d<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934.
For the quarterly period ended August 2, 1997 or
----------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934.
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.)
1266 E. Main Street, Fifth Floor, Stamford, Connecticut 06902
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-0294
-------------------------
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 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
----------- ----------
Number of shares of common stock outstanding at September 8, 1997: 7,547,293
----------
<PAGE>
GANTOS, INC.
Page
Number
------
PART I. FINANCIAL INFORMATION
Statements of Income (Loss) 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-11
PART II. OTHER INFORMATION
Submission of Matters to a Vote
of Security Holders 12
Exhibits and Reports on Form 8-K 12
Signatures 13
Page 2 of 13 pages.
<PAGE>
GANTOS, INC.
STATEMENTS OF INCOME (LOSS)
(Amounts in thousands, except per share and store data)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------- --------------------
Aug. 2, Aug. 3, Aug. 2, Aug. 3,
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $35,816 $41,809 $81,380 $92,174
Cost of sales (including buying,
distribution and occupancy costs) (31,651) (35,058) (66,867) (73,741)
---------- --------- --------- ---------
Gross income 4,165 6,751 14,513 18,433
Selling, general and administrative
expense (9,196) (8,881) (18,785) (18,554)
Credit for facilities closings and other 703 - 703 -
Finance charge and other revenue 1,218 1,119 2,429 2,231
---------- --------- --------- ---------
Operating income (3,110) (1,011) (1,140) 2,110
Interest expense (437) (581) (952) (1,153)
---------- --------- --------- ---------
Income (loss) before income taxes (3,547) (1,592) (2,092) 957
Income taxes - - - -
---------- --------- --------- ---------
Net income (loss) $(3,547) $(1,592) $(2,092) $ 957
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss) per share $(0.47) $(0.21) $(0.28) $ 0.13
------ ------ ------ ------
------ ------ ------ ------
Outstanding shares 7,547,293 7,577,952 7,547,293 7,577,952
---------- --------- --------- ---------
---------- --------- --------- ---------
Estimated weighted average
shares outstanding 7,540,655 7,578,397 7,543,517 7,578,009
---------- --------- --------- ---------
---------- --------- --------- ---------
Stores open at end of period 115 114 115 114
--- --- --- ---
--- --- --- ---
</TABLE>
See accompanying notes to financial statements.
Page 3 of 13 pages.
<PAGE>
GANTOS, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS Aug. 2, February 1, Aug. 3,
- ------ 1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,059 $ 4,346 $ 4,088
Accounts receivable, less
allowance for doubtful accounts
of $614, $636 and $556 at
August 2, 1997, February 1, 1997 and
August 3, 1996, respectively 18,650 21,973 21,675
Merchandise inventories 22,476 22,373 22,474
Prepaid expenses and other 3,101 3,171 2,778
-------- -------- --------
Total current assets 45,286 51,863 51,015
-------- -------- --------
Property and equipment, at cost:
Leasehold improvements 28,961 30,168 28,804
Furniture and fixtures 29,319 32,159 31,409
Other 1,791 52 1,351
-------- -------- --------
Total property and equipment 60,071 62,379 61,564
Less - Accumulated depreciation
and amortization (46,200) (48,384) (46,001)
-------- -------- --------
Net property and equipment 13,871 13,995 15,563
-------- -------- --------
Total assets $59,157 $65,858 $ 66,578
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 9,737 $10,749 $ 11,930
Accrued expenses and other 8,758 10,307 10,476
Current provision for facilities closings - 1,567 2,409
-------- -------- --------
Total current liabilities 18,495 22,623 24,815
-------- -------- --------
Long-term debt 11,364 11,940 11,940
-------- -------- --------
Shareholders' equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized; none issued
Common stock, $.01 par value, 20,000,000
shares authorized; approximately 7,547,000
issued and outstanding at August 2, 1997,
7,563,000 issued and outstanding at
February 1, 1997 and 7,578,000 issued and
outstanding at August 3, 1996 76 76 76
Additional paid-in capital 40,892 40,798 40,705
Accumulated deficit (11,670) (9,579) (10,958)
-------- -------- --------
Total shareholders' equity 29,298 31,295 29,823
-------- -------- --------
Commitments - - -
-------- -------- --------
Total liabilities and shareholders' equity $59,157 $65,858 $ 66,578
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
Page 4 of 13 pages
<PAGE>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
26 Weeks Ended
----------------------
Aug. 2, Aug. 3,
1997 1996
--------- --------
Cash flows from operating activities:
Net income (loss) $(2,092) $ 957
--------- --------
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Credit for facilities closings and other (703) -
Cash used for store closings (785) (7)
Depreciation and amortization 2,558 2,524
Restricted stock compensation expense 55 95
Changes in assets and liabilities:
Accounts receivable 3,322 945
Merchandise inventories (103) 1,480
Prepaid expenses and other 71 73
Accounts payable (1,011) (189)
Accrued expenses and other (1,627) (2,241)
--------- --------
Total adjustments 1,777 2,680
Net cash provided (used) by operating
activities (315) 3,637
--------- --------
Cash flows from investing activities:
Capital expenditures (2,356) (724)
--------- --------
Net cash used by investing activities (2,356) (724)
--------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (2,570) (455)
Net borrowings under revolving
credit notes payable 1,993 -
Issuance of Common Stock 40 -
Other (79) 177
--------- --------
Net cash used by financing activities (616) (278)
--------- --------
Net increase (decrease) in cash
and cash equivalents (3,287) 2,635
Cash and cash equivalents at beginning
of period 4,346 1,453
--------- --------
Cash and cash equivalents at end of period $ 1,059 $ 4,088
--------- --------
--------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 864 $ 903
Income taxes $ 79 $ 28
See accompanying notes to financial statements.
Page 5 of 13 pages.
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. Nevertheless, it is recommended that these financial
statements be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended February 1, 1997.
The accompanying interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to
a fair statement of the results of the interim periods presented
and necessary to present fairly the financial position as of
August 2, 1997, February 1, 1997 and August 3, 1996, the results
of operations for the thirteen and twenty-six weeks ended August
2, 1997 and August 3, 1996, and cash flows for the thirteen and
twenty-six weeks ended August 2, 1997 and August 3, 1996. All
adjustments are of a normal and recurring nature, except for the
credit for facilities closings described in Note 6.
The results of operations for the thirteen and twenty-six week
periods ended August 2, 1997 and August 3, 1996 are not
necessarily indicative of the results to be expected for the full
year due to the seasonal nature of the business.
2. Inventories are stated at the lower of cost or market. A
physical inventory to determine actual cost of merchandise sold
is taken at least two times per year.
3. Net income per share is computed using the weighted average
number of common shares outstanding during each period.
4. The Company opened one new store on April 11, 1997. The Company
plans to open one additional new store on October 24, 1997.
5. The Fleet Facility has certain financial covenants. In part
because of the net loss reported by the Company for the
twenty-six weeks ended August 2, 1997, the Company would not have
been in compliance with the covenant concerning earnings before
interest, taxes, depreciation and amortization for four quarters
ended August 2, 1997 had Fleet Bank N.A. and LaSalle National
Bank not granted a waiver of such covenant for such period.
Page 6 of 13 pages.
<PAGE>
6. During the twenty-six weeks ended August 2, 1997, the Company
completed the relocation of the corporate office and distribution
center. Costs incurred in relation to this relocation were
charged against the provision for facilities closings during this
period. The total costs incurred were less than the amount
accrued and as such a credit for facilities closings and other
was recorded during the period for $0.7 million.
Page 7 of 13 pages.
<PAGE>
GANTOS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997, COMPARED TO
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 3, 1996.
The following table indicates the percentage relationships to net
sales of various revenue and expense items for the thirteen and
twenty-six week periods ended August 2, 1997 and August 3, 1996.
<TABLE>
<CAPTION>
As a percent of net As a percent of net
sales for the thirteen sales for the twenty-
weeks ended six weeks ended
---------------------- ----------------------
Aug. 2, Aug. 3, Aug. 2, Aug. 3,
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (including buying,
distribution and occupancy costs) (88.4) (83.9) (82.2) (80.0)
------- ------ ------ ------
Gross income 11.6 16.1 17.8 20.0
Selling, general and
administrative expense (25.7) (21.2) (23.1) (20.1)
Credit for facilities closings and other 2.0 - 0.9 -
Finance charge and other revenue 3.4 2.7 3.0 2.4
------- ------ ------ ------
Operating income (loss) (8.7) (2.4) (1.4) 2.3
Interest expense (1.2) (1.4) (1.2) (1.3)
------- ------ ------ ------
Income (loss) before income taxes (9.9) (3.8) (2.6) 1.0
Income taxes - - - -
------- ------ ------ ------
Net income (loss) (9.9)% (3.8)% (2.6)% 1.0 %
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
Net sales for the thirteen weeks ended August 2, 1997 were approximately
$35.8 million, a decrease of approximately $6.0 million, compared to net
sales of approximately $41.8 million in the same period of the prior
fiscal year. Net sales for stores in operation throughout both periods
decreased 15%, or $6.4 million, for the second quarter of 1997 compared
to the same period in 1996. The 15% decrease in comparable store sales
is comprised of a 22% decrease in unit sales, a 2% decrease due to a
change in merchandise mix and a 9% increase in average sales dollars per
unit.
Net sales for the twenty-six weeks ended August 2, 1997 were
approximately $81.4 million, a decrease of approximately $10.8 million,
compared to net sales of approximately $92.2 million in the same period
of the prior fiscal year. Net sales for stores in operation throughout
both periods decreased 13%, or $11.6 million, for the first two quarters
of 1997 compared to the same period in 1996. The 13% decrease in
comparable store sales is comprised of a 15% decrease in unit sales a 1%
decrease due to a change in merchandise mix, partially offset by a 3%
increase in average sales dollars per unit. The Company opened one new
store in April 1997 and expects to open another store in October 1997.
The Company experienced negative
Page 8 of 13 pages.
<PAGE>
comparable store sales during the second quarter and management expects
this trend to continue into the third quarter.
Cost of sales decreased $3.4 million in the thirteen weeks ended August
2, 1997 compared to the prior fiscal year. Cost of sales, as a percent
of net sales, increased to 88.4% in the thirteen weeks ended August 2,
1997, compared to 83.9% in the same period in the prior fiscal year.
Cost of sales decreased $6.9 million in the twenty-six weeks ended
August 2, 1997 compared to the prior fiscal year. Cost of sales, as a
percent of net sales, increased to 82.2% in the twenty-six weeks ended
August 2, 1997, compared to 80.0% in the same period in the prior fiscal
year.
The increase in cost of sales, as a percent of net sales, for the
thirteen and twenty-six weeks ended August 2, 1997 is primarily the
result of decreased sales volume with consistent buying, distribution
and occupancy costs, higher shrinkage expense and lower markups and
vendor allowances, partially offset by lower net markdowns for the
period compared to a year ago.
Selling, general and administrative (SG&A) expense for the thirteen and
twenty-six weeks ended August 2, 1997 increased approximately $315,000
and $231,000, respectively, compared to the same periods in the prior
fiscal year. The increase in SG&A for the thirteen weeks ended August
2, 1997 is primarily due to corporate salaries as a result of officers
hired since August 3, 1996 and the one-time moving costs associated with
the relocation of the Company's merchandising operations to Stamford,
Connecticut, partially offset by continued cost control measures taken
at the store and corporate levels during the second quarter. As a
percent of net sales, SG&A expense increased from 21.2% to 25.7% for the
thirteen weeks ended August 2, 1997 primarily as a result of lower
sales.
The increase in SG&A for the twenty-six weeks ended August 2, 1997 is
primarily due to corporate salaries as a result of officers hired since
August 3, 1996 and an increase in moving costs incurred during the
second quarter, partially offset by continued cost control measures taken
at the store and corporate levels during the first and second quarters.
As a percent of net sales, SG&A expense increased from 20.1% to 23.1%
for the twenty-six weeks ended August 2, 1997 primarily as a result of
lower sales.
During the thirteen weeks ended August 2, 1997, the Company recorded a
Credit for Facilities Closings and Other of $0.7 million. During the
second quarter of 1997, the Company completed the relocation of its
corporate offices and distribution center facilities for less than the
amounts accrued.
Finance charge and other revenue increased $99,000 to 3.4% of net sales
and $198,000 to 3.0% of net sales for the thirteen and twenty-six weeks
ended August 2, 1997, respectively, compared to the same periods in the
prior fiscal year. The increases in both the thirteen and twenty-six
weeks ended August 2, 1997 were primarily due to the increased late fee
policy implemented on the Gantos charge card in March 1997, partially
offset by a decrease in finance charge income during the first half of
1997 due to a lower average outstanding balance of Gantos credit card
receivables compared to the same period in the prior fiscal year. The
decrease in the receivable balances is primarily the result of lower
sales and lower use of the Gantos charge card. Finance charge income is
expected to remain lower than last year due to sales volume.
Interest expense for the thirteen and twenty-six weeks ended August 2, 1997
decreased approximately $144,000 and $201,000, respectively, compared to the
same periods in the prior fiscal year. The decrease for both periods is
primarily due to the completion of loan fee amortization in March 1997 and to
payments made on the long-term debt during 1996 and the first quarter of 1997.
These factors resulted in a net loss of approximately $3.5 million, or
$0.47 per share, for the thirteen weeks ended August 2, 1997, compared
to a net loss of approximately $1.6 million, or $0.21 per share, in the
same period of the prior year. For the twenty-six weeks ended August 2,
1997, the Company reported a net loss of approximately $2.1 million, or
$0.28 per share, compared to net income of approximately $957,000, or
$0.13 per share, in the same period of the prior year.
Page 9 of 13 pages.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $0.3 million in the first
half of 1997 compared to net cash provided by operating activities of
$3.6 million in the same period a year ago. The decrease was primarily
due to a net loss this year (net of non-cash items) compared to net
income last year, an increase in the amount of cash used for facilities
closings this year, an increase in merchandise inventories this year
compared to a decrease last year, and a larger decrease in accounts
payable. These amounts are partially offset by a larger decrease in
accounts receivable this year than last year and a smaller decrease in
accrued expense and other. The increase in merchandise inventory this
year is due to the beginning of the year inventory levels in 1997 being
lower than the beginning of the year inventory levels in 1996. The
larger decrease in accounts payable and the smaller decrease in accrued
expense and other is the result of the timing of payments and the effects of
lower sales volumes. The larger decrease in accounts receivable this year
is due to lower sales on the Gantos charge card. The Company expects the
accounts receivable balance to remain lower than last year levels for the
remainder of 1997.
Net cash used by financing activities in the first half of 1997 was $0.6
million compared to net cash used of approximately $0.3 million in the
same period a year ago. Cash used in 1997 represents payments made on
the long-term notes of $2.6 million offset by increased borrowing on the
revolving credit agreement of $2.0 million. In the same period of 1996,
the Company made $0.5 million in payments on the long-term notes and did
not borrow any amounts under the revolving credit agreement.
As of September 8, 1997, the Company had $6.0 million in borrowings and
$2.9 million in letters of credit outstanding under the facility. As of
September 8, 1997, approximately $19.8 million was available for
borrowing under this facility. During the first two quarters of 1997,
the weighted average interest rate under this facility was 9.75%. The
Fleet Facility has certain financial covenants. In part because of the
net loss reported by the Company for the twenty-six weeks ended August
2, 1997, the Company would not have been in compliance with the covenant
concerning earnings before interest, taxes, depreciation and
amortization for the four quarters ended August 2, 1997 had Fleet Bank
N.A. and LaSalle National Bank not granted a waiver of such covenant for
such period.
The Company expects its cash on hand, cash flow from operations and
borrowings under the Fleet facility to be sufficient to meet its capital
expenditure, working capital and other liquidity needs during the
remainder of 1997. Capital expenditures for 1997 are estimated to be $5.0
million. These amounts are expected to be used primarily to remodel and
refixture up to three existing stores, open one additional new store and
make various computer enhancements, in addition
Page 10 of 13 pages.
<PAGE>
to the new store opened in April 1997 and the build out of the Grand
Rapids support and distribution facilities in the second quarter.
Each of the above statements regarding future revenues, expenses or business
plans (including statements regarding the sufficiency of the Company's cash
resources to meet future liquidity needs) may be a "forward looking
statement" within the meaning of the Securities Exchange Act of 1934. Such
statements are subject to important factors and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statement, including the continued support of the Company's trade creditors
and factors, general trends in retail clothing apparel purchasing, especially
during the Christmas season, and the factors set forth in this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 11 of 13 pages.
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Gantos, Inc. was held on June
19, 1997, for the purpose of electing three directors. At the annual
meeting, the following persons were elected as directors of Gantos,
Inc. to serve until the 2000 Annual Meeting of Shareholders and until
their respective successors were duly elected and qualified or until
their earlier death, resignation or removal and the following votes
were cast for or were withheld from voting with respect to the
election of each such person:
Votes
-----------------------
For Withheld
-----------------------
Arlene H. Stern 6,284,042 57,828
Fred K. Schomer 6,281,916 59,828
Erwin A. Marks 6,293,416 48,454
There were no abstentions or broker non-votes in connection with the
election of the directors at the annual meeting. In addition, the
terms of office of L. Douglas Gantos, Hannah H. Strasser, Mary
Elizabeth Burton, Elizabeth M. Eveillard and S. Amanda Putnam
continued after the meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Letter of Employment dated August 19, 1997 between
Gantos, Inc. and Mr. David C. Nelson.
10.2 Waiver Agreement dated as of July 31, 1997 among
Gantos, Inc., Fleet Bank N.A. and LaSalle National
Bank.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during
the quarter for which this report is filed.
Page 12 of 13 pages.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: September 16, 1997
GANTOS, INC.
----------------------------
(Registrant)
By: /S/ DAVID C. NELSON
-----------------------------------
DAVID C. NELSON
ITS SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (DULY
AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
Page 13 of 13 pages.
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
10.1 Letter of Employment dated August 19, 1997 between Gantos, Inc. and
Mr. David C. Nelson.
10.2 Waiver Agreement dated as of July 31, 1997 among Gantos, Inc., Fleet
Bank N.A. and LaSalle National Bank.
27.1 Financial Data Schedule
<PAGE>
August 19, 1997
Mr. David C. Nelson
73 Coachlamp Lane
Darien, Connecticut 06820
Dear David:
We are very pleased to offer you the position of Senior Vice President and
Chief Financial Officer for Gantos, Inc. (the "Company"). We are very excited
to invite you to join our senior management team. The terms of our offer
supersede any of our prior discussions and agreements, and are as follows:
1. Your initial annual salary will be $225,000.
2. Your date of employment will begin on August 19, 1997 ("Start Date").
3. You will receive a sign on bonus of $4,000.
4. You will be eligible to participate in the Gantos, Inc. Executive Bonus
Plan, beginning with the 1997 plan. A copy of the 1997 plan is enclosed. As
reflected in the enclosed 1997 plan, your 1997 bonus will be based on the
Company's 1997 profitability and prorated based on the 1997 Gantos base
salary actually paid to you.
5. On the Start Date, you will be granted an option to purchase 25,000 shares
of Gantos, Inc. common shares at an exercise price equal to the fair market
value of Gantos, Inc. common shares on the Start Date. The option will vest
in one-fifth (1/5) cumulative annual installments, beginning on the first
anniversary of the Start Date. Thereafter, you will be eligible for annual
stock option grants in amounts commensurate with your position with the
Company as may be granted at the discretion of the Board of Directors or its
Compensation Committee.
6. You will receive twelve (12) 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.
<PAGE>
7. You will receive such benefits as the Company provides its other Senior
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 up
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 two months of employment, dental coverage under
our plan, (vi) four weeks vacation a year, (vii) after 870 hours of
employment are met, eligibility to participate in the Company's 401(k) Plan,
and (viii) after six (6) months of continuous employment, eligibility to
participate in the Employee Stock Purchase Plan. 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.
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 6 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/ Arlene H. Stern
Arlene H. Stern
President
Accepted and agreed on August 19, 1997.
/s/ David Nelson
- -----------------------------------
David Nelson
<PAGE>
WAIVER AGREEMENT
WAIVER AGREEMENT dated as of July 31, 1997 (this "WAIVER"), among
GANTOS, INC., a Michigan corporation (the "BORROWER"), FLEET BANK, N.A.
(formerly known as Natwest Bank N.A.) and LASALLE NATIONAL BANK as lenders
(each individually, a "LENDER" and collectively, the "Lenders"), and FLEET
BANK, N.A. (formerly known as Natwest Bank N.A.) as agent for the Lenders (in
such capacity, the "AGENT"). Reference is made to the Revolving Credit
Agreement dated as of March 10, 1995 (as heretofore and hereafter amended,
supplemented or modified from time to time in accordance with its terms, the
"CREDIT AGREEMENT") among the Borrower, the Lenders, and the Agent. Unless
otherwise specifically defined herein, all capitalized terms used herein
shall have the respective meanings ascribed to such terms in the Credit
Agreement.
WHEREAS, Section 7.10 of the Credit Agreement requires that EBITDA of
the Borrower and its subsidiaries for the four fiscal quarter period ended
July 31, 1997 shall have been no less than $6,800,000.
WHEREAS, the Borrower has informed the Agent and the Lenders that EBITDA
of the Borrower and its subsidiaries for such period exceeded $6,000,000 but
was less than $6,800,000; and
WHEREAS, the Borrower has requested that the Agent and the Lenders waive
the requirement under said Section 7.10 that EBITDA of the Borrower and its
subsidiaries for such period shall have been no less than $6,800,000.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and subject to the terms and conditions and
fulfillment of the conditions set forth below, the parties hereto agree as
follows:
1. CONDITIONAL WAIVER OF SECTION 7.10 OF THE CREDIT AGREEMENT. Subject
to the conditions as to effectiveness set forth in Paragraph 3 of this
Waiver, so long as EBITDA of the Borrower and its subsidiaries for the four
fiscal quarter period ended July 31, 1997 exceeded $6,000,000 the Agent and
the Lenders waive the requirement under Section 7.10 of the Credit Agreement
that EBITDA of the Borrower and its subsidiaries for such period shall have
been no less than $6,800,000.
2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants as follows (which representations and warranties shall survive the
execution and delivery of this Waiver) as of the date hereof that:
(a) All representations and warranties contained in the Credit
Agreement and each of the other Loan Documents are true and correct in all
material respects as of
<PAGE>
the date hereof with the same force and effect as if made on such date
(except to the extent that any such representation or warranty relates
expressly to an earlier date).
(b) No registration or filing with, consent or approval of, or
other action by, any Federal, State or other governmental agency, authority
or regulatory body is or will be required on behalf of the Borrower in
connection with the execution, delivery, performance, validity or enforcement
of this Waiver other than any such registration or filing which has been made
or any such consent, approval or other action which has been obtained and
remains in full force and effect and other than the filing of a Form 10-Q or
a Form 10-K with the Securities and Exchange Commission.
(c) The execution, delivery and performance of this Waiver by the
Borrower will not violate any provision of the certificate or articles of
incorporation or bylaws of the Borrower or any of its subsidiaries or any
law, statute, rule or regulation, or any order or decree of any court or
governmental instrumentality applicable to the Borrower or any of its
subsidiaries, or violate, result in the breach of or constitute a default
under any indenture, agreement or other instrument to which the Borrower or
any of its subsidiaries or any of their respective properties or assets are
or may be bound.
(d) After giving effect to this Waiver, the Borrower is in
compliance with all of the various covenants and agreements applicable to it
set forth in the Credit Agreement and each of the other Loan Documents.
(e) After giving effect to this Waiver, no event has occurred and
is continuing which constitutes or would constitute, with the giving of
notice or the lapse of time or both, an Event of Default under the Credit
Agreement or any of the other Loan Documents, or an Event of Default (as
defined in the Indenture) under the Indenture.
(f) The Borrower has no defense to or setoff, counterclaim or
claim against payment of the Obligations or enforcement of the Loan Documents
based upon a fact or circumstance existing or occurring on or prior to the
date hereof.
3. CONDITIONS PRECEDENT. Notwithstanding any term or provision
of this Waiver to the contrary, the waiver set forth in Paragraph 1 hereof
shall become effective until the Agent shall have determined that each of the
following conditions precedent shall have been satisfied:
(a) All representations and warranties made by the Borrower
contained in Paragraph 2 hereof shall be true and correct with the same
effect as though such representations and warranties had been made on the
date of effectiveness of this Waiver after giving effect to such Waiver
(unless any such representation or warranty speaks expressly to an earlier
date).
2
<PAGE>
(b) Counterparts of this Waiver shall have been duly executed and
delivered on behalf of the Borrower, the Lenders and the Agent.
4. CONTINUED EFFECTIVENESS. Each of the parties hereto agrees that,
except as expressly supplemented by this Waiver, all of the covenants and
agreements and other provisions contained in the Credit Agreement and the
other Loan Documents are hereby ratified and confirmed in all respects and
shall remain in full force and effect from and after the date of this Waiver.
5. COUNTERPARTS. This Waiver may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute a single instrument. Delivery of an executed
counterpart of a signature page to this Waiver by telecopier shall be
effective as delivery of a manually executed counterpart of this Waiver.
6. GOVERNING LAW. THIS WAIVER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF).
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
GANTOS, INC., as Borrower
By: /s/ Arlene H. Stern
---------------------------------
Name: Arlene H. Stern
Title: President & CEO
FLEET BANK, N.A. (formerly known as
Natwest Bank N.A.), as Agent and as
a Lender
By: /s/ Thomas B. Joyce
---------------------------------
Name: Thomas B. Joyce
Title: V.P. & Portfolio Manager
3
<PAGE>
LASALLE NATIONAL BANK, as a Lender
By: /s/ Mary S. Joseph
---------------------------------
Name:
Title:
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GANTOS, INC. AS OF, AND FOR THE SIX-MONTH PERIOD
ENDED, AUDUST 2, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS, AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 1,059
<SECURITIES> 0
<RECEIVABLES> 19,264
<ALLOWANCES> (614)
<INVENTORY> 22,476
<CURRENT-ASSETS> 45,286
<PP&E> 60,071
<DEPRECIATION> (46,200)
<TOTAL-ASSETS> 59,157
<CURRENT-LIABILITIES> 18,495
<BONDS> 11,364
0
0
<COMMON> 76
<OTHER-SE> 29,222
<TOTAL-LIABILITY-AND-EQUITY> 59,157
<SALES> 81,380
<TOTAL-REVENUES> 81,380
<CGS> 66,867
<TOTAL-COSTS> 66,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 952
<INCOME-PRETAX> (2,092)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,092)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
