Exchange Commission. THE COMPANY DOES NOT PRESENTLY INTEND TO
UPDATE THESE STATEMENTS AND UNDERTAKES NO DUTY TO ANY PERSON TO EFFECT ANY SUCH UPDATE UNDER ANY
CIRCUMSTANCES.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described more fully in Part II, Item 7A of the Company's 2007 Annual Report on Form 10-K, 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 and on certain of its long-term borrowing arrangements. Based on current market conditions, management does not believe there has
been a material change in the Company's exposure to interest rate risks as described in that report.
23
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains "disclosure controls and procedures," for purposes of Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in
the Company's reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in
the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. Management
necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only
reasonable assurance regarding management's control objectives. The Company has carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15(b). Based upon the foregoing, as of August 2, 2008, the Company's President and Chief Executive Officer along with the
Company's Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in reaching the level of
reasonable assurance regarding management's control objectives.
There has been no change during the Company's fiscal quarter ended August 2, 2008 in the Company's internal
control over financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has
materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
Multiple risk factors exist which could have a material effect on the Company's operations, results of operations,
profitability, financial position, liquidity and capital resources. These risk factors are more fully presented in the Company's 2007 Annual Report
on Form 10-K as filed with the SEC.
There have been no material changes with respect to the risk factors disclosed in our 2007 Annual Report on
Form 10-K.
24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 25, 2008, the Company held its 2008 Annual Meeting of Stockholders at which the following matter was
submitted to a vote of the Company's shareholders:
1. The stockholders voted for eleven nominees for director, each for a one-year term. Each of the eleven nominees
was elected. The results of the vote are as follows:
NOMINEE FOR DIRECTOR
|
VOTES FOR
|
VOTES WITHHELD
|
Joe Levy
|
11,913,758
|
582,127
|
James R. Famalette
|
12,091,026
|
404,859
|
Joseph J. Penbera
|
11,902,586
|
593,299
|
Sharon Levy
|
11,324,189
|
1,171,696
|
O. James Woodward III
|
11,920,406
|
575,479
|
Frederick R. Ruiz
|
12,115,168
|
380,717
|
James L. Czech
|
12,112,946
|
382,939
|
Thomas H. McPeters
|
11,332,426
|
1,163,459
|
Jorge Pont Sa
́
nchez
|
11,280,294
|
1,215,591
|
Philip S. Schlein
|
12,110,920
|
384,965
|
Dale D. Achabal
|
12,113,646
|
382,239
|
Item 6. EXHIBITS
Exhibit
Number
|
Exhibit Description
|
3.1
|
Certificate of Incorporation of the Company, as amended. (1)
|
3.2
|
Bylaws of the Company, as amended. (2)
|
10.61
|
Allonge dated July 25, 2008 to Non-Negotiable Subordinated Note due May 30, 2009. (3)
|
10.62
|
Consent and Amendment Number 1 to the Second Amended and Restated Credit Agreement dated July 24, 2008. (3)
|
10.63
|
Amended and Restated Stockholders' Agreement by and among El Corte Ingles, S.A., Gottschalks Inc., Joseph Levy and Bret Levy
dated July 18, 2008. (3)
|
31.1
|
Section 302 Certification of Chairman and Chief Executive
Officer. (4)
PDF
|
31.2
|
Section 302 Certification of Vice President and Chief Financial
Officer. (4)
PDF
|
32.1
|
Certification of Chairman and Chief Executive
Officer and Vice President and Chief Financial Officer Pursuant to 18 U.S.C.
§1350, As Adopted Pursuant to §906 of the Sarbanes-Oxley Act of
2002. (4)
PDF
|
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (File No. 33-3949).
(2) Previously filed as an exhibit to the Current Report on Form 8-K on December 7, 2007 (File No. 1-09100).
(3) Previously filed as an exhibit to the Current Report on Form 8-K dated August 4, 2008 (File No. 1-09100).
(4) Furnished concurrently herewith.
25
SIGNATURES
Pursuant to the requirements 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.
|
Gottschalks Inc.
|
|
(Registrant)
|
September 9, 2008
|
By:
|
/s/ James R. Famalette
|
|
James R. Famalette
|
|
(Chairman and Chief Executive Officer)
|
September 9, 2008
|
By:
|
/s/ Daniel T. Warzenski
|
|
Daniel T. Warzenski
|
|
(Vice President and Chief Financial Officer)
|
26
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