Gottschalks files Chapter 11 bankruptcy to explore sale, investment possibilities

By Caroline Salls

Pittsburgh, Jan. 14 - Gottschalks Inc. filed Chapter 11 bankruptcy Wednesday in the U.S. Bankruptcy Court for the District of Delaware, according to a company news release.

In collaboration with its advisers, the company said it has decided to explore one or more options to create value for stakeholders, including a sale of its business or other transaction with a third-party investor, subject to court approval and an auction process.

"This was a very difficult, but necessary decision; however, we want to assure our employees and loyal customers that Gottschalks will be conducting business as usual," chairman and chief executive officer Jim Famalette said in the release.

"While we have aggressively pursued a number of important steps over the past year to improve our performance and reduce costs, the persistent challenges in the economy and recent unexpected reductions to our borrowing capacity as a result of tightening credit markets have left us with no other recourse than to pursue a sale of the company under court approval in a Chapter 11 proceeding."

To fund its continuing operations during the reorganization process, Gottschalks said it has negotiated a $125 million debtor-in-possession facility from a group of lenders led by GE Capital Corp., which will be used to fund the company's working capital requirements, including employee wages and benefits, vendor payments and other operating expenses, during the reorganization process.

The DIP financing will expire at the earliest of July 2009, 30 days after the bankruptcy filing date if a final order has not been entered, the close of the first business day after final approval if the required fees have not been paid, the date of confirmation of a plan of reorganization that does not call for the loan to be paid in full, upon closing of a sale of substantially all company assets and either on the effective date of a plan of reorganization that does repay the loan in full or 60 days after confirmation if the effective date has not occurred.

Interest will be Libor plus 400 basis points.

Gottschalks will pay a 2% closing fee.

According to court documents, Gottschalks had $288.44 million in total assets and $197.07 million in total debt as of Jan. 3.

The company's largest unsecured creditors include:

• The Harris Co., Redlands, Calif., with a $16.18 million note payable claim;

• Liz Claiborne, North Bergen, N.J., with a $2.1 million merchandise payable claim;

• The CIT Group/Commercial Services Inc., Los Angeles, with a $1.51 million merchandise payable claim; and

• Finlay Fine Jewelry, New York, with a $1.13 million merchandise payable claim.

Gottschalks said it expects the OTC Bulletin Board to temporarily halt trading of its stock pending receipt of additional information on the company's financial condition and reorganization plans.

The company's financial adviser is FTI Consulting, and its investment bank is Financo.

Gottschalks is a Fresno, Calif.-based regional department store chain. Its Chapter 11 case number is 09-10157.

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