UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 3, 1996 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 0-14577
GANTOS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1414122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3260 Patterson, S.E., Grand Rapids, Michigan 49512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 949-7000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 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 estimated aggregate market value of the voting stock held by nonaffiliates
of the registrant as of April 15, 1996 calculated by reference to the closing
sale price as reported by NASDAQ on such date, was approximately $23,709,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _X_ No ___
The estimated number of shares outstanding of the registrant's common stock,
$.01 par value per share, as of April 15, 1996 was 7,577,290.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy statement for the Annual Meeting of Shareholders
scheduled for June 20, 1996 are incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Gantos is a specialty retailer of a full range of quality, fashionable women's
apparel and accessories at moderate to higher prices. As of April 15, 1996,
Gantos operated 113 stores averaging 8,000 square feet, in 23 states, located
primarily in suburban malls in the West, Midwest and Northeast. The Company
plans to open one to three new stores in 1996. The Company offers an edited
selection of primarily name brand sportswear, career dresses and suits, social
occasion dresses, accessories, outerwear, swimwear, and in selected stores,
shoes. The Company's marketing strategy emphasizes quality merchandise with
assortments from which women can build entire wardrobes, personal attention
and customer service. It is targeted to satisfying the apparel needs of
active, educated, career-orientated, fashion-conscious women, primarily from
30 to late 50 years of age. The Company's four Boutiques located in Illinois
and Michigan feature final clearance merchandise, primarily from Gantos
stores. In March 1995, Gantos, Inc. (formerly known as Gantos Stores, Inc., a
wholly owned subsidiary of the former Gantos, Inc.) became the successor of
the former Gantos, Inc. pursuant to a merger. The former Gantos, Inc. merged
into Gantos Stores, Inc., which then changed its name to Gantos Inc. Gantos,
Inc. is a Michigan corporation incorporated November 10, 1952 as a successor
to a business founded in 1932. Unless otherwise specified, "Gantos" and
"Company" refer to the Registrant and its predecessors, and 1995, 1994 and
1993 refer to the fiscal years ended February 3, 1996, January 28, 1995, and
January 29, 1994, respectively.
RECENT DEVELOPMENTS
Chapter 11 Reorganization.
On November 12, 1993 (the "Petition Date"), the Company filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Western District of Michigan. Under
the protection of Chapter 11, the Company managed its affairs and operated its
business as a debtor-in-possession while developing a plan of reorganization.
The Company filed its Joint Plan of Reorganization on September 29, 1994, the
First Amended Joint Plan of Reorganization on December 22, 1994, and the
Second Amended Joint Plan of Reorganization on January 19, 1995, (as amended
March 7, 1995, the "Plan") along with its Disclosure Statement. On January 19,
1995, the Bankruptcy Court approved the Disclosure Statement as containing
adequate information and established February 27, 1995, as the deadline for
voting on the Plan. The Plan was approved by 93% of the shareholders and 99%
of the creditors that voted. On March 7, 1995, the Bankruptcy Court confirmed
the Plan as amended. The effective date of the Plan was March 31, 1995.
Claims and interests in the Company were classified into 9 classes under the
Plan. The following table summarizes the classification of claims and
interests under the Plan and the treatment of such claims and interests under
the Plan:
Class Description of Treatment
----- ------------------------
1. Priority Claims (claims under Each holder of an allowed Class 1
Section 507(a) under the claim received cash equal to the
Bankruptcy Code, other than amount of the allowed claim.
administrative and priority
tax claims).
2. Convenience Claims (unsecured Each holder of an allowed Class 2
claims less than, or reduced to, claim received cash equal to the
$200). amount of such allowed claim (as
reduced, if applicable, pursuant to
an election by the holder of such
claim).
3. Secured Claims (other than bank Each holder of an allowed Class 3
secured claims). claim had its claim reinstated.
2
<PAGE>
4. Settled Class Action Claims The class action settlement trustee
(claims against the Company and received 168,269 newly-issued
certain of its officers and Common Shares and $550,000 in cash,
directors brought pursuant to which cash was paid by the Company's
the securities class action insurance company.
lawsuit filed March 16,
1994 and the related claim
filed in the bankruptcy
proceedings).
5. Bank Claims. The holders of allowed Class 5 claims
received (a) $15,893,290 in cash,
(b) 1,249,745 Common Shares, and (c)
$5,058,293 in original principal amount
of notes bearing interest at 12.75% and
due April 1, 2001 ("New Notes").
6. Unsecured Claims. Each eligible Class 6 claim holder
received, at the election of such
holder, for each dollar of an allowed
claim either (i) (x) $.50 in cash and
(y) Common Shares (valued for this
purpose as $4.16 a share) with a
hypothetical value of $.50, or (ii)
$1.00 in original principal amount of
New Notes. One holder of a Class 6
claim was not eligible to receive cash
and Common Shares and received $7.2
million in New Notes instead. Holders
of Class 6 claims that were not allowed
as of January 19, 1995, were not
eligible to receive New Notes. The
Company issued approximately $7.3
million in New Notes, 3.3 million
Common Shares and $13.9 million in
cash to holders of unsecured claims.
7. Holders of Gantos, Inc. Common Each holder of an allowed Class 7
Shares before March 31, 1995. interest is entitled to receive one
Common Share for each two
Common Shares previously
held.
8. Holder of Gantos Stores, Inc. Gantos Stores, Inc. Common Shares
Common Shares outstanding before March 31, 1995, were
canceled pursuant to the Merger
Agreement between Gantos, Inc. and
Gantos Stores, Inc.
9. Other equity interests in No property was distributed to
Gantos, Inc. including stock or was retained by the holders of
options outstanding before interests in Class 9 on account
March 31, 1995. of such interests.
Administrative claims and priority tax claims were not classified under the
Plan. The Plan provided for payment in full in cash of all administrative
claims. In accordance with terms under the Plan, the Company exercised its
right to pay in full in cash all Priority tax claims. The Plan had allowed the
Company to defer cash payments of the Priority tax claims over a six-year
period, plus simple interest at 7% a year, beginning March 31, 1996, or such
other rate of interest required to be paid by the Bankruptcy Court.
The percentages of Common Shares distributed to old shareholders and to
creditors were subject to dilution on account of Common Share awards pursuant
to the Amended and Restated Gantos, Inc. Stock Option Plan and the Amended and
Restated
3
<PAGE>
Gantos, Inc. Directors' Stock Option Plan, pursuant to which 1,655,802 Common
Shares, in the aggregate, were reserved for grants and awards.
As of March 7, 1995, the Company had 5,329,526 Common Shares issued and
outstanding before giving effect to the issuance of one new Common Share for
every two outstanding Common Shares pursuant to the Plan and the Agreement of
Merger between Gantos, Inc. and Gantos Stores, Inc. (the "Stock Reduction").
The Company issued approximately 4.6 million common shares and $12.4 million
in aggregate principal amount of New Notes to unsecured creditors pursuant to
the Plan, issued 168,269 common shares as partial settlement of the class
action lawsuit, and issued 200,000 restricted shares to officers and
employees, 23,000 of which have since been forfeited.
Facilities Closings and Other.
On November 11, 1993, the Company's Board of Directors approved a plan to
realign the Company's operations in an effort to improve its long-term profit
potential. This realignment enabled the Company to concentrate its efforts on
those stores that management believed provided potential for ongoing
profitability. The Company closed 41, 5, and 2 stores in fiscal 1993, 1994 and
1995, respectively. In October 1994, the Company reopened one of the stores
closed in the prior year.
During 1993, the Company recorded a charge related to facilities closings and
other of $29.3 million for the anticipated costs of the realignment,
consisting primarily of expected costs of future lease obligations and
rejection claims, losses on disposal of property and equipment, expenses and
losses associated with the disposal of merchandise inventory in the closed
stores and other expenses and losses directly related to the closure of the
stores.
During 1994, the Company was unsuccessful in renegotiating its office and
distribution center lease with its former landlord and elected to reject its
office-distribution center lease in its bankruptcy proceedings. As a result,
the Company reallocated $7.8 million of the Provision for Facilities Closings
for the anticipated costs of rejecting the lease and relocating the
office-distribution center. The provision consisted of the $3.5 million
negotiated lease rejection cost, losses on the disposal of property and
equipment and other expenses associated with the relocation of the Company's
headquarters. See the description of the Company's settlement and lease
arrangements in Note 9 of "Notes to Financial Statements" in this report,
which description is incorporated in this Item 1 by reference.
The costs associated with the closing of the 47 stores and the rejection of
the office and distribution center lease, including some future lease
obligations, have been incurred during fiscal 1993, 1994 and 1995 and
accordingly have been charged against the provision.
During 1994, the Company negotiated favorable terms with its landlords on many
of the remaining under-performing stores. As a result, the Company reversed
$1.8 million of the Provision for Facilities Closings and Other recorded in
1993. During 1995, the Company settled the remaining disputes with its
landlords for less than the amounts accrued and reversed an additional $0.9
million of the reserve.
During 1994, the Company also settled the purported class action lawsuit and
recorded a $700,000 provision for such settlement. See the description of the
treatment of Class 4 claims in "Chapter 11 Reorganization" and the discussion
in Note 3 of "Notes to Financial Statements" in this Report, which information
is incorporated in Item 1 by reference.
In addition, during 1994 the Company entered into agreements with certain of
its creditors settling their claims for approximately 25% of their legally
allowed amounts, which resulted in a $1.6 million reduction in the Provision
for Facilities Closings and Other. This amount was included as an
extraordinary gain in the Company's Statements of Income (Loss).
4
<PAGE>
At February 3, 1996, the remaining balance of the accrued reserve was
approximately $2.4 million.
New Loan Facility and Indenture.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for descriptions of the
Company's Indenture relating to the New Notes and the Company's new loan
facility.
Management Changes.
In March 1995, Erwin A. Marks, Hannah H. Strasser, Mary Elizabeth Burton and
S. Amanda Putnam became directors of the Company. Also in March 1995, George
Sheer ceased to be a director of the Company pursuant to the Plan. In June
1995, Joseph Corso resigned as Vice President-Store Operations. Effective
April 1996, Anthony Barnett was appointed Vice President-Store Operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's business consists of a single industry segment.
MARKETING STRATEGY
The Company's marketing strategy emphasizes quality merchandise, with
assortments from which women can build entire wardrobes, personal attention
and customer service. It is targeted to satisfying the apparel needs of
active, educated, career-oriented, fashion-conscious women, primarily from 30
to late 50 years of age. This strategy is implemented by (i) offering a full
range of current, fashionable quality merchandise at moderate to higher price
levels; (ii) training sales associates in the skills needed to provide a high
level of personal attention and customer service; and (iii) locating its
stores primarily in or near more affluent neighborhoods in regional malls
which contain at least one traditional upscale department store frequented by
its target customers.
Management believes that the typical Gantos customer is a career woman,
residing in a two-income, upper-middle to higher income household, who has
attended college, has sophisticated fashion taste and has high expectations
regarding value and service.
MERCHANDISE
The Company's stores offer a full range of current, quality, fashionable
merchandise at moderate to higher prices. Each store carries an edited
selection of primarily name brand sportswear (both coordinated groupings and
separate tops and bottoms), career dresses and suits, social occasion dresses,
accessories, outerwear, swimwear and, in selected stores, shoes. The Company
attempts to stock all stores with the same basic merchandise content; however,
certain merchandise is varied among stores depending on local trends.
Since the Petition Date, the Company focused its merchandising strategy on a
return to the Company's traditional merchandising strategy, including (i)
narrowing the mix of merchandise, (ii) reducing the number of vendors and
increasing their ability to tailor product, (iii) implementing formal markdown
procedures to ensure more current and well-priced product, (iv) stabilizing
delivery flow to the stores, (v) reinstituting historical markup policies, and
(vi) improving merchandise planning and allocation.
Each of the Company's stores is designed to be a well-organized and complete
shopping source for its target customers, providing merchandise to outfit them
in casual, work and evening wear, including accessories.
5
<PAGE>
The following table shows the approximate percentage of net sales for major
merchandise classifications (other than shoes) for the past three years:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
Product Class 1995 1994 1993
- - ------------- ---- ---- ----
<S> <C> <C> <C>
Sportswear ............... 38% 40% 41%
Dresses................... 34 33 29
Accessories............... 15 14 15
Outerwear and Suits....... 10 10 13
Swimwear.................. 3 3 2
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The percentage of net sales accounted for by each merchandise group is
affected by pricing, consumer trends and the development and introduction of
new fashions. Historical net sales percentages may not be indicative of
percentages in future years.
PERSONAL ATTENTION AND CUSTOMER SERVICE
Personal attention is fundamental to the Company's marketing strategy. Gantos
sales and desk staff are trained to provide courteous and knowledgeable
service to each customer from the time the customer enters the store until the
sale is completed, including assisting customers in the coordination of
merchandise, advising customers about the latest fashion trends, and helping
customers make purchases efficiently. The Company motivates its sales
associates through incentives and periodic productivity awards based largely
on multiple item sales and sales volume.
SALES TERMS AND CONSUMER CREDIT
The Company accepts cash, checks, third party credit cards and the Gantos
credit card. Management believes that offering the Gantos credit card helps
convey Gantos' image as an upscale specialty retailer, enhances customer
loyalty and provides a large customer list available for targeted advertising
promotions on a monthly basis. In 1995, approximately 37% of the Company's
sales were made for cash, 32% by third party credit cards and 31% by the
Gantos credit card. During 1995, the Company offered its customers a 10%
discount on purchases if the customer opened a Gantos charge account as a
means of encouraging usage of the Gantos credit card.
A Gantos credit card is offered to customers who qualify for credit based on
the Company's established credit criteria. The minimum monthly payment is the
greater of $20 or 10% of the unpaid balance of its credit accounts. The
Company imposes finance charges at annual rates varying from 18% to 21%,
depending upon state laws. During 1995, the Company increased the late fee
charge to a maximum of $5 per month. The allowance for doubtful accounts was
2.5% of customer receivables at 1995 year-end compared with 2.4% at 1994
year-end and 3.3% at 1993 year-end. The Company's credit card program may be
affected by changes in federal and state consumer credit laws.
Gantos has a liberal return policy, offering merchandise exchanges or refunds
for cash or credit on returned merchandise at its stores within 90 days from
purchase.
6
<PAGE>
ADVERTISING AND PROMOTION
Gantos relies largely on mall traffic to generate shoppers. In addition, the
Company utilizes direct mail advertising. Advertising, primarily by direct
mail, informs customers about fashion trends and emphasizes Gantos' fashion
image. Direct mail advertising varies in size and format, from postcards and
catalogs to inserts and coupons mailed to Gantos credit card customers with
their monthly statements.
Gross advertising expenditures in 1995 and 1994 approximated 0.8% and 0.7% of
net sales, respectively. The increase in gross advertising costs in 1995
compared to 1994 is due to the production of two additional mailers during the
year. A significant part of advertising costs are paid by vendor
contributions. Such vendor contributions are subject to change or cancellation
at each vendor's sole discretion from year to year.
STORES
The Company's stores are primarily located in enclosed regional malls which
contain at least one traditional upscale department store frequented by the
Company's target customers. A few stores are located in major urban office-
shopping centers which are typically located near at least one such department
store. Store interiors are designed to convey a warm, elegant feeling.
Merchandise is attractively arranged by department classifications, rather
than vendor, and is displayed in coordinated groups on fixtures designed to
allow the customer easy access to purchase complete outfits. The merchandise
set and visual display are centrally administered by Gantos management.
Gantos operates four clearance stores (Bargain Boutiques) which are located in
Illinois (Countryside) and Michigan (one each in Grand Rapids, Kalamazoo and
Livonia). The clearance stores feature marked-down merchandise, which comes
primarily from Gantos stores.
The following table sets forth information concerning sales per store and per
square foot (sales include shoe sales and exclude license fees from shoe
departments) for stores open in the last three years:
<TABLE>
<CAPTION>
Year
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Average sales per store
(in thousands):
All stores (1) $1,752 $1,764 $1,591
Stores open at least two
years at end of year (2) $1,780 $1,796 $1,819
Average sales per square foot
of selling space:
All stores (1) $ 247 $ 248 $ 223
Stores open at least two
years at end of year (2) $ 249 $ 252 $ 253
<FN>
(1) The number of stores and the selling space are adjusted to reflect the
number of months during the period that new stores and stores which closed
were open. These amounts are not adjusted to reflect the seasonal nature of
the Company's sales or the resulting impact of opening stores in different
periods during the year. See "Business-Seasonality". Sales include shoe sales
and do not include shoe license fees.
(2) The sales numbers are restated in prior years to reflect the number of
stores open at the end of fiscal 1995.
</TABLE>
7
<PAGE>
Store hours are generally determined by the mall in which the store is
located. Most stores are open seven days and six nights a week, except major
holidays.
LEASED DEPARTMENTS AND CATALOG OPERATIONS
At 29 midwestern stores, a portion of the selling space is licensed to an
unaffiliated party which operates a shoe department. Fees received by Gantos
from the shoe department licensee (included in net sales) were approximately
$789,000 in 1995, $761,000 in 1994 and $844,000 in 1993.
NUMBER OF STORES AND LOCATION
Prior to February 1991, Gantos grew both through increased sales volume from
existing stores and from new stores. The decline in fiscal 1995, 1994 and 1993
sales was the result of decreased comparable store sales and the closing of 48
stores. Sales growth in 1991 and 1992 was largely the result of increased
comparable store sales. The following table sets forth information with
respect to store openings and closures since the end of fiscal 1983:
<TABLE>
<CAPTION>
Number of Stores
--------------------------------------------
Open at Opened Closed Open at
Year Ended Beginning During During End of
---------- of Year Year Year Year
--------- ------ ------ ------
<S> <C> <C> <C> <C>
February 2, 1985 39 4 1 42
February 1, 1986 42 10 2 50
January 31, 1987 50 15 0 65
January 30, 1988 65 20 1 84
January 28, 1989 84 25 1 108
February 3, 1990 108 32 1 139
February 2, 1991 139 31 6 164
February 1, 1992 164 0 6 158
January 30, 1993 158 1 0 159
January 29, 1994 159 2 43 118
January 28, 1995 118 1 5 114
February 3, 1996 114 1 2 113
</TABLE>
As part of the Chapter 11 restructuring, the Company closed 2 stores in 1995
in addition to the 46 stores closed since the bankruptcy filing. The stores
closed in 1995 were located in New York and Illinois. In 1995, the Company
opened one new store in New York. The Company plans to open one to three new
stores in 1996. As a result, any future sales growth is expected to come from
comparable store sales growth.
The following table shows the geographic distribution of the Company's stores
by state for the 113 stores open as of April 15, 1996.
<TABLE>
<S> <C> <S> <C>
California.................. 4 New Hampshire................ 2
Colorado.................... 4 New Jersey................... 4
Connecticut................. 2 New York..................... 6
Illinois.................... 11 North Carolina............... 2
Indiana..................... 5 Ohio......................... 11
Kansas...................... 1 Oregon....................... 1
Kentucky.................... 2 Pennsylvania................. 9
Maryland.................... 5 Rhode Island................. 1
Massachusetts............... 3 Tennessee.................... 4
Michigan.................... 20 Virginia..................... 4
Minnesota................... 3 Wisconsin.................... 5
Missouri.................... 4
</TABLE>
8
<PAGE>
Capital expenditures for 1995 were incurred primarily to remodel and refixture
21 existing stores, to pay the balance for and install a new register and
information control system and to open one new store. The Company expects that
approximately $6.0 million will be required for capital expenditures in 1996,
principally for remodeling and refixturing 20 to 25 existing stores and to
open one to three new stores.
DISTRIBUTION, SUPPLIERS AND PURCHASING
The majority of the merchandise purchased by the Company from vendors is
delivered by the vendors to the Company's East coast or West coast
"consolidator". Each consolidator stages the merchandise it receives for
shipment and arranges for delivery to the Company's distribution center in
Grand Rapids, Michigan. Merchandise not shipped through a consolidator is
delivered directly to the distribution center. Merchandise is then inspected,
ticketed, allocated and shipped to the Company's various stores. The Company
generally does not warehouse merchandise, but distributes it promptly to
stores. The Company does warehouse damaged items awaiting return to vendors
and a portion of selected merchandise for later allocation to stores in which
such items are selling more rapidly than in other stores. Shipments are made
to the stores via common carrier.
All of the products sold by Gantos are purchased directly from manufacturers.
The Company's purchasing strategy is to buy, where possible, substantial
quantities of quality merchandise from selected manufacturers to whom the
Company is an important customer. All purchasing decisions are made centrally
based on detailed merchandising plans. No manufacturer accounted for more than
10% of the Company's purchases during any of the last three fiscal years. The
Company does not maintain any long-term or exclusive commitments or
arrangements to purchase from any manufacturer. The Company supplements some
of its merchandise lines with private label merchandise.
Management believes that the Company is one of the larger customers (based on
purchase volume) of a number of its suppliers. Gantos works closely with its
suppliers, keeping them informed of selling trends and helping them develop
merchandise lines and production schedules. The Company will require continued
planning and development of close working relationships with suppliers to
continue obtaining adequate supplies of quality merchandise on favorable
terms. To diminish the risk of not obtaining satisfactory additional supplies
of merchandise, the Company is continually exploring possible additional
resources for merchandise supply, including other recognized domestic labels,
private label merchandise (manufactured domestically and overseas) and foreign
manufacturers. There is no assurance that the Company will be able to continue
to purchase merchandise from preferred vendors in the quantities and on the
terms its desires.
Management believes that its purchasing power has not been weakened since the
emergence from Chapter 11.
INFORMATION AND CONTROL SYSTEMS
During 1994, the Company received authorization from the Bankruptcy Court to
purchase new point of sale registers and a micro processor to process
information entered at the registers. This system was fully installed and
operational in May 1995. The integrated computer information system provides
the Company with financial, merchandise, inventory, personnel, credit,
analytical and other information concerning its business. This system includes
several point-of-sale registers in each store, which are connected on-line
with the Company's corporate computers via satellite. This network, which
allows for in-house processing of most of the Company's data processing needs,
is used to communicate with the stores and capture all sales transactions,
Gantos credit card authorizations, data collections by corporate computers and
third party bankcard authorizations.
9
<PAGE>
The system provides Gantos buyers with timely selling information by vendor,
style, color and size and assists in the distribution to each store of
required merchandise. Buyers use this information to plan and budget inventory
monthly by department and analyze the profitability and turnover of
merchandise as well as local consumer tastes. The system monitors the selling
rate of merchandise by classification. It also calculates markdowns at
specified intervals based upon standards established for each merchandise
classification, which are then reviewed by management.
The system maintains over 733,000 customer charge accounts (approximately
268,000 of which are active) and generates monthly customer statements and
financial reporting. The system also provides information to help management
schedule, compensate and evaluate employees.
The Company takes a complete physical inventory at least two times per year to
determine actual cost of merchandise sold. Inventory shrinkage, at cost, as a
percentage of net sales was 1.5% in 1995, 1.5% in 1994 and 2.0% in 1993. The
decrease in shrinkage expense as a percentage of net sales is the result of
the Company's increased emphasis on shrinkage control and its loss prevention
program.
TRADEMARKS AND SERVICE MARKS
The Company has registered the names "Gantos," "Bargain Boutique," "Your Most
Fashionable Shopping Address" and "Sale For All Seasons" as service marks and
its logo as a trademark with the United States Patent and Trademark Office.
Registration of these service marks is renewable indefinitely. The Company is
not aware of any adverse claims concerning its names or marks.
EMPLOYEES
As of February 3, 1996, the Company had 2,106 employees. This total consists
of 630 full-time employees and 1,476 part-time employees. The full-time
employees consist of 340 salaried employees and 290 hourly employees. Of the
full-time, hourly employees, 145 were salespersons who receive incentives in
addition to their hourly wages. Gantos employs additional part-time personnel
as needed throughout the year.
Management believes that its employees are paid competitively compared to
industry standards. All employees receive discounts on Gantos merchandise, and
most full-time employees are entitled to life insurance, medical, dental and
disability coverage and are eligible to participate in a 401(k) plan. All
Gantos employees are non-union. The Company considers its relationship with
its employees to be good.
COMPETITION
The women's retail apparel business is highly competitive, with quality,
price, service and fashion being the principal competitive factors. The
Company's principal competitors include women's apparel specialty stores,
department stores and off-price apparel stores. Many competitors are national
or regional chains which are considerably larger than the Company and have
substantially greater financial and other resources.
10
<PAGE>
SEASONALITY
The Company's business is seasonal, with its highest and second highest sales
volumes and net income levels historically being in the Christmas and spring
seasons, respectively. The following tables set forth the Company's net sales
and net income (loss) per fiscal quarter for 1995 and 1994, on an unaudited
basis and including the results of store closings and new store openings:
<TABLE>
<CAPTION>
Net Sales
-----------------------------------------------
First Second Third Fourth
Years Ended Quarter Quarter Quarter Quarter
----------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
February 3, 1996................ $49,086 $45,579 $42,068 $56,057 (1)
January 28, 1995................ 49,029 46,558 43,549 58,152
<CAPTION>
Net Income (loss)
-----------------------------------------------
First Second Third Fourth
Years Ended Quarter Quarter Quarter Quarter
----------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
February 3, 1996................ $ 745 $ (295) $ 127 $ 3,142 (2)
January 28, 1995................ (402) (796) (662) 4,447 (3)
<FN>
(1) Net sales for the fourth quarter of 1995 include 14 weeks compared to 13
weeks in 1994.
(2) Net income in the fourth quarter of 1995 includes a credit to the
provision for facilities closing and other of $944, a charge to SG&A of $687
as a result of SFAS No. 121 and a credit to SG&A of $592 as a result of
settling the remaining liabilities subject to compromise for less than the
Company had accrued at January 28, 1995.
(3) Net Income in the fourth quarter of 1994 includes a credit to the
provision for facilities closing and other of $1,085 and an extraordinary gain
of $1,628.
</TABLE>
Because of the importance of the Christmas season, sales and operating results
for any quarter are not necessarily indicative of results for the year. The
Company's working capital and cash demands are seasonal, increasing in the
fall when inventories are being increased for the Thanksgiving/Christmas
seasons.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's stores are located primarily in the West, Midwest and Northeast
portions of the United States. Gantos' regular priced merchandise stores range
in size from 5,000 to 13,000 square feet, with most stores within the chain
ranging from 5,000 to 11,000 square feet. Boutiques range in size from 10,000
to 18,000 square feet. The average size of the Company's stores is
approximately 8,000 square feet, with approximately 91% of this area
representing selling space.
The Company leases all of its stores. Most store leases contain fixed rental
provisions and generally leases contain rental payment provisions based on a
percentage of sales. Most leases also require payment of insurance, real
estate taxes and other charges (such as advertising, maintenance and
merchants' association charges) which are subject to escalation clauses.
During 1995, total store rent under these leases was approximately $14.3
million, of which $0.1 million was percentage rent. The Company owns
substantially all of the equipment in its stores.
The following table shows the years in which leases on stores in operation at
April 15, 1996 expire:
<TABLE>
<CAPTION>
Number
Fiscal of Leases
Years Expiring
------ --------
<S> <C>
1996-97..................... 3 (1)
1998-1999................... 24
2000-2001................... 54 (1)(2)
2002-2003................... 26
2004-2005................... 3
2006-2007................... 3
---
Total..................... 113
===
<FN>
- - ---------------
(1) One of these leases contains an option to renew for five years.
(2) One of these leases contains an option to renew for nine years.
</TABLE>
The Company leases approximately 50,000 square feet of a 150,000 square foot
office center and approximately 126,000 square feet of an adjacent 154,000
square foot distribution center in Grand Rapids, Michigan from VRB Corp., an
affiliate of Comerica Bank. The Company believes that its office-distribution
center is larger than is required to serve its existing chain of stores and to
accommodate planned future business volume.
As of April 1, 1995, the Company entered into a 10-month lease with VRB Corp.
In October 1995, the Company exercised its option to extend the current lease
with VRB Corp. for 6 months which will expire July 31, 1996, with base annual
rent of $1,030,000 (including real estate taxes) plus insurance and
maintenance.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of pending lawsuits and claims which are
ordinary, routine suits and claims incidental to its business. In the opinion
of management, the disposition of these actions will not have a material
adverse effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of this Annual Report on Form 10-K.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The common shares of Gantos, Inc. are traded over-the-counter and are quoted
on The Nasdaq National Market under the symbol GTOS.
The table below sets forth the high and low closing sale prices for the
Company's common shares as reported by Nasdaq for 1995 and 1994, as adjusted
to give effect to the issuance of one new common share for every two common
shares outstanding before March 31, 1995, pursuant to the Plan.
<TABLE>
<CAPTION>
Closing Sale Price
Period High Low
------------------------------------------------------
<S> <C> <C>
1995
1st Quarter 4-1/8 2-5/8
2nd Quarter 4-1/16 2-1/8
3rd Quarter 3-1/8 1-5/8
4th Quarter 2-13/16 1-3/4
1994
1st Quarter 10-3/4 3-1/2
2nd Quarter 8-1/4 5-1/2
3rd Quarter 6-1/4 5
4th Quarter 4-1/8 2-1/2
</TABLE>
The number of shareholders of record of the Company's common shares as of
April 15, 1996 was 1,339.
The Company has never paid cash dividends on its common shares. The Company
expects that for the foreseeable future it will follow a policy of retaining
earnings to finance the development of its business, including for working
capital and to fund capital expenditures. For a description of financial
covenants in the Company's loan agreement that may restrict dividend payments,
see Note 7 of "Notes to Financial Statements".
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA 5-Year Summary and Selected Financial Data
(Thousands, except per share data)
<TABLE>
<CAPTION>
1995 * 1994 ** 1993 1992 1991
------ ------- ---- ---- ----
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Net sales $192,790 $197,288 $229,422 $265,918 $259,132
Cost of sales (151,912) (160,434) (205,899) (211,643) (207,227)
Selling, general and
administrative expense (40,018) (40,114) (47,004) (52,440) (55,365)
Finance charge and other revenue 4,472 5,020 6,660 7,954 8,157
(Provision) credit for facilities
closings and other 944 1,085 (29,254) 419 1,000
Operating income (loss) 6,276 2,845 (46,075) 10,208 5,697
Interest expense (2,278) (122) (1,785) (2,900) (5,126)
Reorganization items (279) (1,764) (831) -- --
Income (loss) before income taxes
extraordinary item and cumulative
effect of change in accounting
method 3,719 959 (48,691) 7,308 571
Net income (loss) before extraordinary
item and cumulative effect of change
in accounting method 3,719 959 (44,241) 4,912 410
Extraordinary item -- 1,628 -- -- --
Net income (loss) before cumulative
effect of change in
accounting method 3,719 2,587 (44,241) 4,912 410
Net income (loss) $ 3,719 $ 2,587 $(43,064) $ 4,912 $ 410
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
PER SHARE DATA ***
<S> <C> <C> <C> <C> <C>
Net income (loss) per share
before extraordinary item and
cumulative effect of change
in accounting method $ 0.55 $ 0.36 $(16.58) $ 1.80 $ 0.16
Extraordinary item - 0.61 -- -- --
Net income (loss) per share $ 0.55 $ 0.97 $(16.14) $ 1.80 $ 0.16
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Total assets $ 68,410 $ 95,983 $125,611 $113,575 $125,792
Working capital $ 23,626 $ 53,780 $ 82,706 $ 44,802 $ 45,160
Long-term obligations $ 12,395 $ 66,981 $104,715 $ 33,989 $ 48,693
Shareholders' equity $ 28,763 $ 5,181 $ 2,594 $ 45,641 $ 40,019
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS AND OTHER DATA
<S> <C> <C> <C> <C> <C>
Current ratio 1.9 3.3 5.5 2.4 2.3
Return (loss) on average assets 4.5% 2.3% (36.0)% 4.1% 0.3%
Return (loss) on average
shareholders' equity 21.9% 66.5% (178.6)% 11.5% 1.0%
Book value per share at year end $ 3.80 $ 1.94 $ .98 $ 17.08 $ 15.22
Number of stores at year end 113 114 118 159 158
Weighted Shares Outstanding *** 6,759 2,665 2,669 2,715 2,642
<FN>
* Data for 1995 include the results of operations for 53 weeks.
** The Company closed 46 stores between the fourth quarter of 1993 and the
second quarter of 1994, and emerged from its chapter 11 bankruptcy proceedings
(filed on November 12, 1993) on March 31, 1995.
*** As part of the Plan, each shareholder of record on March 31, 1995 received
one common share for every two common shares previously held. All stock
related data in the table above reflect this stock distribution for all
periods presented.
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
tables indicate the percentage relationships to net sales of various revenue
and expense items included in the Statements of Income (Loss) for 1995, 1994
and 1993 (fiscal years ended February 3, 1996, January 28, 1995 and January
29, 1994, respectively) and the percentage changes in the dollar amounts of
those items for such years.
<TABLE>
<CAPTION>
Percent
Change in
As a Percent of Net Sales Dollar Amounts
--------------------------------- --------------
1994- 1993-
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0 % (2)% (14)%
Cost of sales (including buying,
distribution and occupancy costs) (78.8) (81.3) (89.7) (5) (22)
----- ----- -----
Gross income 21.2 18.7 10.3 11 57
Selling, general and administrative
expense (20.7) (20.3) (20.5) -- (15)
Finance charge and other revenue 2.3 2.5 2.9 (11) (25)
(Provision) credit for facilities
closings and other 0.5 0.5 (12.8) (13) (104)
----- ----- -----
Operating income (loss) 3.3 1.4 (20.1) 121 (106)
Interest expense (1.2) -- (0.8) 1,767 (93)
----- ----- -----
Income (loss) before reorganization items,
income taxes, extraordinary item
and cumulative effect of change in
accounting method 2.1 1.4 (20.9) 47 (106)
----- ----- -----
Reorganization items:
Professional fees (0.3) (1.7) (0.4) (84) 235
Interest earned on accumulating
cash from Chapter 11 proceedings 0.1 0.8 0.1 (84) 853
----- ----- -----
(0.2) (0.9) (0.3) (84) 112
----- ----- -----
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting method 1.9 0.5 (21.2) 288 (102)
(Provision) benefit for income taxes -- -- 1.9 -- --
----- ----- -----
Income (loss) before extraordinary
item and cumulative effect of change
in accounting method 1.9 0.5 (19.3) 288 (106)
Extraordinary Item -- 0.8 -- (100) --
Net income (loss) before cumulative
effect of change in accounting method 1.9 1.3 (19.3) 44 (102)
Cumulative effect of change in
accounting method -- -- 0.5 -- --
----- ----- -----
Net income (loss) 1.9% 1.3% (18.8)% 44 % (106)%
===== ===== =====
</TABLE>
16
<PAGE>
1995 COMPARED TO 1994
Net sales decreased approximately 2%, or approximately $4.5 million, from 1994
to 1995. The decrease was due primarily to a decrease in net sales for stores
in operation throughout both periods of approximately $4.6 million, partially
offset by an increase of $2.6 million resulting from an additional week of
sales experienced during this fiscal year as a result of the fifty-three week
retail calendar. Net sales also decreased approximately $3.2 million as a
result of closing two stores during 1995 and five stores during 1994,
partially offset by approximately $0.7 million in additional sales as a result
of one new store opening during 1995 and one new store opening during the
fourth quarter of 1994. The 2.4% decrease in comparable store sales (excluding
the 53rd week of 1995) was comprised of a 5.4% decrease in average sales
dollars per unit, a 0.1% decrease due to a change in merchandise mix, and a
3.1% increase in unit sales. The increase in unit sales and decrease in
average sales dollars are primarily the result of the Company's increased unit
sales in moderate price classifications, partially offset by lower markdown
expenses as a percentage of sales. The Company plans to open one to three new
stores in 1996. Future sales increases are expected to come largely through
comparable store sales growth.
Cost of sales, as a percent of net sales, decreased to 78.8% in 1995 from
81.3% in 1994. The decrease was primarily due to lower net markdowns taken in
1995 compared to 1994, lower net merchandise costs incurred and a substantial
decrease in distribution and store occupancy costs (primarily lower store rent
expense and maintenance and dues expense), as a result of favorable lease
negotiations with store landlords.
Selling, general and administrative (SG&A) expense decreased approximately
$0.1 million from 1994 to 1995. The decrease was primarily due to reductions
in computer outsourcing fees, depreciation and corporate rent and a $0.6
million credit for the settlement of the remaining liabilities subject to
compromise for less than the amounts accrued, partially offset by higher
payroll and bad debt expenses during 1995 compared to 1994 and a $0.7 million
loss as a result of adoption of Statement of Financial Accounting Standards
(SFAS) No. 121. SG&A expense, as a percent of net sales, increased from 20.3%
to 20.7% during 1995 as a result of lower retail sales. During the fourth
quarter of 1995, the Company adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
As a result, an impairment loss of $0.7 million (0.4% of sales) was recorded
under SG&A expense. See the description of SFAS No. 121 in Note 5 of "Notes to
Financial Statements" in this Report, which description is incorporated in
this Item 7 by reference.
Finance charge and other revenue, as a percent of sales, decreased to 2.3%
this year compared to 2.5% last year. Finance charge income decreased due to a
decrease in average outstanding credit card receivables during 1995 compared
to 1994, partially offset by increased late charge fees in 1995. The decrease
in the receivable balances is primarily the result of faster payment by
customers and lower credit card sales.
During 1995, the Company recorded a credit for Facilities Closings and Other
of $0.9 million. During 1995, the Company settled the remaining disputes with
its landlords for less than the amounts accrued. For a description and
discussion of the Provision for Facilities Closings and Other, see Note 4 of
"Notes to Financial Statements" in this Report, which description is
incorporated in this Item 7 by reference.
Interest expense increased approximately $2.2 million in 1995 compared to
1994. The increase is the result of the Company's emergence from Chapter 11
effective March 31, 1995. As part of the Plan of Reorganization, the Company
entered into a new revolving credit agreement with NatWest Bank and issued
$12.4 million in notes under an indenture agreement. For a description of the
NatWest Facility and of the notes issued under the indenture, see Note 7 of
"Notes to Financial Statements" in this Report, which description is
incorporated in this Item 7 by reference. Both the revolving credit agreement
and notes accrued interest for ten months during 1995. In the prior year,
during the Chapter 11 proceedings, the Company was not required to pay
interest on its unsecured or undersecured pre-petition debts.
17
<PAGE>
Interest income and professional fees, shown separately under "Reorganization
Items" in the Statements of Income (Loss), decreased in 1995 compared to 1994
as a result of the Company's emergence from Chapter 11 during the year and
payments made to creditors under the plan.
The Company did not record a provision for taxes during 1995 or 1994 due to
the availability of net operating loss carryforwards.
These factors resulted in net income of $3.7 million, or $0.55 per share, in
1995 compared to net income of $2.6 million, or $0.97 per share, in 1994. The
net income for 1995 includes a credit of $0.9 million to Facilities Closing
and Other, and a charge of approximately $0.7 million as a result of the early
adoption of SFAS no. 121. The net income for 1994 includes a net credit of
$1.1 million to Facilities Closing and Other and an extraordinary item - gain
on extinguishment of debt in the amount of $1.6 million. As part of the Plan,
each shareholder of record on March 31, 1995 is entitled to receive one common
share for every two common shares previously held. All stock related data
above reflect this stock distribution for all periods presented.
1994 COMPARED TO 1993
Net sales decreased approximately 14%, or approximately $32.1 million, from
1993 to 1994. Of the $32.1 million decrease in net sales, $30 million was
attributed to the closing of 46 stores since the Petition Date, as part of the
Company's plan to realign its operations by downsizing the chain, partially
offset by reopening one of the previously closed stores in the third quarter
of 1994. The remaining $2.1 million decrease in net sales was attributed to a
decrease in net sales for stores in operation throughout both periods.
Excluding the 45 net closed stores, net sales decreased 0.6% during 1994. The
0.6% decrease was comprised of a 4.1% decrease in average sales dollars per
unit and a 0.2% decrease due to a change in merchandise mix, partially offset
by a 3.7% increase in unit sales. The increase in unit sales and decrease in
average sales dollars per unit was primarily due to a return to a more
moderate price point in 1994 compared to 1993, partially offset by reduced
markdowns as a percentage of sales during 1994 compared to 1993 and lower
sales of higher-priced merchandise such as coats, suits and career sportswear.
Cost of sales, as a percent of net sales, decreased to 81.3% in 1994 from
89.7% in 1993. The decrease was primarily due to lower net merchandise
markdowns taken in 1994 compared to the aggressive markdown strategy adopted
in 1993, a decrease in store occupancy costs in 1994 compared to 1993 due to
closing 45 under-performing stores and lower shrinkage costs in 1994.
Selling, general and administrative (SG&A) expense decreased $6.9 million, or
15%, in 1994 compared to 1993. The decrease was primarily due to closing 46
stores since the Petition Date resulting in significant reductions in payroll,
other taxes, maintenance and dues, supplies, depreciation and utilities. In
addition, other expenses decreased as a result of cost control measures, lower
bad debt expenses as a result of a decline in average outstanding receivables
and better collection efforts and a reduction in advertising expense. As a
result of the bankruptcy proceedings, the Company incurred increased
professional fees and administrative costs. These expenses were classified
separately under "Reorganization Items" in the Statements of Income (Loss).
Selling, general and administrative expense as a percent of net sales,
decreased from 20.5% to 20.3%.
Finance charge and other revenue, as a percent of net sales, decreased to 2.5%
during 1994 compared to 2.9% in 1993. Finance charge income decreased due to a
decrease in average outstanding credit card receivables during 1994 compared
to 1993. The decrease in the receivable balances was due to faster payments by
customers and to lower Gantos credit card sales resulting from the net closing
of 45 stores from the Petition Date through the end of 1994. The impact of the
decrease in the number of stores operating was partially offset by an increase
in Gantos credit card sales as a percent of total sales from 27% in 1993 to
30% in 1994 as a result of renewed promotional efforts in 1994.
18
<PAGE>
During 1994, the Company negotiated favorable terms with its landlords on many
of the remaining under-performing stores. As a result, the Company reversed
$1.8 million of the Provision for Facilities Closings and Other recorded in
1993. In addition, the Company reallocated $7.8 million of the reserve to
cover the costs of the corporate office and distribution center as described
below.
During 1994, the Company was unsuccessful in renegotiating its office and
distribution center lease with its present landlord and elected to reject its
office-distribution center lease during the bankruptcy proceedings. As a
result, the Company reallocated $7.8 million of the Provision for Facilities
Closings for the anticipated costs of rejecting the lease and relocating the
office-distribution center. The provision consists of the negotiated lease
rejection cost, losses on the disposal of property and equipment and other
expenses associated with the relocation of the Company's headquarters. See the
description of the Company's settlement and lease arrangements in Note 9 of
"Notes to Financial Statements" in this Report, which description is
incorporated in this Item 7 by reference.
In addition, the Company recorded a $0.7 million Provision for Facilities
Closings and Other representing the Company's share of the costs of settling
the purported class action lawsuit. See the description of the treatment of
Class 4 claims in "Recent Developments - Chapter 11 Reorganization" and the
discussion in Note 3 of "Notes to Financial Statements" in this Report, which
information is incorporated in this Item 7 by reference. For a description of
the Provision for Facilities Closings and Other, see Note 4 of "Notes to
Financial Statements" in this Report, which description is incorporated in
this Item 7 by reference.
Interest expense decreased approximately $1.7 million from 1994 to 1993. The
decline was a result of the Company ceasing to accrue interest on any
obligation subject to compromise during 1994. Under the Federal Bankruptcy
Code, the Company was not required to pay interest during its Chapter 11
proceedings on unsecured or undersecured prepetition debt. Contractual
interest for 1994 would have been $3.7 million. The interest expense incurred
for 1994 primarily represented the accrued commitment and letter of credit
fees under the DIP Facility. As of March 31, 1995, the effective date of the
Plan, the Company was again required to pay interest on its outstanding
indebtedness.
Interest income increased in 1994 compared to 1993 as a result of cash
accumulated during the Chapter 11 proceedings. This amount is shown separately
under "Reorganization Items" in the Statements of Income (Loss). Professional
fees incurred as a result of the Chapter 11 filing are also shown separately
under "Reorganization Items" in the Statements of Income (Loss).
The Company recorded a $1.6 million extraordinary gain as a result of
settlement agreements with certain creditors. In exchange for early cash
payments, certain of the Company's creditors agreed to settle their claims for
approximately 25% of their legally allowed amounts, which resulted in
forgiveness of indebtedness income. This income has been included as an
extraordinary gain in 1994 in the Company's Statements of Income (Loss).
The Company did not record a provision for taxes during 1994, due to the
reversal of a portion of established deferred tax asset valuation allowances.
These factors resulted in a net income for 1994 of $2.6 million, or $0.97 per
share, compared with a net loss of $43.1 million, or $16.14 per share, in
1993. The net income for 1994 includes a net credit of $1.1 million to
Facilities Closing and Other and an extraordinary item - gain on
extinguishment of debt in the amount of $1.6 million. The net loss for 1993
includes a $29.3 million Provision for Facilities Closings and Other,
partially offset by $1.2 million in income as a result of the cumulative
effect of change in accounting method. As part of the Plan, each shareholder
of record on March 31, 1995 was entitled to receive one common share for every
two common shares previously held. All stock related data above reflect this
stock distribution for all periods presented.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, support its accounts receivable and fund its debt
payment obligations and operations. Merchandise purchases vary on a seasonal
basis, peaking in the fall. Accounts receivable also vary on a seasonal basis,
peaking during the holiday season.
Total capital expenditures during 1995, 1994 and 1993 were $6.1, $3.9 and $2.1
million, respectively. Capital expenditures for 1995 were incurred primarily
to open one new store, remodel and refixture 21 existing stores and to pay the
balance for and install a new register and information control system. Capital
expenditures for 1996 are estimated to be $6.0 million. These amounts are
expected to be used primarily to remodel and refixture approximately 20 to 25
existing stores and to open one to three new stores in 1996. Capital
expenditures for 1996 are expected to be financed primarily from funds
generated from operations.
Net cash provided by operating activities before reorganization items totaled
$14.4 million in 1995 compared to $20.8 million in 1994. The decrease was
primarily due to (i) a smaller reduction in accounts receivable as a result of
more store closings in 1994 than in 1995, (ii) an increase in merchandise
inventories compared to a decrease in the prior year, (iii) the Company
collecting an income tax refund in 1994 whereas no such collection occurred in
1995, (iv) an increase in cash used for store closings and other, and (v) the
increase in prepaid expenses in 1995 compared to a reduction in 1994 and a
smaller increase in accrued expenses in 1995 as a result of the timing of
payments. These factors were offset somewhat by an increase in net income (net
of non-cash items included in the determination of earnings including the
provision for facilities closing and other, the extraordinary item, and
depreciation expense).
Net cash used by reorganization items during 1995 was approximately $33.1
million, compared to net cash used by reorganization items of $35.9 million in
1994. In addition to the reorganization items discussed in "Results of
Operations", the Company used approximately $31.6 million of cash to pay the
remaining liabilities subject to compromise, including secured, unsecured and
administrative claims, and approximately $1.4 million in cash to pay accrued
bankruptcy expenses. Pursuant to the Plan, during 1995, the Company used
$31,868,000 of its cash, issued approximately $12,395,000 in original
principal amount of six-year notes payable, bearing interest at 12.75% a year,
and issued or committed to issue approximately 4,735,000 Common Shares (valued
for this purpose at $4.16 a share), in payment of approximately $58,255,000 of
its liabilities subject to compromise, $5,192,000 in long-term debt and
$514,000 of accrued expenses, including the settlement costs of the purported
class action lawsuit. For a description of the classification and treatment of
claims under the Plan, see "Recent Developments -- Chapter 11 Reorganization"
in Item 1 of this Report, which information is incorporated in this Item 7 by
reference.
The New Notes were issued pursuant to an Indenture, dated as of March 1, 1995,
between the Company and Shawmut Bank Connecticut, National Association (the
"Indenture"). Pursuant to the Indenture, the New Notes are payable in 16
quarterly installments of approximately $774,725 beginning July 1, 1997 and
ending April 1, 2001. The New Notes are also subject to prepayment within 50
days after the end of each fiscal year of the Company in an amount equal to
the Company's "Excess Cash Flow". Excess Cash Flow is 50% of the Company's
"Free Cash Flow" in excess of $1.4 million in 1995, $3.5 million in 1996, $3.4
million in 1997, $2.4 million in 1998, and $4.3 million in 1999. Free Cash
Flow is the Company's net income before extraordinary items, plus depreciation
expense, minus specified capital expenditures and principal payments made with
respect to indebtedness for borrowed money (other than the quarterly payments
with respect to the New Notes and payments under the NatWest Facility). The
Excess Cash Flow payment for 1995 was $455,000. If Excess Cash Flow payments
are not at least $2.25 million by March 31, 1997, the Company must pay the
shortfall. The Company must also prepay the New Notes with the proceeds of
specified asset and securities sales.
The New Notes are secured by a $5,000,000 life insurance policy on the life of
L. Douglas Gantos until they are transferred to a third party. The New Notes
secured by the policy must be prepaid with any proceeds from the life
insurance
20
<PAGE>
policy. The New Notes bear interest at 12.75% payable quarterly. The Indenture
contains, among other things, covenants with respect to (i) additional
indebtedness, (ii) capital expenditures, (iii) minimum net worth, (iv)
earnings before interest, taxes, depreciation and amortization, (v) interest
coverage ratios, and (vi) prohibitions on paying dividends.
Net cash used by financing activities in 1995 was approximately $287,000
compared to net cash used by financing activities of $711,000 in 1994. The
payments in both years primarily represent the cost of obtaining the revolving
credit agreement.
As part of the Plan, the Company entered into a three-year borrowing agreement
with NatWest Bank and LaSalle National Bank (the "NatWest Facility") expiring
March 31, 1998. The NatWest Facility provides the Company revolving credit
loans and letters of credit up to $40 million, subject to a borrowing base
formula and lender reserves (as defined in the agreement). Undrawn and
unreimbursed letters of credit under the facility may not exceed $4 million in
face amount, and the initial funding under the facility could not exceed $19
million. The NatWest Facility is expected to be used to provide for the
Company's working capital requirements.
Loans under the NatWest Facility bear interest at NatWest's prime rate plus 1-
1/4%, or, at the Company's option, the reserve adjusted LIBOR rate plus
2-1/2%. The interest is payable in arrears on the last business day of each
month for prime rate loans and on the last day of the applicable one, two,
three or six-month interest period or at the end of three months, whichever is
sooner, for the reserve adjusted LIBOR rate loans. After March 31, 1996, the
agreement provides for a potential decrease in interest rates, depending on
the financial performance of the Company (as described in the NatWest
Facility). The NatWest Facility carries commitment fees of 1/2% of the
difference between $40 million and the average amount outstanding under the
facility (including the face amount of letters of credit) and 1.75% of the
face amount of outstanding letters of credit. This loan is secured by
substantially all of the Company's assets. As of April 15, 1996, the Company
had no borrowings under this facility, approximately $235,000 in letters of
credit outstanding, and $32.5 million available for borrowing.
The NatWest Facility contains, among other things, covenants with respect to
(i) additional indebtedness, (ii) investments, (iii) capital expenditures,
(iv) minimum net worth, (v) fixed charge coverage ratios, (vi) earnings before
interest, taxes, depreciation and amortization, (vii) interest coverage
ratios, (viii) inventory turnover ratios, and (ix) prohibitions on paying cash
dividends.
The Company expects its cash flow from operations and borrowings under the
NatWest Facility to be sufficient to meet its capital expenditure and working
capital requirements and its other needs for liquidity during 1996.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations during the past three years.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this item are set
forth in the "Index to Financial Statements" on page 28 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company will be set forth under the
caption "VOTING SECURITIES AND PRINCIPAL HOLDERS" and under the caption
"ELECTION OF DIRECTORS" in the Company's Proxy Statement in connection with
the 1996 Annual Meeting of Shareholders scheduled to be held June 20, 1996,
and is incorporated herein by reference. Information concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934 will be set forth
under the caption "Compliance with Section 16(a) of the Securities Exchange
Act of 1934" in the Company's Proxy Statement in connection with the 1996
Annual Meeting of Shareholders scheduled to be held June 20, 1996, and is
incorporated herein by reference.
23
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of April 22, 1996, regarding the
Company's executive officers:
<TABLE>
<CAPTION>
Executive
Name Age Positions with the Company Officer Since
---- --- -------------------------- -------------
<S> <C> <C> <C>
L. Douglas Gantos 64 President, Chief Executive 1963
Officer, Chairperson of the
Board and Director
Kenneth Green 41 Vice President, General 1993
Counsel and Secretary
J. E. Bunka 37 Vice President - Finance, 1993
Chief Financial Officer and
Treasurer
Gordon J. Tendler 45 Vice President, General 1994
Merchandising Manager for
Sportswear, Coats and Suits
Jane E. Pahls 36 Vice President, General 1994
Merchandising Manager for
Dresses and Accessories
Anthony Barnett 41 Vice President - Store Operations 1996
</TABLE>
L. Douglas Gantos has been the Company's President, Chief Executive Officer
and Chairperson of the Board since August 1993. From April 1992 until August
1993 he served as the Company's Chief Executive Officer and Chairperson of the
Board. From April 1963 until April 1992, Mr. Gantos served as the Company's
President and Chief Executive Officer. Pursuant to a letter agreement, dated
as of March 27, 1995, as amended March 19, 1996, Mr. Gantos is to be employed
as Chief Executive Officer and Chairperson of the Board until the earlier of
(i) 90 days after written notice from Mr. Gantos or the Company, and (ii) 60
days after the Company hires a Chief Operating Officer that the Company's
Board of Directors determines might become the Company's Chief Executive
Officer. Pursuant to the letter agreement, Mr. Gantos will also serve as a
part-time Chairperson of the Board or a consultant to the Company until four
years after he ceases to be the Company's Chief Executive Officer. The Company
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on November 12, 1993. Mr. Gantos was an executive officer of
the Company at the time of the filing.
Kenneth Green has been the Company's Vice President, General Counsel and
Secretary since December 1993. From July 1992 to December 1993, Mr. Green
served as Director of Legal Services and Secretary for the Company. From
November 1989 until July 1992, Mr. Green was Director of Legal Services for
the Company.
J. E. Bunka has been the Company's Vice President - Finance, Chief Financial
Officer and Treasurer since April 1994. From December 1993 to April 1994, Mr.
Bunka was Vice President - Finance, acting Chief Financial Officer and
Treasurer for the Company. In November 1993, Mr. Bunka was employed by Embrace
Systems Midwest, Inc. From July 1992 until November 1993, Mr. Bunka was the
Controller - Principal Accounting Officer for the Company. From April 1991
until July 1992, Mr. Bunka was the Assistant Controller - Principal Accounting
Officer for the Company. From December 1988 until April 1991, Mr. Bunka was
the Director of Planning and Corporate Development for the Company. Pursuant
to a letter agreement, dated as of December 13, 1993, Mr. Bunka is to be
employed at will as the Company's Vice President and Chief Financial Officer.
Gordon Tendler was named Vice President, General Merchandise Manager for
Sportswear, Coats and Suits effective November 28, 1994. From June 1994 to
November 1994, Mr. Tendler was an independent retail consultant. From July
1993 to May 1994, Mr. Tendler was President of Audrey Jones Inc. (which filed
for protection under Chapter 11 of the Bankruptcy Code in December 1993), a
women's specialty retail company. From May 1987 to June 1993, Mr. Tendler was
Executive Vice President, General Merchandise Manager of Audrey Jones.
Pursuant to a letter agreement, dated November 2, 1994, Mr. Tendler is to be
employed at will
24
<PAGE>
as the Company's Vice President, General Merchandise Manager for Sportswear,
Coats and Suits.
Jane Pahls was named Vice President, General Merchandise Manager for Dresses
and Accessories effective November 28, 1994. Ms. Pahls was Gantos' Senior
Divisional Merchandise Manager for Dresses, Suits, Coats and Accessories from
July 1, 1993 to November 1994. From May 1992 to July 1993, Ms. Pahls was
employed as Vice President for the Dress Division for Winkleman's specialty
stores based in Plymouth, Michigan. Prior to her employment at Winkleman's,
Ms. Pahls was a Gantos employee from 1983 to May 1992. Ms. Pahls began with
Gantos as a Buyer in July 1983 and was promoted to Merchandise Manager in
February 1987.
Anthony Barnett has been the Company's Vice President - Store Operations since
April 19, 1996. From July 1994 through April 1996, Mr. Barnett was a District
Manager for Mervyns Department Stores. From 1993 through July 1994, Mr.
Barnett was the Regional Director of Stores for Sunglass Hut of America, a
specialty retail company. From 1988 through 1993, Mr. Barnett was employed as
a Regional Manager with The Limited, Inc., a women's specialty retail company.
Pursuant to a letter agreement, dated March 15, 1996, Mr. Barnett is to be
employed at will as the Company's Vice President - Store Operations.
Executive officers are elected annually by the Board of Directors and serve at
the pleasure of the Board.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth under the
caption "EXECUTIVE COMPENSATION" in the Company's Proxy Statement in
connection with the 1996 Annual Meeting of Shareholders scheduled to be held
June 20, 1996, and, except for the information under the caption "BOARD
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" or "PERFORMANCE
GRAPH", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and
management will be set forth under the caption "VOTING SECURITIES AND
PRINCIPAL HOLDERS" and "ELECTION OF DIRECTORS" in the Company's Proxy
Statement in connection with the 1996 Annual Meeting of Shareholders scheduled
to be held June 20, 1996, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
set forth under the caption "CERTAIN TRANSACTIONS" or "EXECUTIVE COMPENSATION-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Company's
Proxy Statement in connection with the 1996 Annual Meeting of Shareholders
scheduled to be held June 20, 1996, and is incorporated herein by reference.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
The list of the report, financial statements and notes required by
this Item 14(a)(1) is set forth in the "Index to Financial Statements"
on page 28 of this Report.
14(a)(2) Financial Statement Schedules
The Financial Statement Schedule required by this Item 14(a)(2) is set
forth in the "Index to Financial Statements" on page 28 of this
Report.
14(a)(3) Exhibits
The list of exhibits required by this Item 14(a)(3) is set forth in
the "Index to Exhibits" on pages 45 to 48 of this Report.
14(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter ended February 3, 1996.
26
<PAGE>
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.
Date: April 24, 1996
GANTOS, INC.
(Registrant)
By /s/ J. E. BUNKA
------------------------------
J. E. BUNKA
Its: Vice President - Finance and
Chief Financial 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ L. DOUGLAS GANTOS Chairperson of the Board, April 24, 1996
- - --------------------------- President and Chief Executive
L. Douglas Gantos Officer
(Principal Executive Officer)
/S/ J. E. BUNKA Vice President - Finance, April 24, 1996
- - --------------------------- Chief Financial Officer and
J. E. Bunka Treasurer
(Principal Financial and
Accounting Officer)
/S/ ELIZABETH M. EVEILLARD Director April 24, 1996
- - ---------------------------
Elizabeth M. Eveillard
/S/ FRED K. SCHOMER Director April 24, 1996
- - ---------------------------
Fred K. Schomer
/S/ HANNAH H. STRASSER Director April 18, 1996
- - ---------------------------
Hannah H. Strasser
/S/ MARY ELIZABETH BURTON Director April 18, 1996
- - ---------------------------
Mary Elizabeth Burton
/S/ ERWIN A. MARKS Director April 24, 1996
- - ---------------------------
Erwin A. Marks
/S/ S. AMANDA PUTNAM Director April 24, 1996
- - ---------------------------
S. Amanda Putnam
</TABLE>
27
<PAGE>
GANTOS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants, Price Waterhouse LLP............... 29
Financial Statements
Statements of Income (Loss) for the
three years ended February 3, 1996.............................. 30
Balance Sheets as of February 3, 1996
and January 28, 1995............................................ 31
Statements of Cash Flows for the three
years ended February 3, 1996.................................... 32
Statements of Changes in Shareholders' Equity
for the three years ended February 3, 1996...................... 33
Notes to Financial Statements.....................................34-42
Quarterly Financial Information (unaudited)........................... 43
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts.................. 44
28
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Gantos, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Gantos,
Inc. at February 3, 1996 and January 28, 1995, and the results of its
operations and cash flows for each of the three years in the period ended
February 3, 1996 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 7 to the Financial Statements, the Company changed its
method of accounting for income taxes in fiscal 1993. In 1995, the Company
changed its method of accounting for long-lived assets to conform with
Statement of Financial Accounting Standards No. 121 as discussed in Note 5.
Price Waterhouse LLP
Detroit, Michigan
February 29, 1996
29
<PAGE>
<TABLE>
<CAPTION>
GANTOS, INC.
STATEMENTS OF INCOME (LOSS)
1995 1994 1993
---- ---- ----
(thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 192,790 $ 197,288 $ 229,422
Cost of sales (including buying,
distribution and occupancy costs) (151,912) (160,434) (205,899)
--------- --------- ---------
Gross income 40,878 36,854 23,523
Selling, general and administrative
expense (40,018) (40,114) (47,004)
Finance charge and other revenue 4,472 5,020 6,660
(Provision) credit for facilities
closings and other 944 1,085 (29,254)
--------- --------- ---------
Operating income (loss) 6,276 2,845 (46,075)
Interest expense (contractual interest
of $2,585, $3,707 and $2,500
for 1995, 1994 and 1993) (2,278) (122) (1,785)
--------- --------- ---------
Income (loss) before reorganization items,
income taxes, extraordinary item
and cumulative effect of change in
accounting method 3,998 2,723 (47,860)
--------- --------- ---------
Reorganization items:
Professional fees (530) (3,336) (996)
Interest earned on accumulating
cash from Chapter 11 proceedings 251 1,572 165
--------- --------- ---------
(279) (1,764) (831)
--------- --------- ---------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of change in accounting method 3,719 959 (48,691)
(Provision) benefit for income taxes -- -- 4,450
--------- --------- ---------
Net income (loss) before extraordinary
item and cumulative effect of change
in accounting method 3,719 959 (44,241)
Extraordinary item -- 1,628 --
Cumulative effect of change in
accounting method -- -- 1,177
--------- --------- ---------
Net income (loss) $ 3,719 $ 2,587 $ (43,064)
========= ========= =========
Net income (loss) per share before
extraordinary item and cumulative
effect of change in accounting method $ 0.55 $ 0.36 $ (16.58)
Extraordinary item -- 0.61 --
Cumulative effect of change
in accounting method -- -- .44
--------- --------- ---------
Net income (loss) per share $ 0.55 $ 0.97 $ (16.14)
========= ========= =========
<FN>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
GANTOS, INC.
BALANCE SHEETS
February 3, 1996 January 28, 1995
---------------- ----------------
(thousands, except share and per share data)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,453 $26,545
Accounts receivable, less allowance for
doubtful accounts of $572 and $600
at February 3, 1996 and January 28, 1995,
respectively 22,619 25,165
Merchandise inventories 23,955 22,544
Prepaid expenses and other 2,851 3,347
------- -------
Total current assets 50,878 77,601
------- -------
Property and equipment, at cost:
Leasehold improvements 28,375 28,390
Furniture and fixtures 32,243 32,309
Other 418 128
------- -------
Total property and equipment 61,036 60,827
Less - Accumulated depreciation
and amortization (43,504) (42,445)
------- -------
Net property and equipment 17,532 18,382
------- -------
Total Assets $68,410 $95,983
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $12,119 $ 8,474
Accrued expenses and other 12,716 12,737
Current provision for facilities closings 2,417 2,610
------- -------
Total current liabilities 27,252 23,821
------- -------
Long-term debt 12,395 5,192
------- -------
Long-term provision for facilities closings -- 2,040
------- -------
Liabilities subject to compromise -- 59,749
------- -------
Shareholders' equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized; none issued
Common stock, $.01 par value, 20,000,000
shares authorized; 7,577,000 issued
and outstanding at February 3, 1996
and 2,665,000 issued and outstanding
at January 28, 1995 76 27
Additional paid-in capital 40,603 20,789
Accumulated deficit (11,916) (15,635)
------- -------
Total shareholders' equity 28,763 5,181
------- -------
Commitments (Note 9) -- --
------- -------
Total Liabilities and Shareholders' Equity $68,410 $95,983
======= =======
<FN>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
1995 1994 1993
---- ---- ----
(thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,719 $ 2,587 $(43,064)
-------- -------- --------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Reorganization items 279 1,764 831
Extraordinary item -- (1,628) --
Cumulative effect of change in
accounting method -- -- (1,177)
Provision for facilities closing and other (944) (1,085) 29,254
Cash used for facilities closing and other (571) (93) (2,586)
Depreciation and amortization 5,792 6,343 8,312
Loss on disposals of property and equipment -- 29 474
Restricted stock compensation expense 161 -- 18
Deferred taxes -- -- (2,152)
Changes in assets and liabilities:
Accounts receivable 2,676 4,442 7,093
Merchandise inventories (1,411) 533 11,218
Prepaid expenses and other (265) 526 304
Accounts payable 3,645 3,972 22,317
Accrued expenses and other 1,281 1,770 (2,678)
Income tax receivable -- 1,647 (1,647)
-------- -------- --------
Total adjustments 10,643 18,220 69,581
-------- -------- --------
Net cash provided by operating activities
before reorganization items 14,362 20,807 26,517
-------- -------- --------
Net change to liabilities
subject to compromise (64,941) (37,598) --
Net non-cash change to liabilities
subject to compromise 33,374 3,339 --
-------- -------- --------
Net cash payments on liabilities
subject to compromise (31,567) (34,259) --
Reorganization items (279) (1,764) (831)
Change in accrued interest receivable 88 (61) (26)
Change in accrued bankruptcy expenses (1,352) 197 975
-------- -------- --------
Net cash provided (used) by reorganization items (33,110) (35,887) 118
-------- -------- --------
Net cash provided (used) by operating activities (18,748) (15,080) 26,635
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,057) (3,866) (2,149)
Sale of capital assets -- 206 17
-------- -------- --------
Net cash used by investing activities (6,057) (3,660) (2,132)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (25) (148) (2,291)
Borrowings under debt agreements -- -- --
Net borrowings under line of credit agreements -- -- 22,614
Other (262) (563) (568)
-------- -------- --------
Net cash provided (used) by financing activities (287) (711) 19,755
-------- -------- --------
Net increase (decrease) in cash (25,092) (19,451) 44,258
Cash and cash equivalents at beginning of year 26,545 45,996 1,738
-------- -------- --------
Cash and cash equivalents at end of year $ 1,453 $ 26,545 $ 45,996
======== ======== ========
Cash paid during the year:
Interest $ 2,136 $ 126 $ 2,024
======== ======== ========
Income taxes $ 48 $ 42 $ 68
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
</TABLE>
32<PAGE>
<TABLE>
<CAPTION>
GANTOS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained
Additional Earnings Total
Common Stock Paid-in (Accumulated Shareholders'
Shares Amount Capital Deficit) Equity
------ ------ ---------- ------------ -------------
(thousands)
<S> <C> <C> <C> <C> <C>
Balance January 30, 1993 5,346 $ 54 $ 20,745 $ 24,842 $ 45,641
Restricted stock compensation
expense 23 23
Cancellation of restricted
common stock (17) (1) (5) (6)
Net loss for the year (43,064) (43,064)
<CAPTION>
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 29, 1994 5,329 $ 53 $ 20,763 $(18,222) $ 2,594
Net income for the year 2,587 2,587
One-for-two stock split (2,664) (26) 26 -- --
<CAPTION>
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 28, 1995 2,665 $ 27 $ 20,789 ($15,635) $ 5,181
Issuance of restricted stock 177 $ 2 $ (2) -- --
Restricted stock compensation
expense 162 162
Stock issued in conjunction
with Plan of Reorganization 4,735 47 19,654 -- 19,701
Net income for the year -- -- -- 3,719 3,719
<CAPTION>
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance February 3, 1996 7,577 $ 76 $ 40,603 $(11,916) $ 28,763
===== ======== ======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
</TABLE>
33
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Chapter 11 Reorganization and Basis of Presentation:
On November 12, 1993 (the "Petition Date"), Gantos, Inc. and Gantos
Stores, Inc. (collectively referred to as "Debtor" or "Company") filed
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Western District of Michigan (the "Bankruptcy
Court"). The Company managed its affairs and operated its business under
Chapter 11 as a debtor-in-possession while a plan of reorganization was
formulated.
Through a reorganization under Chapter 11, management restructured the
operations and capitalization of the Company in order to strengthen the
Company's financial position and operating performance.
On January 19, 1995, the Company filed the Second Amended Joint Plan of
Reorganization of Gantos, Inc. and Gantos Stores, Inc. (as amended March
7, 1995, the "POR"). On March 7, 1995, the Bankruptcy Court confirmed
the POR which became effective March 31, 1995.
Pursuant to the POR, the former Gantos, Inc. merged into the Company
(formerly known as Gantos Stores, Inc.) which changed its name to
Gantos, Inc.
As provided for in the POR, all holders of secured and priority claims
received cash equal to the allowed amount of such claims, and unsecured
creditors generally received 50% of the allowed amount of each claim in
cash and 50% of the allowed amount of each claim in new common shares
valued at $4.16 per share. Certain unsecured creditors received
approximately $12.4 million in original principal amount of 6-year notes
bearing interest at 12.75%.
The Company issued 4,735,000 common shares, and paid approximately
$31,567,000 in cash along with the notes as settlement for these claims.
All holders of old common shares received one new common share for every
two old common shares outstanding prior to March 31, 1995.
Prior to the March 31, 1995 effective date of the POR, the Company
followed the American Institute of Certified Public Accountants (AICPA)
Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". After the March 31, 1995
effective date, the Company's assets and liabilities continued to be
recorded at their historical basis.
2. Summary of Significant Accounting Policies:
Industry Information - The Company operates 113 women's apparel
specialty stores in 23 states located primarily in the Western,
Midwestern and Northeastern United States. The following is a summary of
significant accounting policies:
The Company's fiscal year ends on the Saturday closest to the end of
January. Fiscal year 1995 consisted of fifty-three weeks and ended on
February 3, 1996; Fiscal years 1994 and 1993 consisted of fifty-two
weeks and ended on January 28, 1995, and January 29, 1994, respectively.
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investment instruments purchased with a maturity of three
months or less to be cash equivalents.
Non-cash financing charges in connection with the Company's POR,
including the issuance of long-term debt and additional common stock,
are described in Note 1 above.
34
<PAGE>
Accounts receivable consists principally of Gantos credit card customer
receivables. Finance charges are imposed on the unpaid balance at annual
rates varying from 18% to 21% depending upon state laws. Minimum monthly
payments of $20 or 10% of the unpaid balance, whichever is greater, are
required.
Merchandise inventories are valued at the lower of cost or market, using
the cost method, on the First-in, First-out (FIFO) basis. Approximately
$1.2 and $1.1 million of merchandise procurement, storage and
distribution costs are included in inventory at year end 1995 and 1994,
respectively.
Commissions earned on leased shoe sales are included in net sales and
totaled $789,000 in 1995, $761,000 in 1994 and $844,000 in 1993. Third
party leased shoe sales totaled $6.3, $6.1 and $6.7 million in 1995,
1994, and 1993, respectively.
Cost of sales includes the net cost of merchandise, buying, distribution
and occupancy expenses.
Depreciation and amortization are computed using the straight-line
method. Furniture and fixtures are depreciated over their estimated
useful lives, generally five to ten years. Leasehold improvements are
amortized over the terms of the respective leases or their estimated
useful lives, whichever is shorter, generally seven to ten years.
The Company expenses preopening costs of new stores in the year in which
the store is opened.
Advertising costs are expensed the first time the advertising takes
place. Net advertising expense approximated $1.0 million, $0.9 million
and $1.5 million in 1995, 1994 and 1993, respectively.
As part of the Company's POR, each shareholder of record on the
effective date is entitled to receive one new common share for every two
common shares previously held. All share and per share data in the
financial statements and notes reflect this stock distribution for all
periods presented. As part of the POR, the Company issued 4,567,00
common shares as partial settlement for certain claims, 177,000
restricted common shares to management (net of 23,000 restricted common
shares forfeited during 1995) and 168,000 common shares as partial
settlement of a shareholder lawsuit.
Income (loss) per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the year.
The weighted average number of common shares and common share
equivalents outstanding was 6,759,000 in 1995, 2,665,000 in 1994, and
2,669,000 in 1993.
The preparation of 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
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain amounts from the prior year have been reclassified to conform
with the presentation used in the current year.
35
<PAGE>
3. Class Action Lawsuit:
On March 16, 1994, a shareholder of the Company (the Plaintiff) filed a
purported class action lawsuit in the United States District Court for
the Western District of Michigan, against certain current and former
Officers and Directors of the Company (the Defendants). The lawsuit
claimed that the Defendants caused the Company to issue statements
containing material misstatements and omissions. In addition, a proof
of claim which mirrored the lawsuit, was filed in the Bankruptcy Court
on behalf of the Plaintiff class.
In January 1995, the Company, Defendants and the Plaintiff entered into
a settlement of the lawsuit. The settlement provided for the Company's
insurance company to pay $550,000 and the Company to issue $700,000
worth of new common stock on the POR effective date. The $700,000 worth
of new common stock, 168,000 shares, was issued effective March 31,
1995 as part of the Company's emergence from the Chapter 11
proceedings. The Company's expense is included in the Provision for
Facilities Closing and Other.
4. Provision for Facilities Closings and Other:
On November 11, 1993, the Board of Directors approved a plan to realign
the Company's operations in an effort to improve the long-term profit
potential of the Company. This realignment enabled the Company to
concentrate its efforts on those stores that management believed
provided potential for ongoing profitability. The Company closed 41, 5
and 2 stores in fiscal years 1993, 1994 and 1995, respectively. In
October 1994, the Company opened one of the stores closed in the prior
year.
The provision of $29.3 million recorded for the anticipated costs of
the realignment consisted primarily of the expected costs of future
lease obligations and rejection claims, losses on disposal of property
and equipment, expenses and losses associated with the disposal of
merchandise inventory in the closed stores and other expenses and
losses directly related to the closure of the stores.
During 1994, the Company was unsuccessful in renegotiating its office
and distribution center lease with its former landlord (See Note 9) and
elected to reject the lease in its bankruptcy proceedings. As a result,
the Company reallocated $7.8 million of the remaining reserve for the
anticipated costs of rejecting the lease and relocating the corporate
office and distribution center.
To date, the Company closed 47 stores and rejected the office and
distribution center lease. The costs associated with the closing of the
47 stores and the rejection of the office and distribution center
lease, including some future lease obligations, have been incurred
during fiscal 1993, 1994 and 1995 and accordingly have been charged
against the provision. During 1995, the Company settled the remaining
disputes with its landlords for less than the amounts accrued and
reversed the reserve by $0.9 million, which is recorded as a credit for
facilities closing and other. During 1994, the Company negotiated
favorable lease terms with its landlords on many of the remaining
underperforming stores. As a result, the reserve was reduced by $1.8
million, which was recorded as a credit for facilities closing and
other. As of February 3, 1996, the remaining reserve balance represents
costs expected to be incurred in 1996 to complete the relocation of the
Corporate office and distribution center, including the anticipated
loss on disposal of equipment and leasehold improvements and other
incremental costs.
In addition, during 1994, the Company entered into settlement
agreements with certain of its creditors whereby early cash payments
for approximately 25% of their legally allowed claim were made as full
settlement of the Company's obligation, which resulted in a $1.6
million reduction in the provision for facilities closing and other.
This amount, which is treated as forgiveness of debt, has been included
as an extraordinary gain in the Company's Statements of Income (Loss).
36
<PAGE>
The following table sets forth the facilities closing provision
established in 1993 and the related subsequent activity:
<TABLE>
<CAPTION>
Non-Cash
Costs
Provision Cash Costs and Asset Reserve at
Recorded Incurred Write-Offs Other Jan. 28, 1995
-------- -------- ---------- ----- -------------
Facilities Closing Provision (thousands)
<S> <C> <C> <C> <C> <C>
Lease rejection costs $14,590 $ (483) $ -- $(3,728) $10,379
Asset write-offs 10,420 -- (9,468) 1,088 2,040
Inventory disposition costs 3,514 (1,980) (19) (1,515) --
Other 730 (699) 1,766 813 2,610
------- -------- ------- ------- -------
$29,254 $ (3,162) $(7,721) $(3,342) $15,029
======= ======== ======= ======= =======
<CAPTION>
Non-Cash
Costs
Reserve at Cash Costs and Asset Reserve at
Jan. 28, 1995 Incurred Write-Offs Other Feb. 3, 1996
------------- ---------- ---------- ----- -------------
Facilities Closing Provision (thousands)
<S> <C> <C> <C> <C> <C>
Lease rejection costs $10,379 $(4,109) $(5,914) $ (356) $ --
Asset write-offs 2,040 -- (235) (925) 880
Inventory disposition costs -- -- -- -- --
Other 2,610 (571) (839) 337 1,537
------- ------- ------- ------- ------
$15,029 $(4,680) $(6,988) $ (944) $2,417
======= ======= ======= ======= ======
</TABLE>
Included in cash costs incurred in 1995 is $4,109,000 in lease
rejection payments which is included in net cash payments on
liabilities subject to compromise in the Statement of Cash Flows.
Included in non-cash costs and asset write-offs is $4,109,000 in stock
issued and $1,805,000 in New Notes issued as partial settlement of
certain lease rejection claims. Included in other activity are the
facility closing credit and reclassifications.
5. Asset Impairment Change:
During the fourth quarter of 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". The Statement requires companies to record impairments
of long-lived assets, certain identifiable intangibles and goodwill
when there is evidence that events or changes in circumstances have
made recovery of asset carrying values unlikely. Asset impairment is
determined to exist if estimated future cash flows, undiscounted and
without interest charges, are less than the carrying amount. The
Company identified assets in certain retail stores that were impaired
because of a history of and projected future cash flow losses in these
specific stores. An impairment loss of $687,000 was recorded for these
retail store assets and is recorded in selling, general and
administrative expense in the Statement of Income (Loss).
6. Liabilities Subject to Compromise:
As discussed in Note 1, the Company filed a petition on November 12,
1993 with the United States Bankruptcy Court seeking relief to
reorganize under Chapter 11. The Court granted the Company's request
and stayed the payment of prepetition liabilities with minor
exceptions for ongoing payroll and employee benefits. These
liabilities as of the Petition Date were recorded on the Balance
Sheets as liabilities subject to compromise.
37
<PAGE>
The liabilities subject to compromise consist of the following:
<TABLE>
<CAPTION>
Jan. 28,
1995
(thousands)
-----------
<S> <C>
Accounts payable and accrued expenses $ 28,347
Priority tax claims 376
Lease rejection claims 10,378
Long-term debt 20,648
--------
$ 59,749
========
</TABLE>
Pursuant to the POR, during 1995, the Company issued 4,735,000 common
shares, issued approximately $12.4 million in original principal
amount of six-year notes payable bearing interest at 12.75% annually
and paid approximately $31,567,000 in cash as settlement in full for
these claims and other amounts included as long term debt or accrued
expenses at January 28, 1995. Included in selling, general and
administrative expenses is a $592,000 credit, which represents the
reduction in liabilities subject to compromise due to certain claims
settling for less than the Company had accrued at January 28, 1995.
7. Long-Term Debt:
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
----------- -----------
(thousands)
<S> <C> <C>
Revolving Credit Agreement due March 31, 1998,
bearing interest at variable rates $ -- $ --
Notes issued pursuant to an Indenture
Agreement due in sixteen
quarterly installments of $775,000
beginning July 1, 1997, bearing
interest at 12.75% 12,395 --
Revolving Credit Agreement due July 6, 1995,
bearing interest at variable and fixed rates $ -- $5,192
------- ------
$12,395 $5,192
======= ======
</TABLE>
On March 10, 1995, the Company entered into a three-year borrowing
agreement with NatWest Bank N.A. and LaSalle National Bank (the
"NatWest Facility") expiring March 31, 1998. The NatWest Facility
provides the Company with revolving credit loans and letters of credit
up to $40 million, subject to a borrowing base formula and lender
reserves (as defined in the agreement). Undrawn and unreimbursed
letters of credit under the facility may not exceed $4 million in face
amount. During 1995, the maximum amount outstanding on the Revolving
Credit Agreement was $10.3 million, while the average amount
outstanding during the year was $3.4 million.
Loans under the NatWest Facility bear interest at NatWest's prime rate
plus 1-1/4%, or, at the Company's option, the reserve adjusted LIBOR
rate plus 2-1/2%. The interest is payable in arrears on the last
business day of each month for prime rate loans and on the last day of
the applicable one, two, three or six-month interest period or at the
end of three months, whichever is sooner, for the reserve adjusted
LIBOR rate loans. After March 31, 1996, the agreement provides for a
potential decrease in interest rates depending on the financial
performance of the Company (as described in the NatWest Facility). As
of February 3, 1996, the NatWest prime rate is 8.50%.
As part of the NatWest Facility, the Company has entered into a two
year Interest Rate Cap Agreement which provides for an 8.50% interest
cap on 3 month LIBOR borrowings of up to $10 million.
The NatWest Facility carries commitment fees of .5% of the difference
between $40 million and the average amount outstanding under the
facility (including the face amount of letters of credit) and 1.75% of
the face amount of outstanding letters of credit. This facility is
secured by substantially all of the Company's assets.
The NatWest Facility contains, among other things, covenants with
respect to (i) additional indebtedness, (ii) investments, (iii)
capital expenditures, (iv) minimum net worth, (v) fixed charge
coverage ratios, (vi) earnings before interest, taxes, depreciation
and amortization, (vii) interest coverage ratios, (viii) inventory
turnover ratios and (ix) prohibitions on paying cash dividends.
38
<PAGE>
As described in Note 1, the Company issued to some unsecured creditors
approximately $12.4 million in original principal amount of six-year
notes bearing interest payable quarterly at 12.75%. The Notes were
issued pursuant to an Indenture, dated as of March 1, 1995, between
the Company and Shawmut Bank Connecticut, National Association. The
Notes are payable in 16 quarterly installments of approximately
$775,000 beginning July 1, 1997 and ending April 1, 2001. The Notes
are also subject to prepayment within 50 days after the end of each
fiscal year of the Company in an amount equal to the Company's "Excess
Cash Flow". Excess Cash Flow is 50% of the Company's "Free Cash Flow"
in excess of $1.4 million in 1995, $3.5 million in 1996, $3.4 million
in 1997, $2.4 million in 1998, and $4.3 million in 1999. Free Cash
Flow is the Company's net income before extraordinary items, plus
depreciation expense, minus specified capital expenditures and
principal payments made with respect to indebtedness for borrowed
money (other than the quarterly payments with respect to the Notes and
payments under the NatWest Facility). The Company has Excess Cash Flow
of $455,000 for fiscal 1995. This amount has been classified as long
term debt as the Company has both the intent and ability, through the
NatWest Facility, to refinance these amounts on a long term basis. If
Excess Cash Flow payments are not at least $2.25 million by March 31,
1997, the Company must pay the shortfall. The Company must also prepay
the Notes with the proceeds of specified asset and securities sales.
The Notes are secured by a $5,000,000 life insurance policy on the
life of a certain officer of the Company until the Notes are
transferred to a third party. The Notes secured by the policy must be
prepaid with any proceeds from the life insurance policy. The
indenture contains, among other things, covenants with respect to (i)
additional indebtedness, (ii) capital expenditures, (iii) minimum net
worth, (iv) earnings before interest, taxes, depreciation and
amortization, (v) interest coverage ratios, and (vi) prohibitions on
paying dividends.
The amounts due on the Revolving Credit Notes payable due July 6, 1995
represented the allowed secured claim under the revolving credit
agreement existing on the petition date and were paid in full pursuant
to the POR.
8. Income Taxes:
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(thousands)
<S> <C> <C> <C>
Currently payable (refundable) $ -- $ -- $(2,610)
Deferred income taxes -- -- (1,840)
------- ------- -------
$ -- $ -- $(4,450)
======= ======= =======
Federal income taxes -- (4,325)
State income taxes -- -- (125)
------- ------- -------
$ -- $ -- $(4,450)
======= ======= =======
</TABLE>
The effective income tax rate varies from the statutory rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% (35.0)%
Effect of graduated tax rate (1.0) (1.0) 1.0
Limitation on utilization of
tax benefits -- -- 25.2
State income taxes -- -- (0.3)
Tax credits -- -- --
Reversal of valuation allowance (34.0) (34.0) --
Other -- -- --
----- ----- -----
-- % -- % (9.1)%
===== ===== =====
</TABLE>
Effective January 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". This resulted in a benefit of
approximately $1.2 million being reported as a cumulative effect of
change in accounting method in the fiscal 1993 Statement of Income
(Loss). Prior to fiscal 1993, the Company accounted for income taxes
in accordance with Accounting Principles Board Opinion No. 11.
39
<PAGE>
SFAS No. 109 requires that deferred income taxes be recorded for
"temporary differences" between the basis of assets and liabilities
for financial reporting purposes and such amounts as determined by tax
regulations. This method requires that deferred taxes be recorded
based upon currently enacted tax rates.
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not"
criteria under SFAS No. 109 and accordingly a valuation allowance for
the entire net deferred tax asset amount has been recorded.
The components of the net deferred tax asset (liability) and the
related valuation allowance are as follows:
<TABLE>
<CAPTION>
February 3, 1996 January 28, 1995
---------------- ----------------
(thousands)
<S> <C> <C>
NOL carryforward $ 7,600 $ 6,140
Provision for store closings 820 5,480
Tax credit carryforward 3,520 3,520
Other accrued expenses 1,760 1,560
Other 260 350
------- -------
Deferred tax assets 13,960 17,050
------- -------
Depreciation (1,280) (1,950)
Inventory (1,300) (1,250)
Prepaid expenses (400) (830)
Property taxes (530) (380)
------- -------
Deferred tax liabilities (3,510) (4,410)
------- -------
Subtotal 10,450 12,640
Valuation allowance (10,450) (12,640)
------- -------
Net deferred tax assets (liabilities) $ -- $ --
======= =======
</TABLE>
At February 3, 1996, the Company had net operating loss carryforwards
available to offset future income for federal income tax reporting
purposes of approximately $22,360,000, expiring in 2007-2010.
The Company's POR resulted in an ownership change under Section 382 of
the Internal Revenue Code. Section 382 contains rules that limit the
ability of a company to offset pre-ownership change net operating
losses and credit carryovers against post-ownership change taxable
income. Section 382(1)(5) allows certain companies to avoid the
Section 382 limitation. However, under Section 382(1)(5) the net
operating loss carryover as of the reorganization date is reduced by
the interest expense deductible in the year of reorganization and
three prior years on debt that is converted to stock and by 50% of the
excess of the amount of debt converted to stock under the plan of
reorganization over the fair market value of the stock.
The Company expects to elect Section 382(1)(5) treatment effective as
of March 31, 1995. This election will be made on the 1995 corporate
tax return and will reduce the net operating loss carryforward, by
approximately $1.1 million.
Following the Company's election of Section 382(1)(5), any other
Section 382 ownership change within a two year period following March
31, 1995, will result in the Company's inability to use its pre-March
31, 1995, net operating loss and credit carryforward to offset taxable
income generated after March 31, 1995.
9. Leases:
The Company leases store locations, the corporate distribution center
and office building and certain equipment from third parties. The
remaining terms of these leases range from one to eleven years.
Generally, the store leases contain provisions for additional rentals
based on a percentage of sales. Total rent expense under these leases
was approximately $15.0, $16.7 and $20.9 million in 1995, 1994 and
1993, respectively, which includes percentage of sales rentals of
$0.1, $0.4 and $0.3 million, respectively. Accrued rent expense of
$4.1 and $4.3 million at February 3, 1996 and January 28, 1995,
respectively, is included in accrued expenses.
40
<PAGE>
Pursuant to the POR, the Company rejected the lease for the
distribution center and office building as of March 31, 1995. As
settlement for the rejection, the Company paid the owner of the
distribution center and office building $1.75 million in cash and
$1.75 million in shares of new common stock. Also on the effective
date, the owner of the distribution center and office building deeded
in lieu of foreclosure, ownership of the property to the mortgage
holder. The Company then entered into a 10 month lease that was
subsequently extended for 6 months with the mortgage holder which will
expire July 31, 1996, with base annual rent of $1,030,000 (including
real estate taxes).
As part of the Chapter 11 bankruptcy proceedings, the Company rejected
47 store lease and assumed all the remaining store leases.
Estimated future minimum rental payments are as follows:
<TABLE>
<CAPTION>
Year Leases
---- ------
(thousands)
<S> <C>
1996 $14,900
1997 15,254
1998 15,523
1999 14,119
2000 12,156
Thereafter 17,138
-------
Total minimum lease payments $89,090
=======
</TABLE>
10. Stock Option Plans:
On March 20, 1986, the shareholders of the Company approved the
Gantos, Inc. Stock Option Plan (the "Employee Plan") for officers and
key management employees. The Employee Plan provides for granting of
incentive stock options and non-qualified stock options which have an
exercise price not less than the fair market value of the shares on
the grant date.
On June 18, 1992, the Company's shareholders approved an amendment to
the Employee Plan to increase the aggregate number of shares
authorized for grant under the Employee Plan to 0.6 million shares
from 0.3 million shares, to authorize the grant of stock appreciation
rights and restricted stock, and to permit the acceleration of the
exercisability of stock options and stock appreciation rights in
certain circumstances.
As provided for in the POR, the Employee Plan was amended effective
March 31, 1995, (i) to increase the number of shares reserved for
issuance under the plan to 1,609,022 (including 53,220 shares subject
to options exercised before March 31, 1995 and restricted stock
awarded and not forfeited as of March 31, 1995), (ii) to permit
options to continue to be exercised until their expiration dates after
termination of employment, in certain circumstances, (iii) to provide
that no participant may be granted stock options or stock appreciation
rights to be awarded restricted stock as to more than 250,000 Common
Shares in any fiscal year, (iv) to provide that the exercise price of
nonqualified options may not be less than 100% of the fair market
value of the shares underlying such options on the date of grant, and
(v) to provide that the restricted period for restricted stock may be
as little as zero days. Pursuant to the POR, as of March 31, 1995, all
outstanding options were canceled.
Pursuant to the POR, options to purchase 592,500 shares at an exercise
price of $4.16 were granted on March 31, 1995. Currently, outstanding
options granted under the Employee Plan become exercisable within
three years of the grant date and expire ten years after the grant
date, or, if earlier, upon termination of employment, with certain
exceptions. The Company also awarded 200,000 restricted shares. The
restricted shares vest in one-third annual installments beginning
March 31, 1996, and are subject to certain restrictions or forfeiture.
The compensation expense related to the awarding of the restricted
stock is recognized ratably over the restriction period. The number of
shares available for grant at February 3, 1996 was 861,802.
41
<PAGE>
The Employee Plan will expire March 19, 1996, and no stock options,
stock appreciation rights or restricted stock may be granted or
awarded after March 19, 1996 under that plan. The termination of the
Employee Plan does not affect the validity of any stock option, stock
appreciation right or restricted stock which is outstanding on March
19, 1996.
In addition, on June 18, 1992, the Company's shareholders approved the
Gantos, Inc. Director Stock Option Plan (the "Director Plan") which
provides for automatic granting of up to an aggregate of 100,000
shares of non-qualified options to certain directors of the Company
who are not officers or employees of the Company. Options granted
under the Director Plan become 100% exercisable on the grant date and
expire ten years after the grant date, or, if earlier, three months
after resignation, with certain exceptions.
Pursuant to the POR, all options outstanding prior to March 31, 1995,
were canceled. However, the POR provided for the granting of 40,000
options at $4.16 per share as of March 31, 1995. Options to purchase
an additional 2,000 shares were also granted during 1995 at an
exercise price equal to the market value of Company common stock at
the Grant date. The number of shares available for grant under the
Director Plan at February 3, 1996 was 58,000.
A summary of activity for the year ended February 3, 1996 is as
follows:
<TABLE>
<CAPTION>
Range of
Number of Shares Restricted Prices Per
Non-Qualified Total Share
---------------- ---------- ----------
(thousands, except per share data)
<S> <C> <C> <C>
Outstanding January 28, 1995 150 -- $8.00-53.50
Granted 634 200 $3.25-4.16
Exercised
Canceled 220 23 $4.16-53.50
--- --- -----------
Outstanding February 3, 1996 564 177 $3.25-4.16
=== === ===========
Exercisable -- -- $ --
=== === ===========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation" which established new accounting and reporting requirements for
stock based employee compensation. As permitted by the statement, the Company
will continue to account for such plans under APB Opinion No. 25, but will
make required additional disclosures beginning in 1996, including proforma
information.
42
<PAGE>
Quarterly Financial Information (Unaudited):
<TABLE>
<CAPTION>
Fiscal Quarter First Second Third Fourth *
- - -------------- ----- ------ ----- --------
(thousands, except per share data)
<S> <C> <C> <C> <C>
1995
Net Sales $49,086 $45,579 $42,068 $56,057
Gross Income 10,649 8,644 8,620 12,965
Net Income (Loss) 745 (295) 127 3,142
Net Income (Loss) per share .17 (.04) .02 .40
1994
Net Sales $49,029 $46,558 $43,549 $58,152
Gross Income 8,514 7,415 8,239 12,686
Net Income (Loss) before
extraordinary item (402) (796) (662) 2,819
Net Income (Loss) (402) (796) (662) 4,447
Net Income (Loss) per share
before extraordinary item (.16) (.30) (.24) 1.06
Net Income (Loss) per share (.16) (.30) (.24) 1.67
<FN>
* Includes a $1,085 credit to the provision for facilities closing and other
recorded in the fourth quarter of 1994. The fourth quarter of 1995 includes 14
weeks of operations, compared to 13 weeks in 1994. In addition, net income and
net income per share for the fourth quarter of 1995 include (i) a credit to
the provision for facilities closing and other of $944, (ii) a charge to
selling, general and administrative expenses of $687 for the impairment of
assets as a result of the adoption of SFAS no. 121 (see note 5 of "Notes to
Financial Statements"), and (iii) a credit to selling, general and
administrative expenses of $592 as a result of settling the remaining
liabilities subject to compromise for less than the Company had accrued at
January 28, 1995.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
GANTOS, INC.
Schedule II
Valuation and Qualifying Accounts
(Thousands)
Additions
------------------------
Balance at Charged Charged Balance at
beginning of to costs to other end of
Description period and expenses accounts Deductions period
----------- ------------ ------------ -------- ---------- ----------
Allowance for
doubtful accounts:
<S> <C> <C> <C> <C> <C>
1995 $ 600 $ 884 $ -- $ 912 $ 572
====== ====== ===== ====== ======
1994 $ 993 $ 534 $ -- $ 927 $ 600
====== ====== ===== ====== ======
1993 $1,135 $1,939 $ -- $2,081 $ 993
====== ====== ===== ====== ======
</TABLE>
44
<PAGE>
EXHIBIT INDEX
Document Number and Description Page
- - ------------------------------- ----
Each Management contract or compensatory plan or arrangement filed as an
exhibit to this Report is identified in the following list with an asterisk
before the exhibit number.
2.1 Second Amended Joint Plan of Reorganization of Gantos, Inc. N/A
and Gantos Stores, Inc., incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K, dated March 7, 1995 and filed with the Securities
and Exchange Commission on March 22, 1995. A list of
the omitted exhibits is contained on page vii of the
Plan. Gantos, Inc. will supplementally furnish a copy
of any omitted exhibit to the Securities and Exchange
Commission upon request.
2.2 Modifications to the Debtors' Second Amended Joint Plan of N/A
Reorganization, incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K, dated
March 7, 1995 and filed with the Securities and
Exchange Commission on March 22, 1995.
2.3 Agreement of Merger, dated as of March 15, 1995, between N/A
Gantos Stores, Inc. and Gantos, Inc., incorporated by
reference to Exhibit 2.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28,
1995.
3(i) Restated Articles of Incorporation, incorporated by reference N/A
to Exhibit 4.1 to the Company's Current Report on Form
8-K, dated March 7, 1995 and filed with the Securities
and Exchange Commission on March 22, 1995.
3(ii) Bylaws, as amended March 16, 1993, incorporated by reference N/A
to Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended January 30, 1993.
4.1 Long-term debt documents, see Exhibits 10.20 through 10.21 N/A
of this Form 10-K.
4.2 Form of Indenture between Gantos, Inc. and Shawmut Bank N/A
Connecticut, National Association, as Trustee,
including forms of notes attached as exhibits, a
reasonable itemized table of contents and a
cross-reference sheet showing the location in the
Indenture of the provision inserted pursuant to Section
310 through 2318(a) inclusive of the Trust Indenture
Act of 1939, incorporated by reference to Exhibit T3C
to the Company's Application for Qualification of
Indenture under the Trust Indenture Act of 1939 on Form
T-3.
10.1 Lease Agreement, dated effective April 1, 1995, between N/A
Gantos, Inc. and VRB Corp., concerning
office-distribution center, incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 29, 1995.
10.2 Amendment to Lease Agreement between Gantos, Inc. and VRB N/A
Corp., dated as of April 28, 1995, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 29,
1995.
10.3 Agreement and Release, dated as of April 28, 1995, among N/A
Comerica Bank, Gantos, Inc., Four 'D' Investment
Company, Kathy Tann Gantos, and L. Douglas Gantos,
incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended April 29, 1995.
10.4 Notice of Option to Renew Lease Agreement between Gantos, N/A
Inc. and VRB Corp., dated October 30, 1995,
incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 28, 1995.
45
<PAGE>
EXHIBIT INDEX
Document Number and Description Page
- - ------------------------------- ----
10.5 Form of Gantos, Inc. credit card application and agreement, N/A
incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 28, 1995.
10.6 License Agreement, dated as of October 15, 1982, as amended N/A
by amendments one through four, between Gantos, Inc.
and Sherman and Sons, Inc., incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the year ended January 30, 1988.
10.7 Fifth Amendment, dated as of May 31, 1989, to the License N/A
Agreement dated as of October 15, 1982, as amended,
between Gantos, Inc. and Sherman and Sons, Inc.,
incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended
February 3, 1990.
10.8 Sixth Amendment, dated as of June 30, 1992, to the License N/A
Agreement dated as of October 15, 1992, as amended,
between Gantos Stores, Inc. and Sherman and Sons, Inc.,
incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1992.
*10.9 Gantos, Inc. Amended and Restated Stock Option Plan, N/A
adopted March 20, 1986, as amended and restated March
31, 1995, incorporated by reference to Exhibit 1 to L.
Douglas Gantos' Schedule 13D, dated March 31, 1995 and
filed with the Securities and Exchange Commission on
April 10, 1995.
*10.10 Gantos, Inc. 1996 Stock Option Plan, adopted March 19, 1996. --
*10.11 Gantos, Inc. Amended and Restated Director Stock Option Plan, N/A
adopted March 17, 1992, as amended and restated March
31, 1995, incorporated by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1995.
*10.12 Gantos, Inc. Employees' 401(k) Plan, effective July 5, 1992, N/A
incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 2, 1992.
*10.13 First Amendment, dated as of July 19, 1993, to the Gantos, N/A
Inc. Employees' 401(k) Plan, effective July 5, 1992,
incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1993.
**10.14 Second Amendment, dated as of July 15, 1994, to the Gantos, N/A
Inc., Employees' 401(k) Plan, incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q, for the quarter ended July 30, 1994.
*10.15 Third Amendment, dated as of May 3, 1995, to the Gantos, Inc. N/A
Employees' 401(k) Plan, incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 29, 1995.
*10.16 Fourth Amendment, dated as of January 24, 1996, to the --
Gantos, Inc. Employees' 401(k) Plan.
*10.17 1995 Gantos, Inc. Executive Bonus Plan adopted January 10, N/A
1995 as amended and restated March 14, 1995,
incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1995.
46
<PAGE>
EXHIBIT INDEX
Document Number and Description Page
- - ------------------------------- ----
*10.18 1996 Gantos, Inc. Executive Bonus Plan, adopted --
March 19, 1996.
*10.19 Gantos, Inc. Master Severance Plan and Key Employee Retention N/A
Bonus Program adopted January 11, 1994 as amended March
15, 1994, incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the fiscal
year ended January 29, 1994.
10.20 Revolving Credit Agreement, dated as of March 10, 1995, among N/A
Gantos, Inc., NatWest Bank, N.A., LaSalle National Bank
and NatWest Bank, N.A., as agent, incorporated by
reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the fiscal year ended January
28, 1995.
10.21 Forms of note, Security Agreement, Security Agreement and N/A
Mortgage -- Patents and Trademarks, and Assignment of
Life Insurance Policy as Collateral Security, all in
connection with the Revolving Credit Agreement, dated
as of March 10, 1995, among Gantos, Inc., NatWest Bank,
N.A., LaSalle National Bank and NatWest Bank, N.A., as
agent, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended April 29, 1995.
10.22 Termsheet for Settlement of Comerica/Four "D" Investment N/A
Company Issues, dated as of February 14, 1995,
incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1995.
*10.23 Letter of employment, dated December 13, 1993, between N/A
Gantos, Inc. and J. E. Bunka, incorporated by reference
to Exhibit 10.41 to the Company's Annual Report on Form
10-K for the fiscal year ended January 29, 1994.
*10.24 Letter of employment, dated September 20, 1994, between N/A
Gantos, Inc. and Mr. Joseph Corso, Vice President --
Store Operations, incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 29, 1994.
*10.25 Letter of employment, dated November 2, 1994, between Gantos, N/A
Inc. and Mr. Gordon Tendler, Vice President, General
Merchandise Manager for Sportswear, Coats and Suits,
incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 29, 1994.
*10.26 Letter of employment, dated March 27, 1995, between Gantos, N/A
Inc. and Mr. L. Douglas Gantos, President, Chief
Executive Officer and Chairperson of the Board,
incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1995.
*10.27 Amendment to Letter of Employment, dated as of March 19, 1996, --
between Gantos, Inc. and L. Douglas Gantos.
*10.28 Letter of employment, dated March 15, 1996, between Gantos, --
Inc. and Mr. Anthony Barnett, Vice President of Store
Operations.
47
<PAGE>
EXHIBIT INDEX
Document Number and Description Page
- - ------------------------------- ----
*10.29 Severance agreement, dated as of January 23, 1995, between N/A
Gantos, Inc. and Mr. J.E. Bunka, incorporated by
reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended January
28, 1995.
*10.30 Severance agreement, dated as of January 31, 1995, between N/A
Gantos, Inc. and Mr. Kenneth Green, incorporated by
reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the fiscal year ended January
28, 1995.
*10.31 Severance agreement, dated as of January 23, 1995, between N/A
Gantos, Inc. and Ms. Jane Pahls, incorporated by
reference to Exhibit 10.36 to the Company's Annual
Report on Form 10-K for the fiscal year ended January
28, 1995.
23.1 Consent of independent accountants. --
27.1 Financial Data Schedule --
48
Exhibit 10.10
GANTOS, INC.
1996 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have
the following meanings:
(a) "Plan" shall mean this Gantos, Inc. 1996 Stock Option
Plan.
(b) "Corporation" shall mean Gantos, Inc., a Michigan
corporation, or any successor thereof.
(c) "Committee" shall mean, with respect to administration of
the Plan regarding Participants who are subject to Section 16(a) and
(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), a committee meeting the standards of Rule 16b-3 of the Rules
and Regulations under the Exchange Act, or any similar successor rule,
appointed by the Board of Directors of the Corporation to administer
the Plan, or, if no such committee is appointed, the Board of
Directors as a whole, and with respect to administration of the Plan
regarding all other Participants, such committee or the Board of
Directors of the Corporation as described above or such other
committee or entity appointed by the Board of Directors of the
Corporation.
(d) "Participant" shall mean any individual designated by the
Committee under Paragraph 4 hereof, for participation in the Plan.
(e) "Nonqualified Option" shall mean an option to purchase
Common Stock of the Corporation which meets the requirements set forth
in the Plan but does not meet the definition of an incentive stock
option set forth in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
(f) "Incentive Option" shall mean an option to purchase Common
Stock of the Corporation which meets the requirements set forth in the
Plan and also meets the definition of an incentive stock option set
forth in Section 422 of the Code.
(g) "Stock appreciation right" shall mean a right to receive
the appreciation in value, or a portion of the appreciation in value,
of a specified number of shares of the Common Stock of the
Corporation, as provided in Paragraph 9.
(h) "Restricted stock award" shall mean a grant of Common Stock
of the Corporation which is subject to restrictions against transfer,
forfeiture and such other terms and conditions determined by the
Committee, as provided in Paragraph 15.
2. Administration: The Plan shall be administered by the
Committee. Subject to the provisions of the Plan, the Committee is authorized
to interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or
advisable for its administration. Interpretation and construction of any
provision of the Plan by the Committee shall, unless otherwise determined by
the Board of Directors of the
<PAGE>
Corporation, be final and conclusive. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a
majority of the Committee, shall be the acts of the Committee.
3. Maximum Number of Shares Subject to Plan: The maximum number of
shares with respect to which stock options or stock appreciation rights may be
granted or which may be awarded as restricted stock under the Plan shall be
1,000,000 in the aggregate of the Common Stock of the Corporation, which may
consist in whole or in part of the authorized and unissued or reacquired
Common Stock of the Corporation. The number of shares with respect to which a
stock appreciation right is granted, but not the number of shares which the
Corporation delivers or could deliver to a Participant upon exercise of a
stock appreciation right, shall be charged against the aggregate number of
shares remaining available under the Plan; provided, however, that in the case
of a stock appreciation right granted in conjunction with a stock option under
circumstances in which the exercise of the stock appreciation right results in
termination of the stock option and vice versa, only the number of shares
subject to the stock option shall be charged against the aggregate number of
shares remaining available under the Plan. If a stock option or stock
appreciation right expires, is cancelled or terminates for any reason (other
than termination as a result of the exercise of a related right) without
having been fully exercised, or if shares of restricted stock are forfeited,
the number of shares with respect to which the stock option or stock
appreciation right was not exercised at the time of its expiration,
cancellation or termination, and the number of forfeited shares of restricted
stock, shall again become available for the grant of stock options or stock
appreciation rights or the award of restricted stock under the Plan, unless
the Plan shall have been terminated.
If a dividend shall be declared upon the Common Stock of the
Corporation payable in shares of Common Stock of the Corporation, the number
of shares of Common Stock then subject to each outstanding stock option, stock
appreciation right or restricted stock award and the number of shares reserved
for issuance pursuant to the Plan but not yet covered by an option, stock
appreciation right or restricted stock award shall be adjusted by adding to
each such option, stock appreciation right, restricted stock award, or share
the number of shares which would be distributable thereon if such share had
been outstanding on the date fixed for determining the shareholders entitled
to receive such stock dividend. In the event that the outstanding shares of
the Common Stock of the Corporation shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the
Corporation or of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation or otherwise, then there shall be substituted for each share of
Common Stock subject to each outstanding stock option, stock appreciation
right or restricted stock award and for each share of Common Stock reserved
for issuance pursuant to the Plan but not yet covered by an option, stock
appreciation right or restricted stock award, the number and kind of shares of
stock or other securities into which each outstanding share of Common Stock
shall be so changed or for which each such share shall be exchanged. In the
event there shall be any change, other than as specified above in this
Paragraph 3, in the number or kind of outstanding shares of Common Stock of
the Corporation or of any stock or other securities into which such Common
Stock shall have been changed or for which it shall have been exchanged, then
if the Committee
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<PAGE>
shall in its sole discretion determine that such change equitably requires an
adjustment in the number or kind of shares theretofore reserved for issuance
pursuant to the Plan but not yet covered by an option, stock appreciation
right or restricted stock award and of the shares then subject to an option or
options, stock appreciation rights or restricted stock awards, such adjustment
shall be made by the Committee and shall be effective and binding for all
purposes of the Plan and each stock option, stock appreciation right or
restricted stock award agreement. In the case of any such substitution or
adjustment as provided for in this Paragraph, the option price in each stock
option agreement and the grant value in each stock appreciation right
agreement for each share covered thereby prior to such substitution or
adjustment will be the option price or grant value, as the case may be, for
all shares of stock or other securities which shall have been substituted for
such share or to which such share shall have been adjusted pursuant to this
Paragraph. No adjustment or substitution provided for in this Paragraph 3
shall require the Corporation in any stock option, stock appreciation right or
restricted stock award agreement to sell or issue a fractional share, and the
total substitution or adjustment with respect to each stock option, stock
appreciation right or restricted stock award agreement shall be limited
accordingly.
4. Participants: The Committee shall determine and designate from time
to time, in its discretion, those key employees of the Corporation (or any
subsidiary in which the Corporation owns directly or indirectly more than 50%
of the total combined voting power of all classes of stock) to whom stock
options, stock appreciation rights, or restricted stock are to be granted and
who thereby become Participants under the Plan. Provided, however, that the
members of any committee appointed by the Board of Directors to act as the
Committee shall not be eligible to be Participants under the Plan while such
persons are members of such a committee. Subject to adjustments as provided in
the final paragraph of Paragraph 3, no Participant may be granted stock
options or stock appreciation rights, or be awarded restricted stock, as to
more than 500,000 shares of the Corporation's Common Stock in the aggregate in
any fiscal year of the Corporation.
5. Allotment of Shares: The Committee shall determine and fix the
number of shares of stock with respect to which a Participant may be granted
stock options and stock appreciation rights and the number of shares of
restricted stock which a Participant may be awarded; provided, that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined on the date of
option grant, of the underlying stock with respect to which incentive stock
options are exercisable for the first time by such Participant during any
calendar year (under all plans of the Corporation or any parent or subsidiary
corporation of the Corporation) exceeding $100,000.
6. Option Price: Subject to the rules set forth in this Paragraph 6,
the Committee shall establish the option price at the time any stock option is
granted. With respect to an Incentive Option, such option price shall not be
less than 100% of the fair market value of the stock on the date on which such
option is granted; provided, however, that with respect to an Incentive Option
granted to an employee who at the time of the grant owns (after applying the
attribution rules of Section 425(d) of the Code) more than 10% of the total
combined voting
-3-
<PAGE>
stock of the Corporation or of any parent or subsidiary, the option price
shall not be less than 110% of the fair market value of the stock on the date
such option is granted. With respect to a Nonqualified Option, the option
price shall not be less than the par value, if any, of the common Stock. Fair
market value of a share shall be determined by the Committee and may be
determined by taking the mean between the highest and lowest quoted selling
prices of the Corporation's stock on any exchange or other market on which the
shares of Common Stock of the Corporation shall be traded on such date. The
option price will be subject to adjustment in accordance with the provisions
of Paragraph 3 of the Plan.
7. Granting and Exercise of Stock Options, Stock Appreciation Rights
and Restricted Stock: The granting of stock options, stock appreciation rights
and restricted stock hereunder shall be effected in accordance with
determinations made by the Committee pursuant to the provisions of the Plan,
by execution of instruments in writing in form approved by the Committee.
Each stock option and stock appreciation right granted hereunder shall
be exercisable at any such time or times or in any such installments as may be
determined by the Committee in its discretion; provided that the aggregate
fair market value (determined at the time the option is granted) of the stock
with respect to which Incentive Options are exercisable for the first time by
a Participant during any calendar year shall not exceed $100,000. Except as
provided in Paragraphs 11, 12 and 14, stock options and stock appreciation
rights may be exercised only while the Participant is an employee of the
Corporation or a subsidiary.
Notwithstanding any other term or provision of this Plan, but subject
to the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant ceasing
to be an employee of the Corporation or a subsidiary for any reason or in
connection with a change in control of the Corporation, the stock option
agreement or stock appreciation right agreement may provide for the
acceleration of, or the Committee may accelerate, in its discretion (exercised
at the date of the grant of the stock option or stock appreciation right or
after the date of grant), in whole or in part, the time or times or
installments with respect to which any stock option or stock appreciation
right granted hereunder shall be exercisable in connection with termination of
a Participant's employment with the Corporation or a subsidiary and/or in
connection with a change in control of the Corporation, subject to any
restrictions, terms and conditions fixed by the Committee either at the date
of the award or at the date it exercises such discretion.
Moreover, if a Participant who is granted a stock appreciation right
is a person who is subject to Section 16(a) and (b) of the Exchange Act, then
any election to exercise as well as any actual exercise of his stock
appreciation right shall be made only in such a manner as to conform to the
provisions of Rule 16b-3(e), if any, or any replacement rule, if any, adopted
pursuant to the provisions of the Exchange Act.
Successive stock options and stock appreciation rights may be granted
to the same Participant whether or not the stock option or options and stock
appreciation rights first granted
-4-
<PAGE>
to such Participant remain unexercised. A Participant may exercise an option
or a stock appreciation right, if then exercisable, notwithstanding that stock
options and stock appreciation rights granted to such Participant prior to the
stock option or stock appreciation right then being exercised remain
unexercised.
8. Payment of Option Price: At the time of the exercise in whole or in
part of any stock option granted hereunder, payment in full (a) in cash or,
(b) with the consent of the Committee, in its sole discretion, (i) in Common
Stock of the Corporation, or (ii) by a promissory note payable to the order of
the Corporation which is acceptable to the Committee, or (iii) by delivery of
irrevocable instructions to a stockbroker to promptly deliver to the
Corporation full payment for the shares with respect to which the stock option
is exercised from the proceeds of the stockbroker's sale of, or loan against,
some or all of the shares, shall be made by the Participant for all shares so
purchased. Such payment may, with the consent of the Committee, also consist
of a cash down payment and delivery of such a promissory note in the amount of
the unpaid exercise price. No Participant shall have any of the rights of a
shareholder of the Corporation under any such option until the actual issuance
of shares to said Participant, and prior to such issuance no adjustment shall
be made for dividends, distributions or other rights in respect of such
shares, except as provided in Paragraph 3.
9. Stock Appreciation Rights: Subject to the terms of the Plan, the
Committee may grant stock appreciation rights to Participants either in
conjunction with, or independently of, any stock options granted under the
Plan. A stock appreciation right granted in conjunction with a stock option
may be an alternative right wherein the exercise of the stock option
terminates the stock appreciation right to the extent of the number of shares
purchased upon exercise of the stock option and, correspondingly, the exercise
of the stock appreciation right terminates the stock option to the extent of
the number of shares with respect to which the stock appreciation right is
exercised. Alternatively, a stock appreciation right granted in conjunction
with a stock option may be an additional right wherein both the stock
appreciation right and the stock option may be exercised. A stock appreciation
right may not be granted in conjunction with an Incentive Option under
circumstances in which the exercise of the stock appreciation right affects
the right to exercise the Incentive Option or vice versa, unless the stock
appreciation right, by its terms, meets all of the following requirements:
(a) The stock appreciation right will expire no later than the
Incentive Option;
(b) The stock appreciation right may be for no more than the
difference between the option price of the Incentive Option and the
fair market value of the shares subject to the Incentive Option at the
time the stock appreciation right is exercised;
(c) The stock appreciation right is transferable only when the
Incentive Option is transferable, and under the same conditions;
(d) The stock appreciation right may be exercised only when
the Incentive Option is eligible to be exercised; and
-5-
<PAGE>
(e) The stock appreciation right may be exercised only when the
fair market value of the shares subject to the Incentive Option
exceeds the option price of the Incentive Option.
Upon exercise of a stock appreciation right, a Participant shall be
entitled to receive, without payment to the Corporation (except for applicable
withholding taxes), an amount equal to the excess of or, in the sole
discretion of the Committee, a portion of the excess of (i) the then aggregate
fair market value of the number of shares with respect to which the
Participant exercises the stock appreciation right, over (ii) the aggregate
fair market value of such number of shares at the time the stock appreciation
right was granted. This amount shall be payable by the Corporation, in the
sole discretion of the Committee (which discretion the Committee may exercise
at the date of grant or at the date of exercise, or may delegate to the
Participant), in cash, in shares of Common Stock of the Corporation or any
combination thereof.
10. Non-transferability of Stock Options and Stock Appreciation
Rights: To the extent required by Rule 16b-3 under the Exchange Act, or any
successor rule, but only with respect to stock options and stock appreciation
rights granted to Participants who are subject to Section 16(a) and (b) of the
Exchange Act, to the extent required by Section 422 of the Code, or any
successor section, but only with respect to Incentive Options, or to the
extent determined by the Committee (either by resolution or by a provision in,
or amendment to, the option), no stock option or stock appreciation right
granted under the Plan to a Participant shall be transferable by such
Participant otherwise than by will, or the laws of descent and distribution,
and such option or stock appreciation right shall be exercisable, during the
lifetime of the Participant, only by the Participant.
11. Death of Participant: Subject to the other provisions of this
Plan, including, without limitation, Paragraph 7, if the employment of a
Participant by the Corporation, or a subsidiary thereof, is terminated by the
death of such Participant, an option and a stock appreciation right, to the
extent that it is exercisable by the Participant at the date of death, may be
exercised within 12 months of death, but in no event subsequent to the
expiration date of the option or stock appreciation right, by the legal
representative of the Participant's estate or the person or persons to whom
the rights of the Participant shall pass by will or by the laws of descent and
distribution; provided, that notwithstanding any other term or provision of
the Plan to the contrary, the Committee may, in its sole discretion, either by
resolution or by a provision in, or amendment to, the option, grant the right
to exercise all or any portion of any Nonqualified Option for any period
determined by the Committee ending on or before the expiration date of such
Nonqualified Option notwithstanding the termination of the Participant's
employment by the Corporation or a subsidiary due to the death of such
Participant, subject to any restrictions, terms and conditions fixed by the
Committee either at the date of the award or at the date it exercises such
discretion.
12. Permanent Disability: Subject to the other provisions of this
Plan, including, without limitation, Paragraph 7, if the employment of a
Participant by the Corporation, or a subsidiary thereof, is terminated due to
the permanent disability of such Participant, such Participant shall have the
right for a period of three months following such termination, but in no event
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<PAGE>
subsequent to the expiration date of the option or stock appreciation right,
to exercise that portion of the option or stock appreciation right, if any,
which is exercisable by such Participant at the date of termination of
employment; provided, that notwithstanding any other term or provision of the
Plan to the contrary, the Committee may, in its sole discretion, either by
resolution or by a provision in, or amendment to, the option, grant the right
to exercise all or any portion of any Nonqualified Option for any period
determined by the Committee ending on or before the expiration date of such
Nonqualified Option notwithstanding the termination of the Participant's
employment by the Corporation or a subsidiary due to the permanent disability
of such Participant, subject to any restrictions, terms and conditions fixed
by the Committee either at the date of the award or at the date it exercises
such discretion.
13. Continuance of Employment: The Committee may require, in its
discretion, that any Participant under the Plan to whom a stock option or
stock appreciation right shall be granted shall agree in writing as a
condition of the granting of such stock option or stock appreciation right to
remain in the employ of the Corporation or a subsidiary for a designated
minimum period from the date of the granting of such stock option or stock
appreciation right as shall be fixed by the Committee.
Nothing contained in the Plan or in any stock option, stock
appreciation right or restricted stock award granted or awarded pursuant to
the Plan, nor any action taken by the Committee hereunder, shall confer upon
any Participant any right with respect to continuation of employment by the
Corporation or a subsidiary nor interfere in any way with the right of the
Corporation or a subsidiary to terminate such person's employment at any time.
14. Termination or Expiration of Options: Subject to the other
provisions of this Plan, including, without limitation, Paragraph 7, all
rights to exercise stock options and stock appreciation rights granted under
this Plan shall terminate if any Participant ceases to be an employee of the
Corporation or a subsidiary for any cause other than death or permanent
disability; provided, however, that notwithstanding any other term or
provision of the Plan to the contrary, the Committee may, in its sole
discretion, either by resolution or by a provision in, or amendment to, the
option or stock appreciation right agreement, grant the right to exercise
all or portion of any option or stock appreciation right for any period
determined by the Committee ending on or before the expiration date of
such option or stock appreciation right notwithstanding the termination of the
Participant's employment by the Corporation or a subsidiary due to the
Participant's retirement, resignation or any other cause, subject to any
restrictions, terms and conditions fixed by the Committee either at the date
of the award or at the date it exercises such discretion, except that
Incentive Options that are intended to remain Incentive Options and related
stock appreciation rights may not be exercised more than three months
after such termination.
If not sooner terminated, each stock option and stock appreciation
right granted hereunder shall expire not more than 10 years from the date of
the granting thereof; provided that, with respect to an Incentive Option or a
related stock appreciation right granted to an employee who, at the time of
the grant, owns (after applying the attribution rules of Section 425(d) of the
Code) more than 10% of the total combined voting stock of all classes of stock
of the Corporation or of any parent or subsidiary, such option and stock
appreciation right shall expire not more than five (5) years after the date of
granting thereof.
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<PAGE>
15. Restricted Stock Awards: Subject to the terms of the Plan, the
Committee may award shares of restricted stock to Participants. All shares of
restricted stock granted to Participants under the Plan shall be subject to
the following terms and conditions (and to such other terms and conditions
prescribed by the Committee):
(a) At the time of each award of restricted shares, there shall
be established for the shares a restricted period, which may be zero
days and shall be no greater than ten years. Such restricted period
may differ among Participants and may have different expiration dates
with respect to portions of shares covered by the same award.
(b) Shares of restricted stock awarded to Participants may not
be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered during the restricted period applicable to such shares.
Except for such restrictions on transfer, a Participant shall have all
of the rights of a shareholder in respect of restricted shares awarded
to him including, but not limited to, the right to receive any
dividends on, and the right to vote, the shares.
(c) Except as otherwise provided in Paragraph 15(d), if a
Participant ceases to be an employee of the Corporation or a
subsidiary for any reason, all shares theretofore awarded to the
Participant which are still subject to the restrictions imposed by
Paragraph 15(b) shall upon such termination of employment be forfeited
and transferred back to the Corporation, without payment of any
consideration by the Corporation.
(d) If a Participant ceases to be an employee of the
Corporation or a subsidiary for any reason, the restricted stock award
agreement may provide for the release of, or the Committee may
release, in its discretion (exercised at the date of award or after
the date of award), some or all of the shares from the restrictions,
subject to any restrictions, terms and conditions fixed by the
Committee either at the date of the award or at the date it exercises
such discretion.
(e) Stock certificates shall be issued in respect of shares of
restricted stock awarded hereunder and shall be registered in the name
of the Participant. Such certificates shall be deposited with the
Corporation or its designee, together with a stock power endorsed in
blank by the Participant, and, in the discretion of the Committee, a
legend shall be placed upon such certificates reflecting that the
shares represented thereby are subject to restrictions against
transfer and forfeiture.
(f) At the expiration of the restricted period applicable to
the shares, the Corporation shall deliver to the Participant or the
legal representative of the Participant's estate the stock
certificates deposited with it or its designee and as to which the
restricted period has expired. If a legend has been placed on such
certificates, the Corporation shall cause such certificates to be
reissued without the legend.
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<PAGE>
In the case of events such as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of or by the
Corporation, any stock, securities or other property which a Participant
receives or is entitled to receive by reason of his ownership of restricted
shares shall, unless otherwise determined by the Committee, be subject to the
same restrictions applicable to the restricted shares and shall be deposited
with the Corporation or its designee.
16. Investment Purpose: If the Committee in its discretion determines
that as a matter of law such procedure is or may be desirable, it may require
a Participant, upon any acquisition of stock hereunder (whether by reason of
the exercise of stock options or stock appreciation rights or the award of
restricted shares) and as a condition to the Corporation's obligation to issue
or deliver certificates representing such shares, to execute and deliver to
the Corporation a written statement, in form satisfactory to the Corporation,
representing and warranting that the Participant's acquisition of shares of
Common Stock shall be for such person's own account, for investment and not
with a view to the resale or distribution thereof and that any subsequent
offer for sale or sale of any such shares shall be made either pursuant to (a)
a Registration Statement on an appropriate form under the Securities Act of
1933, as amended (the "Securities Act"), which Registration Statement has
become effective and is current with respect to the shares being offered and
sold, or (b) a specific exemption from the registration requirements of the
Securities Act, but in claiming such exemption the Participant shall, prior to
any offer for sale or sale of such shares, obtain a favorable written opinion
from counsel for or approved by the Corporation as to the availability of such
exemption.
The Corporation may endorse an appropriate legend referring to the
foregoing restriction upon the certificate or certificates representing any
shares issued or transferred to the Participant under the Plan.
17. Withholding Payments: If, upon the exercise of any Nonqualified
Option or stock appreciation right, or upon the award of restricted stock or
the expiration of restrictions applicable to restricted stock, or upon a
disqualifying disposition within the meaning of Section 422 of the Code of
shares of Common Stock acquired upon exercise of an Incentive Option, there
shall be payable by the Corporation any amount for income tax withholding, in
the Committee's sole discretion, either the Corporation shall appropriately
reduce the amount of stock or cash to be delivered or paid to the Participant
or the Participant shall pay such amount to the Corporation to reimburse the
Corporation for such income tax withholding.
18. Effectiveness of Plan: The Plan shall be effective on the date the
Board of Directors of the Corporation adopts the Plan, provided that the
shareholders of the Corporation approve the Plan within 12 months before or
after its adoption by the Board of Directors. Stock options, stock
appreciation rights and restricted stock may be granted or awarded prior to
shareholder approval of the Plan, but each such stock option, stock
appreciation right or restricted stock grant or award shall be subject to
shareholder approval of the Plan. No stock option or stock appreciation right
may be exercised prior to shareholder approval, and any restricted stock
awarded is subject to forfeiture if such shareholder approval is not obtained.
-9-
<PAGE>
19. Termination, Duration and Amendments of Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the
Corporation. Unless sooner terminated, the Plan shall terminate on the date
ten years after the earlier of its adoption by the Board of Directors or its
approval by the shareholders of the Corporation, and no stock options, stock
appreciation rights or restricted stock may be granted or awarded thereafter.
The termination of the Plan shall not affect the validity of any stock option,
stock appreciation right or restricted stock which is outstanding on the date
of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders
of the Corporation, to amend or revise the terms of the Plan, or any stock
option, stock appreciation right or restricted stock award agreement under
this Plan, at any time; provided, however, that (i) to the extent required by
Rule 16b-3 under the Exchange Act, or any successor rule, but only with
respect to amendments or revisions affecting Participants who are subject to
Section 16(a) and (b) of the Exchange Act, to the extent required by Section
162(m) of the Code and related regulations, or any successor rule, but only
with respect to amendments or revisions affecting Participants whose
compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Options, no such amendment or revision shall increase the
maximum number of shares in the aggregate which are subject to the Plan
(subject, however, to the provisions of Paragraph 3), change the class of
persons eligible to be Participants under the Plan or materially increase the
benefits accruing to Participants under the Plan, without approval or
ratification of the shareholders of the Corporation, and (ii) no such
amendment or revision shall change the option price (except as contemplated by
Paragraph 3) or alter or impair any stock option, stock appreciation right, or
restricted stock which shall have been previously granted or awarded under the
Plan, without the consent of the holder thereof.
As adopted by the Board of Directors on March 19, 1996.
-10-
Exhibit 10.16
AMENDMENT
AND
ACCEPTANCE OF TRUST
FOR
GANTOS, INC. EMPLOYEES' 401(k) PLAN
- - ------------------------------------------------------------------------------
WHEREAS, Gantos, Inc. (the "Company") has established the Gantos,
Inc. Employees' 401(k) Plan, originally effective July 5, 1992, and as
thereafter amended from time to time; and
WHEREAS, in accordance with the provisions of Section 8.1 of the
Plan, the Company reserves the right to amend the Plan at any time, in certain
respects; and
WHEREAS, in accordance with the provisions of Section 7.9 of the
Plan, the Company retains the right to appoint trustees for the Plan; and
WHEREAS, the Company is desirous of appointing new trustees for the
Plan and of amending the Plan to clarify certain provisions of its Adoption
Agreement.
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, the following
actions are hereby taken with respect to the Plan, effective as of March 31,
1995:
A. The Adoption Agreement of the Plan is hereby amended in the
following respects:
1. Item B3 is modified to reflect the Employer
Identification Number of the Company as 38-1414122.
2. Item B6 is amended to reflect the following two
trustees:
J. E. Bunka
L. Douglas Gantos
<PAGE>
B. The Company hereby appoints the following individuals to
serve as the only trustees for the Plan, effective until further
action by the Company: J. E. Bunka and L. Douglas Gantos.
IN WITNESS WHEREOF, the Company has caused this Amendment to the
Gantos, Inc. Employees' 401(k) Plan to be executed by its duly authorized
officer this 24th day of January, 1996.
GANTOS, INC.
By: L. Douglas Gantos
-----------------
Its: President
By execution of this Amendment, the new trustees signify their
acceptance of trust and its terms and agree to operate in accordance with and
be bound by the terms of the Plan and trust.
L. DOUGLAS GANTOS
/s/ L. Douglas Gantos
-----------------------
Trustee
January 24, 1996
Date
J. E. BUNKA
/s/ J.E. Bunka
-----------------------
Trustee
January 24, 1996
Date
2
Exhibit 10.18
1996 Gantos, Inc. Executive Bonus Plan<F1>1
1. Definitions. As used in this Executive Bonus Plan, the
following terms have the following meanings:
"Board" is the Board of Directors of Corporation.
"Committee" is the Compensation Committee of the Board or any
other committee appointed by the Board to administer the Plan
or, at the Board's discretion, the Board itself.
"Corporation" is Gantos, Inc., a Michigan corporation, or any
successor thereto.
"Effective Date" is February 4, 1996.
"Fiscal 1996" is Corporation's fiscal year ending February 1,
1997.
"Fiscal 1996 Target" is the Fiscal 1996 Profit target which has
been determined by the Board or the Committee and announced to
the Participants.
"Participant" means any participant in the Plan pursuant to
paragraph 3 below.
"Plan" is this Executive Bonus Plan.
"Profit" is Corporation's income
(i) before deductions for (1) federal, state and local
income taxes, (2) extraordinary items, and (3) all
bonuses payable under this Plan, and
(ii) plus or minus any items not included in the
projections from which the Fiscal 1996 Profit was
determined and that otherwise decreased or increased
Profit, at the discretion of the Compensation Committee.
Profit will be determined by Corporation's regular independent
public accountants (1) in accordance with generally accepted
accounting principles and (2) using amounts obtained as part of
the annual audit of Corporation's Fiscal 1996 financial
statements.
2. Administration. The Plan will be administered by the Committee.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to make, amend and rescind rules and regulations relating
to the Plan, to make bonus awards under the Plan and to make all other
determinations necessary or advisable for its administration. All Plan
<PAGE>
determinations made by the Committee, and the Committee's interpretation and
construction of any provision of the Plan, will be final and conclusive.
3. Participants; Termination of a Participant's Employment.
(a) The initial persons covered by the Plan are L. Douglas Gantos,
J.E. Bunka, Kenneth Green, Jane Pahls, Gordon Tendler, Terri Connett and Bruce
Castillo. In addition, any President, Vice President - Store Operations, or
both, hired by the Corporation during Fiscal 1996 will be a Participant in the
Plan. The Committee or the Corporation's Chief Executive Officer will
determine and designate from time to time, in its, his or her discretion, any
additional officers hired by the Corporation during Fiscal 1996 to be covered
by the Plan. The Committee will determine and designate from time to time, in
its discretion, any other key employees of Corporation to be covered by the
Plan.
(b) If a Participant's employment with Corporation terminates before
the end of Fiscal 1996 because of such Participant's death or disability, such
Participant will be eligible to receive a bonus under the Plan. If a
Participant's employment with Corporation terminates before the end of Fiscal
1996 for any other reason, such Participant will receive no bonus under the
Plan.
4. Fiscal 1996 Annual Bonus.
(a) If Corporation's Fiscal 1996 Profit exceeds the Fiscal 1996
Target, the Fiscal 1996 cash bonus pool will equal 50% of such excess, up to a
maximum cash bonus pool equal to 35% of the actual salaries of all
Participants in the Plan with respect to services performed in Fiscal 1996 for
Corporation (the "Bonus Pool").
(b) Fifty percent of the Bonus Pool will be automatically earned and
payable upon achievement of Fiscal 1996 Profits in excess of the Fiscal 1996
Target. This 50% portion will be paid to each Participant in proportion to the
1996 base salary actually paid to such Participant. The Committee shall
determine, in its discretion, what portion, if any, of the remaining Bonus
Pool will be payable to each Participant, based on its evaluation of senior
management's recommendations, the individual's achievement of his or her
Performance Plan/Objectives and such other factors as the Committee deems
relevant. The Committee, in its discretion, may determine that all, any
portion or none of the remaining Bonus Pool will be payable to any particular
Participant, and the Committee is not required to award the entire amount of
the remaining Bonus Pool to the Participants. Bonuses will be paid promptly
after the Committee certifies the amount of Fiscal 1996 Profit and the
calculation of the portion of the Bonus Pool automatically payable to each
Participant receiving bonuses under the Plan and makes its decisions regarding
the merit portion of the bonus, if any.
The Board reserves the right to pay bonuses to Participants
beyond those, if any, called for by the Plan.
5. Base Salaries. The Plan does not cover Participants' salaries.
-2-
<PAGE>
6. Stock Options. The Plan does not cover stock option grants,
which will be subject to the Board's discretion.
7. Nontransferability of Rights under the Plan. A Participant's
rights under the Plan may not be transferred, assigned or pledged.
8. Employment Agreement/Continuation of Employment. Nothing
contained in the Plan nor any action taken by the Committee in connection with
the Plan will confer upon any Participant any right to continuation of
employment by Corporation or any subsidiary of Corporation, nor interfere in
any way with the right of Corporation or any subsidiary to terminate such
Participant's employment at any time. Notwithstanding the preceding sentence,
nothing in the Plan affects the rights of any Participant under any written
employment agreement between such Participant and Corporation.
9. Withholding Payments. Participants will be responsible for
all taxes on bonuses awarded to them under the Plan, and Corporation will be
entitled to make all appropriate withholding from amounts due to Participants
under the Plan.
10. Effectiveness of Plan. This Plan becomes effective on the
Effective Date and will remain in effect through the end of Fiscal 1996.
<F1>
- - --------
1 Adopted by the Gantos, Inc. Board of Directors on March 19, 1996.
-3-
Exhibit 10.27
Gantos, Inc.
3260 Patterson, S.E.
Grand Rapids, Michigan 49512
March 19, 1996
L. Douglas Gantos
3260 Patterson, S.E.
Grand Rapids, Michigan 49512
Dear Mr. Gantos:
We have entered into a letter agreement, dated March 27, 1995 (the
"Agreement"), with respect to your employment with Gantos, Inc. ("Gantos").
The time that you are required to be Gantos' Chairperson of the Board and
Chief Executive Officer under the Agreement could end as early as March 31,
1996, and you and Gantos desire to revise the Agreement to provide for the
terms of your employment by Gantos after that date. This letter (the
"Amendment") states our agreement with respect to the changes to the Agreement
and your employment with Gantos.
1. Position and Duties.
(a) The Agreement is amended by substituting the following for the
second and third sentences in the first paragraph of Paragraph 1 of the
Agreement:
"Beginning on the Start Date and during the term of your employment
under this agreement (as defined in Paragraph 2), you will be
employed as the Chairperson of the Board and Chief Executive Officer
of Gantos until the earlier of (i) 90 days after written notice from
either of us to the other of the termination of your employment as
Gantos' Chief Executive Officer is deemed given pursuant to Paragraph
8.(e), and (ii) 60 days after (A) Gantos hires a Chief Operating
Officer, and (B) Gantos' Board of Directors determines that such
Chief Operating Officer might become Gantos' Chief Executive Officer,
either by approving an employment agreement that provides for the
possibility of such person becoming Chief Executive Officer or by
adopting a resolution stating that such person might become Gantos'
Chief Executive Officer in the future (the "Full Time Period").
During the term of this agreement after the Full Time Period, you
will serve either as part-time Chairperson of the Board of Gantos or
as a consultant to Gantos for the remaining term of this agreement."
(b) The Agreement is amended by substituting the following for the
second paragraph of Paragraph 1 of the Agreement:
"You will devote such working time, attention and best
efforts to your position with Gantos as you and Gantos agree are
reasonably necessary to perform your duties under this agreement;
provided that you may continue to have the outside interests and
<PAGE>
Mr. L. Douglas Gantos
March 19, 1996
Page 2
may continue to devote working time, attention and efforts to those
businesses and activities existing as of the Start Date, including,
without limitation, Four 'D' Investment Company, Four 'G' Investment
Company and Four G Investment Corporation, and any other outside
interests that do not compete with Gantos' business (collectively,
"Outside Interests"); and provided further that after the Full Time
Period you will not be required to devote more than 25 hours a month
to your duties under this agreement."
(c) The Agreement is amended by substituting the following for the
second to last sentence of the third paragraph of Paragraph 1 of the
Agreement:
"During the Full Time Period, you will be required to spend such time
in Grand Rapids as you and Gantos agree is reasonably necessary to
perform your duties under this agreement."
2. Bonus. The Agreement is amended by adding the following Paragraph
3.(e) to the Agreement:
"(e) If, with respect to the fiscal year in which the Full
Time Period ends, you are not eligible to participate in the
executive bonus plan established by Gantos' Compensation Committee
(the "Bonus Plan"), if any, or any of your salary and consulting fees
paid during such fiscal year under Paragraph 3.(a) are not considered
in calculating your bonus under such Bonus Plan, or both, for
example, because you are not an executive officer of Gantos as of the
end of such fiscal year, in addition to your other compensation under
this agreement, you will receive the difference between, (i) the
bonus payable to you under the Bonus Plan as if you were eligible to
participate in such Bonus Plan and all of your salary and consulting
fees paid during such fiscal year under Paragraph 3.(a) were
considered in calculating your bonus under such Bonus Plan, and (ii)
the amount actually paid or payable to you under such Bonus Plan.
Such amount shall be paid to you if and when bonuses are paid to
participants in such Bonus Plan."
3. Termination Without Good Reason. The Agreement is amended by
substituting the following for the last sentence of Paragraph 2.(d) of the
Agreement:
"Such termination by you shall be effective 90 days after such notice
is deemed given pursuant to Paragraph 8.(e)."
4. Fringe Benefits.
(a) The Agreement is amended by substituting "Full Time Period" for
the phrase "Full Time Term" at the end of the first sentence in Paragraph
5.(a) of the Agreement.
<PAGE>
Mr. L. Douglas Gantos
March 19, 1996
Page 3
(b) Paragraph 5.(c) of the Agreement is amended by adding to
following to the end of Paragraph 5.(c):
"You will also be reimbursed for all reasonable and necessary travel
expenses to and from Grand Rapids and, after you have sold your Grand
Rapids residence, for all reasonable and necessary interim living
expenses while you are in Grand Rapids, including, without
limitation, expenses for meals and lodging, all in connection with
the performance of your duties under this agreement, upon
presentation of expense vouchers for such expenses in accordance with
Gantos' usual accounting procedures for reimbursement of travel
expenses."
5. No Other Change. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
6. Counterparts. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidences by signed copies transmitted by telecopier
or facsimile transmission.
If this letter correctly expresses our mutual understanding, please sign
and date the enclosed copy and return it to us.
Very truly yours,
GANTOS, INC.
By: /s/ Kenneth Green
--------------------------------
Kenneth Green, Vice President
The terms of this agreement
are accepted and agreed to
on March 19, 1996:
/s/ L. Douglas Gantos
- - ---------------------
L. Douglas Gantos
Exhibit 10.28
March 15, 1996
Mr. Anthony Barnett
730 Weybridge Place
Alpharetta, GA 30202
Dear Tony:
We are very pleased to offer you the position of Vice President of Store
Operations for Gantos, Inc. (the "Company"). We are very excited to invite you
to join our senior management team. The terms of our offer are subject to
approval of the Company's Board of Directors, supersede any of our prior
discussions and agreements, and are as follows:
1. Your initial annual salary will be $155,000.
2. Your date of employment will begin on or before May 6, 1996.
3. You will be eligible to participate in the Gantos, Inc. Executive Bonus
Plan, beginning with the 1996 plan. A copy of the 1995 plan is enclosed. As
reflected in the enclosed 1995 plan, your 1996 bonus will be based on the
Company's profitability and prorated based on the 1996 Gantos base salary
actually paid to you.
4. In 1996, you will receive an equivalent amount of stock options as is
granted to other Vice Presidents of the Company, thereafter you will be
eligible for annual stock option grants in amounts commensurate with your
position with the Company at the discretion of the Board of Directors or its
Compensation Committee.
5. You will receive six (6) months separation pay as your exclusive severance
benefits in the event that your employment is terminated without cause (and
other than pursuant to your death or disability) within the first twenty-four
(24) months of your employment. As a condition of your receipt of severance
pursuant to this agreement, after any termination you must (a) use your best
efforts to seek and obtain new employment (b) advise the Company, on a timely
and regular basis, of the status of your efforts, of the terms of any
employment (including self-employment), and of any remuneration you receive
from such employment. If at any time the Company, in good faith, determines
that you are not so seeking such employment, your right to receive severance
benefits will be immediately terminated. The severance benefits to which you
would otherwise be entitled will be reduced by the remuneration that is paid
or payable to you (whether as salary, bonus, commissions, consulting fees,
compensation and dividends from any entity owned by you or a sole
proprietorship established by you or otherwise) from rendering any services to
any person, corporation or entity during the period that you are eligible to
receive severance benefits under this agreement. Payment on account of death
or disability or for termination without cause after the first twenty-four
(24) months of employment will be in accordance with the Company policies
concerning these areas. You will be entitled to no severance benefits if you
terminate your employment with the Company.
6. To assist you in relocating to the Grand Rapids area, the Company will pay
or reimburse you for the reasonable expenses of:
A. A third party relocation service engaged by the Company to
purchase your residence in Atlanta. This service will appraise
your residence and give you a written offer to purchase it for a
specified price, net of closing costs. You would have 90 days to
accept the relocation services offer; if you do not timely accept
the offer, you will be responsible for the sale of your residence.
<PAGE>
Mr. Anthony Barnett
March 15, 1996
Page two
B. Loan origination fees and discount points of up to two percent of
the principal amount of your mortgage and other reasonable and
customary closing costs in conjunction with your home purchased in
Grand Rapids.
C. Movement of all household goods and vehicles from Atlanta to Grand
Rapids.
D. Interim living expenses for you for temporary living quarters (at
a mutually acceptable place) in the Grand Rapids area and a rental
car for a period of ninety days after your employment with the
Company begins while you secure housing in the Grand Rapids area.
E. Two house hunting trips to Grand Rapids and back for your wife and
family.
F. To the extent not deductible by you, pay you an additional amount
as compensation to cover taxes owing on the amounts paid to you
for all relocation related expenses for tax purposes (i.e. gross
up).
7. You will receive such benefits as the Company provides its other Vice
Presidents. Currently the Company provides (i) a non-contributory group life
insurance policy in the amount of one times your annual base compensation,
(ii) an individual disability policy which provides benefits equal to 60% of
your salary, (iii) a 30% discount on all merchandise purchases at our regular
price stores, (iv) medical prescription coverage under our plan on the first
day of the month following two months of employment, (v) on the first day of
the month after six months of employment, dental coverage under our plan, and
(vi) four weeks vacation a year (beginning in fiscal 1996 for you). During the
health benefits waiting periods, the Company will reimburse you for the cost
of continuing these coverages under COBRA with your former employer. Enclosed
is a complete breakdown of our benefit plans for your information and review.
You will also receive a car allowance of $450 per month.
8. Your employment will be at will and may be terminated by either of us, with
or without cause, reason or notice. Upon such a termination, as your exclusive
severance benefits, you will be entitled to your salary through the
termination date and amounts, if any, payable to you or your estate as
described in paragraph 5 above.
9. You will comply with and be bound by all Company policies, procedures and
guidelines, as they may be amended and supplemented from time to time during
your employment with the Company.
Please date, sign and return the enclosed copy of this letter to indicate your
acceptance of employment on these terms.
If I can be of assistance in answering any questions that you may have, please
don't hesitate to contact my office.
Very truly yours,
GANTOS, INC.
/s/ Kenneth Green
-------------------------------------
Kenneth Green
Vice President of Human Resources and
General Counsel
Accepted and agreed on March 18, 1996
/s/ Anthony Barnett
- - -----------------------------------
Signed, Anthony Barnett
KG/sra
Enclosures
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-15092, 33-33188-3, 33-55496 and 33-92576) of
Gantos, Inc. of our report dated February 29, 1996, appearing on page 29 of
this Form 10-K.
PRICE WATERHOUSE LLP
Detroit, Michigan
April 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM STATEMENTS OF INCOME (LOSS) AND BALANCE
SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> FEB-03-1996
<CASH> $ 453
<SECURITIES> 0
<RECEIVABLES> 23,191
<ALLOWANCES> 572
<INVENTORY> 23,955
<CURRENT-ASSETS> 50,878
<PP&E> 61,036
<DEPRECIATION> 43,504
<TOTAL-ASSETS> 68,410
<CURRENT-LIABILITIES> 27,252
<BONDS> 12,395
<COMMON> 76
0
0
<OTHER-SE> 28,687
<TOTAL-LIABILITY-AND-EQUITY> 68,410
<SALES> 192,790
<TOTAL-REVENUES> 192,790
<CGS> 151,912
<TOTAL-COSTS> 151,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,278
<INCOME-PRETAX> 3,719
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,719
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
