<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 November 1, 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
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Number of shares of common stock outstanding at December 9, 1997: 7,555,636
-----------
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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 8-12
Quantitative and Qualitative Disclosures
about Market Risk 12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K 13
Signatures 14
Page 2 of 14 pages
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GANTOS, INC.
STATEMENTS OF INCOME (LOSS)
(Amounts in thousands, except per share and store data)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------ -----------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 35,478 $ 41,716 $116,858 $ 133,890
Cost of sales (including buying,
distribution and occupancy costs) (30,027) (33,502) (96,895) (107,243)
--------- --------- --------- ---------
Gross income 5,451 8,214 19,963 26,647
Selling, general and administrative
expense (9,432) (9,003) (28,216) (27,557)
Credit for facilities closings and other - - 703 -
Finance charge and other revenue 1,164 1,093 3,593 3,324
--------- --------- --------- ---------
Operating income (loss) (2,817) 304 (3,957) 2,414
Interest expense (571) (579) (1,523) (1,732)
--------- --------- --------- ---------
Income (loss) before income taxes (3,388) (275) (5,480) 682
Income taxes - - - -
--------- --------- --------- ---------
Net income (loss) $ (3,388) $ (275) $ (5,480) $ 682
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share $ (.45) $ (0.04) $ (.73) $ 0.09
--------- --------- --------- ---------
--------- --------- --------- ---------
Outstanding shares 7,555,637 7,571,353 7,555,637 7,571,353
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average
shares outstanding 7,550,074 7,572,418 7,545,703 7,576,146
--------- --------- --------- ---------
--------- --------- --------- ---------
Stores open at end of period 116 114 116 114
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
Page 3 of 14 pages
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GANTOS, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS Nov. 1, February 1, Nov. 2,
1997 1997 1996
-------- ----------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,127 $ 4,346 $ 982
Accounts receivable, less
allowance for doubtful accounts
of $625, $636, and $585, at
November 1, 1997, February 1, 1997 and
November 2, 1996, respectively 18,679 21,973 21,361
Merchandise inventories 38,264 22,373 32,454
Prepaid expenses and other 3,092 3,171 2,727
-------- -------- --------
Total current assets 61,162 51,863 57,524
-------- -------- --------
Property and equipment, at cost:
Leasehold improvements 29,026 30,168 29,404
Furniture and fixtures 29,422 32,159 33,320
Other 2,676 52 34
-------- -------- --------
Total property and equipment 61,124 62,379 62,758
Less - Accumulated depreciation
and amortization (47,211) (48,384) (47,103)
-------- -------- --------
Net property and equipment 13,913 13,995 15,655
-------- -------- --------
Total assets $ 75,075 $ 65,858 $ 73,179
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,051 $ 10,749 $ 17,820
Accrued expenses and other 8,327 10,307 10,012
Current provision for facilities closings - 1,567 2,407
-------- -------- --------
Total current liabilities 24,378 22,623 30,239
-------- -------- --------
Long-term debt 24,769 11,940 13,326
-------- -------- --------
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 7,556,000
issued and outstanding at November 1, 1997,
7,563,000 issued and outstanding at
February 1, 1997, and 7,571,000 issued
and outstanding at November 2, 1996 76 76 76
Additional paid-in capital 40,910 40,798 40,772
Accumulated deficit (15,058) (9,579) (11,234)
-------- -------- --------
Total shareholders' equity 25,928 31,295 29,614
-------- -------- --------
Commitments - - -
-------- -------- --------
Total liabilities and shareholders' equity $ 75,075 $ 65,858 $ 73,179
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
Page 4 of 14 pages
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GANTOS, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
-------------------------
Nov. 1, Nov. 2,
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,480) $ 682
--------- --------
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 (863) (9)
Depreciation and amortization 3,656 3,727
Restricted stock compensation expense 73 138
Changes in assets and liabilities:
Accounts receivable 3,293 1,258
Merchandise inventories (15,891) (8,499)
Prepaid expenses and other 79 124
Accounts payable 5,303 5,701
Accrued expenses and other (2,040) (2,793)
--------- --------
Total adjustments (7,093) (353)
--------- --------
Net cash provided (used) by operating activities (12,573) 329
--------- --------
Cash flows from investing activities:
Capital expenditures (3,430) (2,072)
--------- --------
Net cash used by investing activities (3,430) (2,072)
--------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (3,344) (455)
Issuance of Common Stock 59 33
Net borrowings under revolving credit
notes payable 16,172 1,385
Other (103) 309
--------- --------
Net cash provided by financing activities 12,784 1,272
--------- --------
Net decrease in cash and cash
equivalents (3,219) (471)
Cash and cash equivalents at beginning of period 4,346 1,453
--------- --------
Cash and cash equivalents at end of period $ 1,127 $ 982
--------- --------
--------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 1,367 $ 1,193
Income taxes $ 92 $ 34
</TABLE>
See accompanying notes to financial statements.
Page 5 of 14 pages
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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 November 1, 1997, February 1, 1997
and November 2, 1996 and the results of operations for the thirteen and
thirty-nine weeks ended November 1, 1997 and November 2, 1996, and cash
flows for the thirty-nine weeks ended November 1, 1997 and November 2,
1996. All adjustments are of a normal and recurring nature, except for
the credit for facilities closings described in Note 7.
The results of operations for the thirteen and thirty-nine week periods
ended November 1, 1997 and November 2, 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, and one new store on
October 31, 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 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. On October 8, 1997, the Company entered into Amendment No.3
to the Fleet Facility (the Third Amendment). The Third Amendment
provides for an adjustment to the interest rates, beginning in fiscal
1998, based upon financial performance, an increase in the loan advance
rate on inventory during the months of October through January, and
adjustments to the financial covenants so that compliance with the
financial covenants is based on a liquidity test as long as minimum
levels of liquidity are maintained. It also provides that if the Company
prepays its 12.75% Notes outstanding under its Indenture, it must pay
Fleet Bank a fee of $750,000 and the loan advance rate on inventory is
reduced to pre-amendment levels. The total commitment and term remain
the same.
Page 6 of 14 pages
<PAGE>
6. The Indenture, under which the Company's 12.75% Notes were issued,
contains certain financial covenants. In part, because of the net loss
reported by the Company for the thirty-nine weeks ended November 1, 1997,
the Company was not in compliance with the earnings before interest,
taxes, depreciation, and amortization covenant for both quarters ended
August 2, 1997, and November 1, 1997, and it was not in compliance
with the interest coverage ratio covenant for the quarter ended November
1, 1997. As of December 9, 1997, $8.6 million in principal amount of Notes
were outstanding. On December 15, 1997, the Company entered into
Supplemental Indenture No. 1 and an Agreement with the trustee and principal
holder of the Notes, respectively, to waive existing EBITDA and interest
coverage ratio defaults and to revise some of the financial covenants under
the Indenture, in exchange for the payment of approximately $400,000 plus
expenses to the Trustee for the benefit of the Note holders. The indenture,
as amended, continues to require a minimum net worth of $20 million at the
end of each quarter. As of November 1, 1997, the Company's net worth was
approximately $25.9 million. Management believes the Company will be able
to meet the terms of the amended Indenture, including the net worth
covenant, for the next twelve months assuming the Company can generate the
profit and cash flow associated with sales volume that is at least at the
same level as that of the current year.
7. During the thirty-nine weeks ended November 1, 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 14 pages
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GANTOS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 COMPARED TO
THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996.
The following table indicates the percentage relationships to net sales of
various revenue and expense items for the thirteen and thirty-nine week periods
ended November 1, 1997 and November 2, 1996.
<TABLE>
<CAPTION>
As a percent of net As a percent of net
sales for the thirteen sales for the thirty-
weeks ended nine weeks ended
---------------------- ---------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
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) (84.6) (80.3) (82.9) (80.1)
------- ------- ------- -------
Gross income 15.4 19.7 17.1 19.9
Selling, general and
administrative expense (26.6) (21.6) (24.2) (20.6)
Credit for facilities
closings and other - - 0.6 -
Finance charge and other revenue 3.3 2.6 3.1 2.5
------- ------- ------- -------
Operating income (loss) (7.9) 0.7 (3.4) 1.8
Interest expense (1.6) (1.4) (1.3) (1.3)
------- ------- ------- -------
Income (loss) before income taxes (9.5) (0.7) (4.7) 0.5
Income taxes - - - -
------- ------- ------- -------
Net income (loss) (9.5)% (0.7)% (4.7)% 0.5%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Net sales for the thirteen weeks ended November 1, 1997 were approximately
$35.5 million, a decrease of approximately $6.2 million, compared to net
sales of approximately $41.7 million in the same period of the prior fiscal
year. Net sales for stores in operation throughout both periods decreased
15.7%, or $6.6 million, for the third quarter of 1997 compared to the same
period in 1996. The 15.7% decrease in comparable store sales is comprised of
a 23.2% decrease in unit sales and a 2.2% decrease due to a change in the
merchandise mix, partially offset by a 9.7% increase in average sales dollars
per unit.
Net sales for the thirty-nine weeks ended November 1, 1997 were approximately
$116.9 million, a decrease of approximately $17.0 million, compared to net
sales of approximately $133.9 million in the same period of the prior fiscal
year. Net sales
Page 8 of 14 pages
<PAGE>
for stores in operation throughout both periods decreased 13.4%, or $18.0
million, for the first three quarters of 1997 compared to the same period in
1996. The 13.4% decrease in comparable store sales is comprised of a 17.7%
decrease in unit sales and a 0.7% decrease due to a change in merchandise
mix, partially offset by a 5.0% increase in average sales dollars per unit.
The Company opened two new stores in 1997. The Company experienced negative
comparable store sales during the first three quarters of 1997 and management
expects the negative comparable store sales trend to continue into the fourth
quarter.
Cost of sales decreased $3.5 million in the thirteen weeks ended November 1,
1997, compared to the prior fiscal year. Cost of sales, as a percent of net
sales, increased to 84.6% in the thirteen weeks ended November 1, 1997,
compared to 80.3% in the same period in the prior fiscal year. Cost of sales
decreased $10.3 million in the thirty-nine weeks ended November 1, 1997,
compared to the prior fiscal year. Cost of sales, as a percent of net sales,
increased to 82.9% in the thirty-nine weeks ended November 1, 1997, compared
to 80.1% in the same period in the prior fiscal year. The increase in cost
of sales, as a percent of net sales, for the thirteen weeks ended November 1,
1997, is primarily the result of decreased sales volume with consistent
buying, distribution and occupancy costs, higher net markdowns and lower
vendor allowances, partially offset by higher markups and lower shrinkage
expenses. This trend of increased cost of goods sold is expected to continue
into the fourth quarter.
The increase in cost of sales, as a percent of net sales, for the thirty-nine
weeks ended November 1, 1997, is primarily the result of decreased sales
volume with consistent buying, distribution and occupancy costs, and lower
vendor allowances, partially offset by lower net markdowns and higher markups
for the period compared to a year ago.
Selling, general and administrative expense for the thirteen and thirty-nine
weeks ended November 1, 1997 increased approximately $429,000 and $659,000,
respectively, compared to the same periods in the prior fiscal year. The
increase in SG&A for both the thirteen and thirty-nine weeks ended November
1, 1997 is primarily due to corporate salaries as a result of officers hired
in 1996, the moving costs associated with the relocation of the Company's
merchandising operations to Stamford, Connecticut, an increase in maintenance
and dues expense as a result of a rent settlement made to one of the
Company's store landlords, and an increase in net advertising expense due to
the Company's increased volume of private label merchandise produced for the
stores resulting in decreased vendor participation in advertising co-op
programs, partially offset by continued cost control measures taken at the
store and corporate levels during 1997 compared to 1996. As a percent of net
sales, SG&A expense increased from 21.6% to 26.6% for the thirteen weeks
ended November 1, 1997, and from 20.6% to 24.2% for the thirty-nine weeks
ended November 1, 1997, primarily as a result of lower sales and the expense
increases described above.
During the second quarter of 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 $71,000 to 3.3% of net sales and
$269,000 to 3.1% of net sales for the thirteen and thirty-nine weeks ended
November 1, 1997, respectively, compared to the same periods in the prior
fiscal year. The increases in both the thirteen and thirty-nine weeks ended
November 1, 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 nine months of 1997 due to
a lower average outstanding balance of Gantos credit card
Page 9 of 14 pages
<PAGE>
receivables compared to the same period in the prior fiscal year. The
decrease in the receivable balances is primarily the result of lower sales,
lower use of the Gantos charge card, and faster payment of balances. Finance
charge income is expected to remain lower than last year due to sales volume.
Interest expense remained flat for the thirteen weeks ended November 1, 1997,
and decreased approximately $209,000 for the thirty-nine weeks ended November
1, 1997, compared to the same periods in the prior fiscal year. The decrease
in interest expense for the thirty-nine weeks ended November 1, 1997 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 nine months of
1997, partially offset by increased borrowings under the Fleet Facility. As
a result of the recent amendment to the Fleet Facility, the Company expects
the interest rates under the Fleet Facility to increase in fiscal 1998 and
the average amounts outstanding under the Fleet Facility to be higher.
These factors resulted in a net loss of approximately $3.4 million, or $0.45
per share, for the thirteen weeks ended November 1, 1997, compared to a net
loss of approximately $275,000, or $0.04 per share, in the same period of the
prior year. For the thirty-nine weeks ended November 1, 1997, the Company
reported a net loss of approximately $5.5 million, or $0.73 per share,
compared to net income of approximately $682,000, or $0.09 per share, in the
same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $12.6 million in the first
three quarters of 1997 compared to net cash provided by operations of $0.3
million in the same period a year ago. This substantial increase in cash
used by operating activities is primarily the result of a net loss this year
(net of non-cash items) compared to a net income for the same period a year
ago, a larger increase in merchandise inventories this year compared to last
year as a result of lower sales volume being only partially offset by reduced
purchases resulting in higher ending inventory levels, cash used this year
for facility closings of $0.9 million, and a smaller increase in accounts
payable due to tightened trade credit. These are offset somewhat by a larger
decrease in accounts receivable due to lower sales volume, lower Gantos
credit card use and faster payment of account balances, and a smaller
decrease in accrued expenses and other due to the timing of payments. The
Company expects the accounts receivable balance to remain lower than last
year's levels for the remainder of 1997 and that trade credit will remain
tighter than it was in the prior year throughout the remainder of 1997.
Capital expenditures for the first nine months of fiscal 1997 were
approximately $3.4 million, compared to approximately $2.1 million for the
first nine months of fiscal 1996. The increase is primarily due to capital
expenditures in connection with opening two new stores in 1997.
Net cash provided by financing activities in the first three quarters of 1997
was $12.8 million compared to net cash provided of approximately $1.3 million
in the same period a year ago. The increase in cash provided is the result
of the Company needing more revolving credit borrowings in 1997 to meet its
cash flow needs, including to fund cash used by operating activities and
approximately $3.3 million in payments on the Company's 12.75% Notes.
The Company has a revolving credit agreement expiring March 31, 2000, with
Fleet Bank N.A. (formerly NatWest Bank N.A.) with a maximum commitment of $40
million, subject to a borrowing base formula and lender reserves. As of
December 9, 1997, the Company had $24.2 million in borrowings and $1.0
million in letters of credit outstanding under this facility. As of December
9, 1997, approximately $12.3 million was available for borrowing under this
facility. During the first three quarters of 1997, the weighted average
interest rate under this facility was 9.27%.
Page 10 of 14 pages
<PAGE>
On October 8, 1997, the Company entered into Amendment No. 3 to the Fleet
Facility (the Third Amendment). The Third Amendment provides for an
adjustment to the interest rates based upon financial performance, an
increase in the loan advance rate on inventory during the months of October
through January and adjustments to the financial covenants so that compliance
with the financial covenants is based on a liquidity test as long as minimum
levels of liquidity are maintained. It also provides that if the Company
prepays its 12.75% Notes outstanding under its Indenture, it must pay Fleet
Bank a fee of $750,000 and the loan advance rate on inventory is reduced to
pre-amendment levels. The total commitment and term remain the same.
The Indenture under which the Company's 12.75% Notes were issued, contains
certain financial covenants. In part, because of the net loss reported by
the Company for the thirty-nine weeks ended November 1, 1997, the Company was
not in compliance with the earnings before interest, taxes, depreciation, and
amortization covenant for both quarters ended August 2, 1997, and November 1,
1997, and it was not in compliance with the interest coverage ratio covenant
for the quarter ended November 1, 1997. As of December 9, 1997, $8.6 million
in principal amount of Notes were outstanding. On December 15, 1997, the
Company entered into Supplemental Indenture No. 1 and an Agreement with the
trustee and principal holder of the Notes, respectively, to waive existing
EBITDA and interest coverage ratio defaults and to revise some of the
financial covenants under the Indenture in exchange for the payment of
approximately $400,000 plus expenses to the Trustee for the benefit of the
Note holders.
The Indenture, as amended, continues to require a minimum net worth of $20
million at the end of each quarter. As of November 1, 1997, the Company's net
worth was approximately $25.9 million. Management believes the Company will
be able to meet the terms of the amended Indenture, including the net worth
covenant, for the next twelve months assuming the Company can generate the
profit and cash flow associated with sales volume that is at least at the
same level as that of the current year.
The Company has decided not to pursue the private placement of non-voting
convertible preferred stock described in its November 19, 1997 press release.
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 $4.2 million.
These amounts are expected to be used primarily to pay the remaining amounts
on the new stores.
Page 11 of 14 pages
<PAGE>
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 and future compliance with financial
covenants.) 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 level
of support of the Company's trade creditors and factors, general trends in
retail clothing apparel purchasing, especially during the Christmas season,
the Company's comparable store sales changes, and the factors set forth in
this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
N/A
Page 12 of 14 pages
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Amendment No. #3 to Credit Agreement and the related
side letter, both dated October 8, 1997, among
Gantos, Inc. and Fleet Bank, N.A. (formerly known as
NatWest Bank N.A.).
27 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 13 of 14 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: December 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 14 of 14 pages
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
10.1 Amendment No. 3 to Credit Agreement and the related side
letter, both dated October 8, 1997, among Gantos, Inc. and
Fleet Bank, N.A. (formerly known as NatWest Bank N.A.).
27. Financial Data Schedule
<PAGE>
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT NO. 3 TO CREDIT AGREEMENT, dated as of October 8, 1997
(this "AMENDMENT"), among GANTOS, INC., a Michigan corporation (the
"BORROWER"), the lenders named therein (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").
WHEREAS, the Borrower, the Lenders, and the Agent are party to the
Revolving Credit Agreement, dated as of March 10, 1995 (as amended by
amendment no. 1, dated April 25, 1996 and amendment no. 2, dated March 18,
1997, and as otherwise and/or further amended, supplemented or modified from
time to time in accordance with its terms, the "CREDIT AGREEMENT"); and
WHEREAS, subject to the terms and conditions hereof, the parties
hereto desire to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and subject to the fulfillment of the
conditions set forth below, the parties hereto agree as follows:
1. DEFINED TERMS. Unless otherwise specifically defined herein,
all capitalized terms used herein shall have the respective meanings ascribed
to such terms in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions as
to effectiveness set forth in Paragraph 4 of this Amendment, the Credit
Agreement is hereby amended as follows:
(a) The definition of "Applicable Margin" appearing in Article I
of the Credit
Agreement is
amended and
restated in its
entirety as
follows:
"APPLICABLE MARGIN" means:
(a) until the day immediately preceding the first Adjustment
Date (i) with respect to Prime Rate Loans, one and one-quarter
percent (1-1/4%) and (ii) with respect to Eurodollar Loans, two and
one-half percent (2-1/2%), in each case, subject to adjustment
pursuant to Section 2.05(d) hereof; and
<PAGE>
(b) for each Calculation Period, the margin set forth below for
Prime Rate Loans or Eurodollar Loans, respectively, opposite the
level of EBITDA set forth below (000's omitted) for the period of
four consecutive fiscal quarters ending with the fiscal quarter (or
fiscal quarter ending a Fiscal Year) reflected in the financial
statements required to be delivered as of the first day of such
Calculation Period (EBITDA being deemed to be not over $2,400,000
for any Calculation Period as of the first date of which any
financial statements and accompanying documents have not been
delivered within the time period required by Section 6.05(a) and
Section 6.05(d) or Section 6.05(b)(ii) hereof, respectively):
EBITDA for four
consecutive fiscal Margin for Margin for
quarters (000'S omitted) Eurodollar Loans Prime Rate Loans
------------------------ ---------------- ----------------
Over $10,800 1.75% 0.50%
Over $9,800 and
not over $10,800 2.00% 0.75%
Over $8,800 and
not over $9,800 2.25% 1.00%
Over $4,400 and
not over $8,800 2.50% 1.25%
Over $3,400 and
not over $4,400 2.75% 1.50%
Over $2,400 and
not over $3,400 3.00% 1.75%
Not over $2,400 3.25% 2.00%
(b) The definition of "Borrowing Base" appearing in Article I of the
Credit Agreement
is amended and
restated in its
entirety as
follows:
"BORROWING BASE" shall mean an amount equal to:
(a) ninety percent (90%) of the Net Amount of Eligible Receivables,
PLUS
(b) the excess of:
(i) the lesser of (A) (1) at any time during each four month
period commencing on October 1 and ending on January 31, fifty-
five percent (55%) of the Eligible Inventory valued at the lower
of cost (on a FIFO
<PAGE>
basis) and current market value and (2) at any time during
each eight month period commencing on February 1 and ending
on September 30, forty-five percent (45%) of the Eligible
Inventory valued at the lower of cost (on a FIFO basis) and
current market value and (B) thirty-five percent (35%) of the
Retail Value of Eligible Inventory, OVER
(ii) the aggregate amount of all outstanding gift
certificates sold by the Borrower.
(c) The following definition is added in its proper alphabetically
determined place in Article I of the Credit Agreement:
"FISCAL PERIOD" shall mean any four or five week fiscal period
(as applicable) of the Borrower.
(d) The definition of "Trigger Date" appearing in Article I of the
Credit Agreement is amended and restated in its entirety as follows:
"TRIGGER DATE" means the last day of any Fiscal Period (i) for
which the average amount (calculated on a daily basis for each
Business Day in such Fiscal Period) of Availability was less than
$5,000,000 OR (ii) during which the amount of Availability
(calculated at the close of business of each day during such Fiscal
Period) was less than $3,500,000 at the end of any Business Day;
PROVIDED, that in the event that a default occurs under Section
6.05(j)(ii) hereof for any reason, the Trigger Date shall for all
purposes of this Agreement be deemed to have occurred as of the last
day of the Fiscal Period immediately preceding the date such default
occurs.
(e) Section 6.05(j) of the Credit Agreement is amended and
restated in its entirety as follows:
(j) (i) no later than the Wednesday next following the end of
each week, a certificate substantially in the form of SCHEDULE
6.05(J) hereto (or in such other form as is mutually agreed to by the
Borrower and the Agent) executed by the Financial Officer of the
Borrower (or another duly authorized financial officer of the
Borrower) demonstrating compliance as at the close of business on
Saturday of the previous week with the Borrowing Base and (ii) no
later than the third Business Day of each Fiscal Period, a
certificate substantially in the form of SCHEDULE 6.05(J)(II) hereto
(or in such other form as is mutually agreed to by the Borrower and
the Agent) executed by the Financial Officer of the Borrower (or
another duly authorized financial officer of the Borrower) setting
forth with respect to the immediately preceding Fiscal Period (A) the
average amount (calculated on a daily basis for each Business Day in
such prior Fiscal Period) of Availability and (B) the actual amount
of Availability as of the close of business of each day during such
Fiscal Period;
3
<PAGE>
(f) Section 7.09 of the Credit Agreement is amended and restated
in its entirety as follows:
SECTION 7.09. FIXED CHARGE COVERAGE RATIO. From and after the
Trigger Date, permit or suffer the Fixed Charge Coverage Ratio of the
Borrower and its subsidiaries to be less than 1.0:1.0 as of the last
day of any fiscal quarter which ends on or after the Trigger Date.
(g) Section 7.10 of the Credit Agreement is amended and restated in
its entirety as follows:
SECTION 7.10. EBITDA. From and after the Trigger Date, permit
EBITDA of the Borrower and its subsidiaries at the end of each fiscal
quarter ending on or after the Trigger Date for the four-quarter
period then ending to be less than the respective amounts set forth
below for the periods indicated:
Four Fiscal Quarters Minimum
Ending on or about EBITDA
------------------ ------
January 31, 1997 $9,500,000
April 30, 1997 $7,900,000
July 31, 1997 $6,000,000
October 31, 1997 $5,800,000
January 31, 1998 $7,000,000
April 30, 1998 $6,800,000
July 31, 1998 $6,200,000
October 31, 1998 $6,400,000
January 31, 1999 $7,600,000
April 30, 1999 $8,600,000
July 31, 1999 $8,700,000
October 31, 1999 and
the last day of each
fiscal quarter thereafter $8,600,000
(h) Section 7.11 of the Credit Agreement is amended and restated
in its entirety as follows:
4
<PAGE>
SECTION 7.11. INTEREST COVERAGE RATIO. From and after the
Trigger Date, permit or suffer the Interest Coverage Ratio of the
Borrower and its subsidiaries at the end of each fiscal quarter
ending on or after the Trigger Date for the four quarter period then
ending to be less than the respective amounts set forth below for the
periods indicated:
Four Fiscal Quarters Ending
On or about Minimum Ratio
----------- -------------
January 31, 1997 2.0:1
April 30, 1997 3.4:1
July 31, 1997 3.2:1
October 31, 1997 2.9:1
January 31, 1998 3.8:1
April 30, 1998 3.9:1
July 31, 1998 3.5:1
October 31, 1998 3.4:1
January 31, 1999 4.1:1
April 30, 1999 4.4:1
July 31, 1999 4.4:1
October 31, 1999 and
the last day of each
fiscal quarter thereafter 4.1:1
(i) The proviso appearing at the end of Section 7.19(a) of the
Credit Agreement, which was added pursuant to Amendment No. 2 to Credit
Agreement dated as of March 18, 1997, is amended and restated in its entirety
as follows::
PROVIDED, FURTHER, that notwithstanding the foregoing and
notwithstanding Section 7.06 hereof, in addition to the Borrower's
rights under the immediately preceding proviso in this Section
7.19(a), the Borrower may prepay, purchase or redeem and concurrently
retire any or all of the Senior Notes, at par or less, without
obtaining the prior written consent of the Required Lenders, so long
as (i) at least three Business Days prior to the date of such
prepayment, purchase or redemption the Required Lenders shall have
received financial operation projections for the Borrower and its
subsidiaries giving effect to such transaction for the period
commencing on the date of such transaction and ending with on the
last day of the twelfth full Fiscal Period ending thereafter, which
projections (x) shall include balance sheets, statements of profit
and loss, statements of cash flow and Availability forecasts (in each
case on a daily, weekly, monthly, quarterly or other basis as the
Required Lenders may in their sole discretion require), (y) shall
include calculations demonstrating that the Borrower will be in
compliance with Sections 7.07 through and including 7.12 hereof at
all times during such period and (z) shall be certified by the
Financial Officer of the Borrower (or another duly authorized
financial officer of the Borrower) as having been prepared in good
5
<PAGE>
faith based upon reasonable assumptions and the best information
then available, (ii) at the time of any such prepayment, purchase or
redemption and concurrent retirement, no Default or Event of Default
is continuing or would arise as a result thereof, and (iii) the
Borrower shall pay all fees then due and payable to the Agent,
including without limitation all fees payable pursuant to the fee
letter agreement dated as of October 8, 1997.
(j) In the event the Borrower prepays, purchases or redeems any or
all of the Senior Notes in accordance with the further proviso clause of
Section 7.19(a) then immediately prior to any such prepayment, purchase or
redemption and at all times thereafter, the definition of "Borrowing Base"
appearing in Article I of the Credit Agreement shall be amended and restated
in its entirety as follows:
"BORROWING BASE" shall mean an amount equal to the sum of (a)
ninety percent (90%) of the Net Amount of Eligible Receivables plus (b) the
excess of (i) the lesser of (A) forty-five percent (45%) of the Eligible
Inventory valued at the lower of cost (on a FIFO basis) and current market
value and (B) thirty-five percent (35%) of the Retail Value of Eligible
Inventory over (ii) the aggregate amount of all outstanding gift certificates
sold by the Borrower.
(k) Section 8.01(g) is amended and restated in its entirety as
follows:
(g) (i) default shall be made with respect to any
Indebtedness or obligations under a Capitalized Lease Obligation
of any Credit Party the aggregate principal amount of which
exceeds $500,000 (excluding the Obligations and Indebtedness
arising under the Indenture Documents) if the effect of any such
default shall be to accelerate, or to permit the holder or
obligee of any such Indebtedness or obligations under a
Capitalized Lease Obligation (or any trustee on behalf of such
holder or obligee) at its option to accelerate, the maturity of
such Indebtedness or obligations under a Capitalized Lease
Obligation, unless such default has been waived or unless such
Indebtedness or obligations or such default is being contested
in good faith by appropriate proceedings diligently prosecuted
and no acceleration of such Indebtedness or obligations has
taken place or (ii) default shall be made with respect to
Indebtedness arising under the Indenture Documents and (A) the
maturity of such Indebtedness shall have been accelerated or (B)
such default shall have permitted the holder of any such
Indebtedness (or any trustee on behalf of such holder) at its
option to accelerate the maturity of such Indebtedness and such
holder (or trustee) shall have accelerated such Indebtedness or
taken any action or exercised any remedy intended to enforce
collection of such Indebtedness (it being understood and agreed
that mere delivery to one or more Credit Parties of a notice of
default, notice of a proposed acceleration at a future date or
notice of demand for payment at a future date shall not
constitute such an action or remedy for purposes of this Section
8.01 (g)(ii)(B)), unless such default has been waived or unless
such Indebtedness or default is being
6
<PAGE>
contested in good faith by appropriate proceedings diligently
prosecuted and no acceleration of such Indebtedness has taken
place;
(l) SCHEDULE 6.05(j)(ii) annexed to this Amendment is hereby
incorporated into the Credit Agreement as SCHEDULE 6.05(j)(ii) thereto.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants as follows (which representations and warranties shall survive
the execution and delivery of this Amendment) as of the date hereof that:
(1) 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 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).
(2) The Borrower has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Amendment and has
taken all necessary corporate action to authorize the execution, delivery and
performance of this Amendment.
(3) This Amendment has been duly executed and delivered and
constitutes the legal, valid and binding obligation of the Borrower, and is
enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, reorganization, insolvency, moratorium
and other similar laws affecting the enforcement of creditors' rights
generally and by general equity principles.
(4) 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 Amendment 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.
(5) The execution, delivery and performance of this Amendment 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.
(6) 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.
7
<PAGE>
(7) 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.
(8) 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.
4. CONDITIONS PRECEDENT. Notwithstanding any term or provision of
this Amendment to the contrary, no amendment set forth in Paragraph 2 hereof
shall become effective until the Agent shall have determined that each of the
following conditions precedent shall have been satisfied:
(1) All required corporate actions in connection with the
execution and delivery of this Amendment shall have been taken, and each
shall be satisfactory in form and substance to the Agent, and the Agent shall
have received all information and copies of all documents, including, without
limitation, records of requisite corporate action that the Agent may
reasonably request, to be certified by the appropriate corporate person or
government authorities.
(2) All representations and warranties made by the Borrower
contained in Paragraph 3 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 the amendments contained in this Amendment after
giving effect to such amendments (unless any such representation or warranty
speaks expressly to an earlier date).
(3) Counterparts of the separate fee letter agreement dated the
date hereof among the Borrower, the Lenders and the Agent shall have been
duly executed and delivered on behalf of each of the parties thereto and such
fee letter agreement shall be in full force and effect.
(4) Counterparts of this Amendment shall have been duly executed
and delivered on behalf of the Borrower, the Lenders and the Agent.
5. CONTINUED EFFECTIVENESS. The term "Agreement", "hereof",
"herein" and similar terms as used in the Credit Agreement, and references in
the other Loan Documents to the Credit Agreement, shall mean and refer to,
from and after the effective date of the amendments contained herein as
determined in accordance with Paragraph 4 hereof, the Credit Agreement as
amended by this Amendment. Each of the parties hereto agrees that, as amended
by this Amendment, 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 Amendment.
6. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be an original, and all of which, taken
together, shall constitute
8
<PAGE>
a single instrument. Delivery of an executed counterpart of a signature page
to this Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.
7. GOVERNING LAW. THIS AMENDMENT 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 Amendment 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:________________________________
Name:
Title:
FLEET BANK, N.A. (formerly known as Natwest
Bank N.A.), as Agent and as a Lender
By:________________________________
Name:
Title:
9
<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 NINE-MONTH PERIOD ENDED, NOVEMBER
1, 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> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 1,127
<SECURITIES> 0
<RECEIVABLES> 19,304
<ALLOWANCES> 625
<INVENTORY> 38,264
<CURRENT-ASSETS> 61,162
<PP&E> 61,124
<DEPRECIATION> 47,211
<TOTAL-ASSETS> 75,075
<CURRENT-LIABILITIES> 24,378
<BONDS> 24,769
76
0
<COMMON> 0
<OTHER-SE> 28,852
<TOTAL-LIABILITY-AND-EQUITY> 75,078
<SALES> 116,858
<TOTAL-REVENUES> 116,858
<CGS> 96,895
<TOTAL-COSTS> 96,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,523
<INCOME-PRETAX> (5,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,480)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
