<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 1, 1998 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
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GANTOS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-1414122
- ----------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
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 common shares outstanding at September 10, 1998: 7,658,481
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Page 1 of 14
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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 6-8
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9-12
Quantitative and Qualitative Disclosures
about Market Risk 12
PART II. OTHER INFORMATION
Changes in Securities and Use of Proceeds 13
Exhibits and Reports on Form 8-K 13
Signatures 14
Page 2 of 14
<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. 1, Aug. 2, Aug. 1, Aug. 2,
----------------- -------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $31,758 $35,816 $70,822 $81,380
Cost of sales (including buying,
distribution and occupancy (28,396) (31,651) (59,289) (66,867)
costs)
-------- -------- --------- ---------
Gross income 3,362 4,165 11,533 14,513
Selling, general and
administrative expense (8,517) (9,196) (17,637) (18,785)
Credit for facilities closings - 703 - 703
and other
Finance charge and other revenue 1,061 1,218 2,132 2,429
-------- -------- --------- ---------
Operating loss (4,094) (3,110) (3,972) (1,140)
Interest expense (858) (437) (1,725) (952)
-------- -------- --------- ---------
Loss before income taxes (4,952) (3,547) (5,697) (2,092)
Income taxes - - - -
-------- -------- --------- ---------
Net loss (4,952) (3,547) (5,697) (2,092)
======== ======== ========= =========
Net loss per share (basic and (0.65) (0.47) (0.75) (0.28)
diluted)
======== ======== ========= =========
Outstanding shares 7,658,147 7,547,293 7,658,147 7,547,293
========= ========= ========= =========
Weighted average
shares outstanding (basic 7,628,528 7,540,655 7,610,344 7,546,380
and diluted)
======== ======== ========= =========
Stores open at end of period 115 115 115 115
==== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
Page 3 of 14
<PAGE>
GANTOS, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS Aug. 1, Jan 31, Aug. 2,
1998 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 775 $ 1,295 $ 1,059
Accounts receivable, less
allowance for doubtful
accounts of $492, $591 and $614
at August 1, 1998, January 31, 1998 and
August 2, 1997, respectively 16,203 18,607 18,650
Merchandise inventories 26,640 22,540 22,476
Prepaid expenses and other 8,362 8,205 3,101
--------- -------- ---------
Total current assets 51,980 50,647 45,286
--------- -------- ---------
Property and equipment, at cost:
Leasehold improvements 31,076 30,506 28,961
Furniture and fixtures 31,716 32,034 29,319
Other 772 122 1,791
--------- -------- ---------
Total property and equipment 63,564 62,662 60,071
Less - Accumulated depreciation
and amortization (50,247) (48,115) (46,200)
--------- -------- ---------
Net property and equipment 13,317 14,547 13,871
========= ======== =========
Total assets $65,297 $65,194 $59,157
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,977 $ 7,644 $ 9,737
Accrued expenses and other 7,954 8,472 8,758
--------- -------- ---------
Total current liabilities 17,931 16,116 18,495
--------- -------- ---------
Long-term debt 31,339 27,398 11,364
--------- -------- ---------
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 7,658,000
issued and outstanding at August
1, 1998, 7,583,000 issued and
outstanding at January 31, 1998 and
7,547,000 issued and outstanding
at August 2, 1997 77 76 76
Additional paid-in capital 41,020 40,977 40,892
Accumulated deficit (25,070) (19,373) (11,670)
--------- -------- ---------
Total shareholders' equity 16,027 21,680 29,298
--------- -------- ---------
Commitments - - -
--------- -------- ---------
Total liabilities and shareholders' $65,297 $65,194 $59,157
equity
========= ======== =========
</TABLE>
See accompanying notes to financial statements.
Page 4 of 14
<PAGE>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------
Aug. 1, Aug. 2,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,697) $(2,092)
--------- ---------
Adjustments to reconcile net loss
to net cash used by
operating activities:
Credit for facilities closings and (703)
other
Cash used for facilities closings (785)
Depreciation and amortization 2,251 2,558
Restricted stock compensation 30 55
expense
Changes in assets and liabilities:
Accounts receivable 2,404 3,322
Merchandise inventories (4,100) (103)
Prepaid expenses and other (157) 71
Accounts payable 2,333 (1,011)
Accrued expenses and other (518) (1,627)
--------- ---------
Total adjustments 2,243 1,777
Net cash used by operating activities (3,454) (315)
--------- ---------
Cash flows from investing activities:
Capital expenditures (696) (2,356)
--------- ---------
Net cash used by investing activities (696) (2,356)
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (803) (2,570)
Borrowings under long-term credit facility 82,394 105,199
Payments under long-term credit facility (77,650) (103,206)
Issuance of Common Shares 14 40
Other (325) (79)
--------- ---------
Net cash provided (used) by financing 3,630 (616)
activities
--------- ---------
Net decrease in cash
and cash equivalents (520) (3,287)
Cash and cash equivalents at beginning of 1,295 4,346
period
========= =========
Cash and cash equivalents at end of period $ 775 $ 1,059
========= =========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 860 $ 864
Income taxes - $ 79
</TABLE>
See accompanying notes to financial statements.
Page 5 of 14
<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, as amended, for the
fiscal year ended January 31, 1998.
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 1, 1998, January 31, 1998 and August 2,
1997, the results of operations for the thirteen and twenty-six weeks ended
August 1, 1998 and August 2, 1997, and cash flows for the twenty-six weeks
ended August 1, 1998 and August 2, 1997. All adjustments are of a normal and
recurring nature.
The results of operations for the thirteen and twenty-six week periods ended
August 1, 1998 and August 2, 1997 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. Basic income (loss) per share is determined by dividing net income (loss) by
the weighted average number of common shares outstanding during the quarter.
Diluted net income (loss) per share is similarly determined except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if all dilutive potential common shares had
been issued. Dilutive potential shares are principally comprised of employee
stock options issued by the Company and had an insignificant impact on
income (loss) per share during the periods presented.
4. The Company's borrowing agreement with Fleet Bank N.A. (the "Fleet
Facility") was amended as of July 8, 1998 to cure potential defaults
under the Fleet Facility. The Fleet Facility currently provides that, until
October 12, 1998, the fixed charge coverage ratio, earnings before interest,
taxes, depreciation and amortization and interest coverage ratio covenants
are suspended. Thereafter, compliance with these financial covenants is
based on a liquidity test as long as minimum levels of liquidity are
maintained. The liquidity test generally requires that the Company have
"availability" (as defined in the Fleet Facility) of at least (i) a daily
average of $5,000,000 for each fiscal month, and (ii) $3,500,000 at the end
of each business day. As of September 8, 1998, the Company had $28.2
million in borrowings and $2.9 million in letters of credit outstanding
under the Fleet Facility, and approximately $1.5 million was available for
borrowing under the Fleet Facility.
In addition, the Indenture, dated as of April 1, 1995, pursuant to which the
Company's 12.75% notes were issued (the "Indenture"), was amended as of June
30, 1998 to cure potential defaults under the Indenture, subject to
consummation of the merger described in Note 6 by September 30, 1998.
Previous covenants concerning capital expenditures, earnings before
interest, taxes, depreciation and amortization, and interest coverage ratios
were deleted from the Indenture. The remaining net worth covenant requires
the Company to maintain a minimum net worth of $7.5 million at the end of
each quarter through the third quarter of fiscal 2000 and $10.0 million at
the end of each subsequent quarter. As of August 1, 1998, the Company's net
worth was approximately $16.0 million. As of September 8, 1998, $7.0 million
in principal amount of notes were outstanding under the Indenture. Holders
of approximately 96% of the notes underlying the Indenture agreed to defer
payment of their regularly scheduled July 1, 1998 payment of principal,
totaling approximately $745,000, until the earlier of the consummation of
the merger described in Note 6 or September 25, 1998. In
Page 6 of 14
<PAGE>
exchange for such deferral, the Company issued such holders five-year
warrants to purchase 150,000 of the Company's Common Shares at an exercise
price of $1.625 per share.
The Company does not expect to be able to meet the liquidity test under the
Fleet Facility on October 13, 1998, and, therefore, management believes that
it will likely be in default under the Fleet Facility if the Fleet Facility
is not further amended or replaced before then. In addition, because the
Company does not expect to consummate the merger by September 30, 1998, the
amendments to the Indenture described above are not expected to be effective
unless the Indenture is further amended. Management does not believe that it
will be in compliance with the financial covenants under the Indenture if
such amendments are not affective.
The Company is negotiating with Fleet Bank and the principal holder of the
Notes issued under the Indenture to further defer or amend the financial
covenants under the Fleet Facility, to defer the deadline for consummation
of the merger under the Indenture or to modify the financial covenants under
the Indenture and to further defer the July 1, 1998 Note payment currently
due September 25, 1998.
If the Company is not successful in negotiating further amendments to the
Fleet Facility and the Indenture on or before September 25, 1998 on terms
and conditions acceptable to the Company, if the Company's "availability"
under the Fleet Facility, trade credit or sales are lower than expected, or
if the Company's borrowing requirements or liquidity needs are higher than
expected, the Company could have insufficient liquidity to continue its
current operations, its business, operations, liquidity, financial condition
and results of operations could be materially adversely affected, and the
Company could be required to substantially reduce or discontinue its
operations. In addition, even if the Company is successful in amending the
Fleet Facility and the Indenture, there can be no assurance that the Company
will be able to meet the revised covenants or the continuing net worth
covenant under the Indenture for the next 12 months unless sales and trade
credit substantially improve.
5. The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the twenty-six weeks ended August 1, 1998, the Company
incurred a loss of $5,697,000 and has experienced a tightening of trade
credit. See also Notes 4 and 6. These factors among others indicate that
the Company may be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of the Fleet Facility and the Indenture,
support from trade creditors, changes in comparable store sales, future
profitable operations, and the successful completion of the merger described
in Note 6 below.
6. On May 12, 1998, the Company announced it had entered into a definitive
Agreement and Plan of Merger (the "Merger Agreement") with Hit or Miss,
Inc. ("Hit or Miss") and HOM Holding, Inc., the sole stockholder of Hit or
Miss ("HOM Holding"). Pursuant to the Merger Agreement, by operation of
law, the Company would acquire all of the assets and assume all of the
liabilities of HOM Holding, including all the capital stock of Hit or Miss,
for an aggregate of approximately 7.4 million of the Company's Common Shares
and warrants to purchase 1.25 million of the Company's Common Shares for
$1.50 per share. The warrants would not be immediately exercisable. The
Company expects to account for the transaction as a purchase and for the
transaction to be finalized on or before October 31, 1998.
The consummation of the transaction contemplated by the Merger Agreement is
subject to several material conditions including, among others, the
consummation of a financing to refinance the working capital facilities of
the Company and Hit or Miss into a combined $60 million facility, the
approval of the merger by the Company's shareholders and Holding, the waiver
of certain covenants under the Fleet Facility and the Indenture and by
certain debtholders of Hit or Miss, and the absence of adverse changes to
the business of the Company and Hit or Miss. In addition, either HOM Holding
or the Company may terminate the Merger Agreement if the merger is not
consummated on or before August 31, 1998, unless the failure of the closing
to occur by such date shall be due to the failure of the party seeking to
terminate the Merger Agreement to perform or observe in any material respect
the covenants and agreements of such party. The parties are negotiating an
amendment to extend this deadline to October 31, 1998. The Company is
continuing to
Page 7 of 14
<PAGE>
negotiate financing for the surviving corporation, but it does not have a
definitive commitment or a credit committee approved proposal. There can be
no assurance that the Company will be successful in closing the
above-described merger with Holding and Hit or Miss.
Page 8 of 14
<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 1, 1998,
COMPARED TO THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997.
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 1, 1998 and August 2, 1997.
<TABLE>
<CAPTION>
As a percent of As a percent of
net sales for net sales for
the thirteen the twenty-six
weeks ended weeks ended
-------------------- -------------------
Aug. 1, Aug. 2, Aug. 1, Aug. 2,
1998 1997 1998 1997
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (including
buying, distribution and
occupancy costs) (89.4) (88.4) (83.7) (82.2)
--------- -------- --------- ---------
Gross income 10.6 11.6 16.3 17.8
Selling, general and
administrative expense (26.8) (25.7) (24.9) (23.1)
Credit for facilities - 2.0 - 0.9
closings and other
Finance charge and other 3.3 3.4 3.0 3.0
revenue
--------- -------- --------- ---------
Operating loss (12.9) (8.7) (5.6) (1.4)
Interest expense (2.7) (1.2) (2.4) (1.2)
--------- -------- --------- ---------
Loss before income taxes (15.6) (9.9) (8.0) (2.6)
Income taxes - - - -
--------- -------- --------- ---------
Net loss (15.6)% (9.9)% (8.0)% (2.6)%
========= ========= ========= ========
</TABLE>
Net sales for the thirteen weeks ended August 1, 1998 were approximately $31.8
million, a decrease of approximately $4.0 million, compared to net sales of
approximately $35.8 million in the same period of the prior fiscal year. Net
sales for stores in operation throughout both periods decreased 11.4%, or $4.0
million, for the second quarter of 1998 compared to the same period in 1997. The
11.4% decrease in comparable store sales is comprised of a 7.6% decrease in unit
sales (partially due to difficulties in obtaining merchandise from vendors
resulting from the Company's current financial condition and the related
tightening of trade credit) and a 4.1% decrease in average sales dollars per
unit partially offset by a .3% increase due to a change in merchandise mix.
Net sales for the twenty-six weeks ended August 1, 1998 were approximately $70.8
million, a decrease of approximately $10.6 million, compared to net sales of
approximately $81.4 million in the same period of the prior fiscal year. Net
sales for stores in operation throughout both periods decreased 13.4%, or $10.7
million, for the first two quarters of 1998 compared to the same period in 1997.
The 13.4% decrease in comparable store sales is comprised of a 10.5% decrease in
unit sales(partially due to difficulties in obtaining merchandise from vendors
Page 9 of 14
<PAGE>
resulting from the Company's current financial condition and the related
tightening of trade credit) and a 3.2% decrease in average sales dollars per
unit, partially offset by a .3% increase due to a change in merchandise mix.
The Company opened a new store in April 1997 and another in October 1997. One
store was closed in January 1998. The Company experienced negative comparable
store sales during the second quarter and management expects this trend to
continue into the third quarter.
Cost of sales decreased $3.3 million in the thirteen weeks ended August 1, 1998
compared to the prior fiscal year. Cost of sales, as a percent of net sales,
increased to 89.4% in the thirteen weeks ended August 1, 1998, compared to 88.4%
in the same period in the prior fiscal year. Cost of sales decreased $7.6
million in the twenty-six weeks ended August 1, 1998 compared to the prior
fiscal year. Cost of sales, as a percent of net sales, increased to 83.7% in the
twenty-six weeks ended August 1, 1998, compared to 82.2% 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 1, 1998 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 for the period compared to a year ago.
Selling, general and administrative (SG&A) expense for the thirteen weeks ended
August 1, 1998 decreased approximately $679,000, compared to the same period in
the prior fiscal year. The decrease in SG&A is partly due to prior period
one-time moving costs associated with the Company's merchandising operations to
Stamford, Connecticut. In addition, the decrease in SG&A is due to lower payroll
and the related taxes primarily at the store locations due to the decreased
sales volume, and a decrease in depreciation due to the age of the assets. These
decreases were partially offset by increases in rent and maintenance and dues as
a result of increases passed on from the landlords and an increase in net
advertising expense due to increased private label merchandise and decreased
vendor participation. As a percent of net sales, SG&A expense increased from
25.7% to 26.8% for the thirteen weeks ended August 1, 1998 primarily as a result
of lower sales, offset slightly by the reductions described above.
Selling, general and administrative (SG&A) expense for the twenty-six weeks
ended August 1, 1998 decreased approximately $1,148,000, compared to the same
period in the prior fiscal year. The decrease in SG&A is primarily due to lower
payroll and the related taxes primarily at the store locations due to the
decreased sales volume, and a decrease in depreciation due to the age of the
assets. These decreases were partially offset by increases in rent and
maintenance and dues as a result of increases passed on from the landlords and
an increase in net advertising expense due to increased private label
merchandise and decreased vendor participation. As a percent of net sales, SG&A
expense increased from 23.1% to 24.9% for the twenty-six weeks ended August 1,
1998 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 decreased approximately $157,000 to 3.3% of net
sales and approximately $297,000 to 3.0% of net sales for the thirteen and
twenty-six weeks ended August 1, 1998, respectively, compared to the same
periods in the prior fiscal year. The decreases in both the thirteen and
twenty-six weeks ended August 1, 1998 were partially due to new legal limits on
late fees, and a decrease in finance charge income during the first half of 1998
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 1, 1998
increased approximately $421,000 and $773,000, respectively, compared to the
same periods in the prior fiscal year. The increase for both periods is due to
higher debt levels under the Fleet Facility, partially offset by reduced
interest expense on the Indenture Notes as a result of scheduled principal
payments. The increase in amounts outstanding under the Fleet Facility is due to
operating losses and continued difficulties with trade credit.
The effective tax rate varies from the statutory rate of 35% due to the
establishment of additional valuation allowances during the quarter.
These factors resulted in a net loss of approximately $5.0 million, or $0.65 per
share, for the thirteen weeks ended August 1, 1998, compared to a net loss of
approximately $3.5 million, or $0.47 per share, in the same period of the
Page 10 of 14
<PAGE>
prior year. For the twenty-six weeks ended August 1, 1998, the Company
reported a net loss of approximately $5.7 million, or $0.75 per share,
compared to net loss of approximately $2.1 million, or $0.28 per share, in
the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $3.5 million in the first half of
1998 compared to $0.3 million in the same period a year ago. The increase was
primarily due to a greater net loss this year (net of non-cash items) compared
to last year, a larger increase in merchandise inventories this year over last
year and a smaller decrease in accounts receivable this year. These amounts are
partially offset by an increase in accounts payable this year, compared to a
decrease last year, a smaller decrease in accrued expenses and other this year,
and cash used last year for facilities closings. The increase in merchandise
inventory and accounts payable this year is primarily due to the low 1998
beginning inventory levels. The decrease in accrued expense and other is the
result of the timing of payments and the effects of lower sales volumes. The
smaller decrease in accounts receivable this year is due to a greater portion of
sales made using the Gantos charge card. The Company expects the accounts
receivable balance to remain lower than last year levels for the remainder of
1998 and trade credit to remain tight through at least the third quarter of
1998.
Capital expenditures for the first six months of 1998 were approximately
$696,000, compared to approximately $2,356,000 for the same period in 1997.
Capital expenditures in fiscal 1998 were primarily for remodeling one store.
Net cash provided by financing activities in the first half of 1998 was
approximately $3.6 million compared to net cash used of approximately $0.6
million in the same period a year ago. The increase in cash provided is the
result of reduced payments on the long-term debt (one payment due July 1, 1998
was deferred to September) and increased borrowing under the Fleet Facility.
Cash provided in 1998 represents $803,000 in payments made on the long-term
notes, offset by net borrowings of $4.7 million ($82.4 million in total
borrowings, $77.7 million in total payments) under the Fleet Facility. In the
same period of 1997, the Company made $2.6 million in payments on the long-term
notes (including a $1.8 million "alternative cash flow payment") and borrowed
$2.0 million ($105.2 million in total borrowings, $103.2 in total payments)
under the Fleet Facility.
The Company has a revolving credit agreement (the "Fleet Facility") 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. The Company has entered into nine amendments to the Fleet Facility.
Without these amendments, the Company would not have been in compliance with the
financial covenants, including the liquidity test, under the Fleet Facility (See
Note 4 to the Financial Statements). As of September 8, 1998, the Company had
$28.2 million in borrowings and $2.9 million in letters of credit outstanding
under the Fleet Facility. As of September 8, 1997, approximately $1.5 million
was available for borrowing under the Fleet Facility. During the first two
quarters of 1998, the weighted average interest rate under the Fleet Facility
was 8.80%.
The Company's Indenture, under which the Company's 12.75% Notes were issued, was
amended as of June 30, 1998 to cure potential defaults under the Indenture,
subject to consummation of the merger described in Note 6 to the Financial
Statements by September 30, 1998 (See Note 4 to the Financial Statements).
As of September 8, 1998, $7.0 million in principal amount of notes were
outstanding under the Indenture. Holders of approximately 96% of the notes
underlying the Indenture agreed to defer payment of their regularly scheduled
July 1, 1998 payment of principal, totaling approximately $745,000, until the
earlier of the consummation of the merger described in Note 6 of the Financial
Statements or September 25, 1998. In exchange for such deferral, the Company
issued such holders five-year warrants to purchase 150,000 of the Company's
Common Shares at an exercise price of $1.625 per share. Another principal
payment, totaling approximately $775,000, is due October 1, 1998.
The Company does not expect to be able to meet the liquidity test under the
Fleet Facility on October 13, 1998, and, therefore, management believes that it
would likely be in default under the Fleet Facility if the Fleet Facility is not
further amended or replaced before then. In addition, because the Company does
not expect to consummate the merger by September 30, 1998, the amendments to the
Indenture described above are not expected to be effective unless the Indenture
is further amended. Management does not believe that it will be in compliance
with the
Page 11 of 14
<PAGE>
financial covenants under the Indenture if such amendments are not
effective.
The Company is negotiating with Fleet Bank and the principal holder of the Notes
issued under the Indenture and to further defer or amend the financial covenants
under the Fleet Facility, to defer the deadline for consummation of the merger
under the Indenture and to modify the financial covenants under the Indenture
and to further defer the July 1, 1998 Note payment currently due September 25,
1998.
If the Company is not successful in negotiating further amendments to the Fleet
Facility and the Indenture on or before September 25, 1998 on terms and
conditions acceptable to the Company, if the Company's "availability" under the
Fleet Facility, trade credit or sales are lower than expected, or if the
Company's borrowing requirements or liquidity needs are higher than expected,
the Company could have insufficient liquidity to continue its current
operations, its business, operations, liquidity, financial condition and results
of operations could be materially adversely affected, and the Company could be
required to substantially reduce or discontinue its operations. In addition,
even if the Company is successful in amending the Fleet Facility and the
Indenture, there can be no assurance that the Company will be able to meet the
revised covenants or the continuing net worth covenant under the Indenture for
the next 12 months unless sales and trade credit substantially improve.
As discussed in Note 6 to the Financial Statements, the Company has entered into
a definitive Agreement and Plan of Merger with Hit or Miss, Inc. and HOM
Holding, Inc., subject to various terms and conditions (some of which are
discussed in Note 6 to the Financial Statements). Either HOM Holding or the
Company may terminate the Merger Agreement if the merger is not consummated on
or before August 31, 1998, unless the failure of the closing to occur by such
date shall be due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe in any material respect the covenants and
agreements of such party. The parties are negotiating an amendment to extend
this deadline to October 31, 1998. In connection with this proposed merger, the
Company and Hit or Miss have received a proposal, which has not received credit
committee approval, to refinance the working capital facilities of the Company
and Hit or Miss into a combined $60 million facility. The Company is continuing
to negotiate financing for the surviving corporation, but it does not have a
definitive commitment or a credit committee approved proposal.
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 Company's ability to
negotiate acceptable amendments to the Fleet Facility and the Indenture, the
Company's ability to negotiate acceptable financing terms for the surviving
corporation in the merger, 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.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. To distinguish 21st
century dates from 20th century dates, these date code fields must be able to
accept four digit entries. The Company has evaluated its management information
systems (including information technology ("IT") and non-IT computerized
systems) and has prepared a plan for Year 2000 compliance. The Company estimates
that the cost to modify its management information systems to become Year 2000
compliant will be approximately $400,000 and therefore will not be material to
its financial condition or results of operations. Given that such modification
is expected to be completed by June 1999, the Company has not prepared a
contingency plan and does not currently believe that a contingency plan is
necessary. The Company is also evaluating the systems of its vendors to ensure
that these companies are Year 2000 compliant. The cost of this evaluation is
expected to be nominal. In the event that its current vendors are unable to
certify that they will be Year 2000 compliant by early 1999 or if such vendors
are unable to certify that their failure to be Year 2000 compliant will not
adversely affect the Company, the Company will be reviewing its alternatives
with respect to other vendors. There can be no assurance that the Company will
be able to find vendors which are acceptable to the Company. The Company does
not anticipate any material disruption in its operations as a result of any
failure by the Company or its vendors to become Year 2000 compliant.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
Page 12 of 14
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Four holders of approximately 96% of the notes underlying the Indenture
agreed to defer payment of their regularly scheduled July 1, 1998 payment of
principal, totaling approximately $745,000, until the earlier of the
consummation of the merger described in Note 6 to the Financial Statements in
Part I, Item 1 of this Report (the "Merger") or September 25, 1998. In exchange
for such deferral, on July 1, 1998, the Company issued such holders warrants
exercisable until June 30, 2003 to purchase 150,000 of the Company's Common
Shares, par value $0.01 per share, at an exercise price of $1.625 per share. The
Company has agreed to use its good faith efforts to register the Common Shares
underlying such warrants for resale within sixty days after consummation of the
Merger. Such warrants were not registered, but were issued in reliance on the
exemptions from registration contained in Sections 4(2) and 4(6) under the
Securities Act of 1933, as amended.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Supplemental Indenture No. 2, dated as of June 30, 1998,
to Indenture dated as of April 1, 1995, between Gantos, Inc.
and State Street Bank and Trust Company (successor to Fleet
Bank N.A., which was the successor to Shawmut Bank
Connecticut, National Association), and forms of Agreement,
dated as of June 30, 1998 between Gantos, Inc. and various
holders of notes issued under the Indenture.
4.2 Form of Common Stock Purchase Warrant, dated as of July 1,
1998, issued to consenting note holders.
10.1 Amendment No. 9 to Credit Agreement, dated as of July 8,
1998, between Gantos, Inc. and Fleet Bank, N.A.(formerly
known as NatWest Bank N.A.).
10.2 Letter Agreement dated as of July 8, between Gantos, Inc.
and Enhanced Retail Funding, LLC.
10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted
May 19, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On May 15, 1998, Gantos, Inc. filed a Current Report on Form 8-K,
reporting in Item 5 that on May 12, 1998 Gantos, Inc. entered
into a definitive Agreement and Plan of Merger with Hit or Miss,
Inc. ("Hit or Miss") and HOM Holding, Inc., the sole stockholder
of Hit or Miss ("HOM Holding") regarding the merger of HOM
Holding with and into the Company. No financial statements were
filed.
Page 13 of 14
<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 15, 1998
GANTOS, INC.
------------------------
(Registrant)
By:/s/ ARLENE H. STERN
-------------------------
ARLENE H. STERN
Its: PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED
OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
Page 14 of 14
<PAGE>
EXHIBIT INDEX
DOCUMENT NUMBER AND DESCRIPTION
4.1 Supplemental Indenture No. 2, dated as of June 30, 1998, to Indenture dated
as of April 1, 1995, between Gantos, Inc. and State Street Bank and Trust
Company (successor to Fleet Bank N.A., which was the successor to Shawmut
Bank Connecticut, National Association), and forms of Agreement, dated as
of June 30,1998 between Gantos, Inc. and various holders of notes issued
under the Indenture.
4.2 Form of Common Stock Purchase Warrant, dated as of July 1, 1998, issued to
consenting note holders.
10.1 Amendment No. 9 to Credit Agreement, dated as of July 8, 1998, between
Gantos, Inc. and Fleet Bank, N.A Financial Data Schedule.
10.2 Letter Agreement dated as of July 8, 1998 between Gantos, Inc. and
Enhanced Retail Funding, LLC.
10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19, 1998.
27.1 Financial Data Schedule
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GANTOS, INC.
AND
STATE STREET BANK AND TRUST COMPANY
-----------------------------------------
SUPPLEMENTAL INDENTURE NO. 2 TO INDENTURE
DATED AS OF APRIL 1, 1995
-----------------------------------------
SERIES A PROMISSORY NOTES
SERIES B PROMISSORY NOTES
DATED AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL INDENTURE NO. 2
Supplemental Indenture No. 2 (the "Supplemental Indenture"), dated as of
June 30, 1998, between Gantos, Inc., a Michigan corporation (the "Company"),
and State Street Bank and Trust Company, a Massachusetts trust company and
successor to Fleet Bank N.A. (successor to Shawmut Bank Connecticut, National
Association, a national banking association) (the "Trustee").
RECITALS
A. The Company and the Trustee are the parties to the Indenture, dated
as of April 1, 1995 between Company and Trustee, as successor trustee, as
amended by Supplemental Indenture No. 1, dated as of December 15, 1997
("Supplemental Indenture No. 1" and, together with the initial Indenture, the
"Indenture").
B. The Company has entered into an Agreement and Plan of Merger, dated
as of May 12, 1998 (the "Merger Agreement"), with HOM Holding, Inc., a
Delaware corporation ("Holding"), and Hit or Miss Inc., a Delaware
corporation wholly owned by Holding, pursuant to which Holding will merge
(the "Merger") with and into the Company with the Company being the surviving
corporation, and an aggregate of 7,415,450 of the Company's common shares
("Gantos Common Shares") and warrants ("Warrants") to purchase an aggregate
of 1,250,000 Gantos Common Shares will be issued to Holding's stockholders
and certain affiliated entities, which will represent approximately 49.5% of
the outstanding Gantos Common Shares immediately after the Merger (and
approximately 53.3% of the outstanding Gantos Common Shares, assuming full
exercise of the Warrants).
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH, for and in
consideration of the premises, it is mutually agreed and consented, for the
equal and proportionate benefit of the respective Holders from time to time
of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used in this Supplemental
Indenture No. 2 and not defined in this Supplemental Indenture No. 2 have the
meanings given them in the Indenture.
2. ELIMINATION OF COVENANTS. Effective on the Effective Date (as
defined in Section 21 hereof), Sections 6.12(a), (c), (d) and (f) and Section
6.16 of the Indenture are eliminated from, and shall not apply to, the
Indenture or the Notes.
3. ELIMINATION OF DEFINITIONS. Effective on the Effective Date, the
definitions of the following terms are eliminated from Section 1.01 of the
Indenture and shall not apply to the Indenture or the Notes:
"Adjusted Interest Expense";
"Alternative Payment";
<PAGE>
"Availability";
"Capital Expenditures";
"Capitalized Lease Obligation";
"Cases";
"Disclosure Statement";
"EBITDA";
"Fiscal Period";
"Interest Coverage Ratio";
"Interest Expense"; and
"Trigger Date".
4. AMENDMENT TO DEFINITION OF FREE CASH FLOW. Effective on the
Effective Date, the definition of "Free Cash Flow" in Section 1.01 of the
Indenture is amended and restated to read as follows:
"The term "Free Cash Flow" means, for any year (i) Net Income,
PLUS (ii) the sum of amortization expense and depreciation expense,
MINUS (iii) actual principal payments (including sinking fund
payments) and voluntary principal payments, but not Excess Cash Flow
payments, made with respect to indebtedness for borrowed money (which
does not include the Revolving Credit Agreement or Replacement Credit
Agreement), PLUS OR MINUS (iv) extraordinary cash items (provided that
such items are not taken into account in determining Net Income)."
5. AMENDMENT TO DEFINITION OF SENIOR DEBT OBLIGATIONS. Effective on
the Effective Date, the definition of "Senior Debt Obligations" in Section
1.01 of the Indenture is amended as follows:
(a) The phrase "up to $40,000,000" in clause (ii) of the definition
is amended to read "up to $60,000,000;"
(b) The phrase "not exceeding $500,000" in clauses (iii)(b), (iii)(d)
and (iii)(f)(8) of the definition is amended to read "not exceeding
$1,000,000;" and
(c) The phrase "(A) which do not exceed $350,000 in the aggregate or
(B) securing the repayment of up to $500,000 aggregate outstanding
principal amount of landlord constructions loans" in clause (iii)(f)(9) of
the definition is amended to read "(A) which do not exceed $750,000 in the
aggregate or (B) securing the repayment of up to $1,000,000 aggregate
outstanding principal amount of landlord constructions loans."
6. ELIMINATION OF ELECTION TO APPLY REVISIONS TO REVOLVING CREDIT
AGREEMENT COVENANTS. Effective on the Effective Date, Section 5 of
Supplemental Indenture No. 1 is eliminated from, and shall not apply to, the
Indenture or the Notes.
2
<PAGE>
7. AMENDMENT TO REDEMPTION PROVISIONS. Effective on the Effective
Date, Section 3.01(c) of the Indenture is amended and restated to read as
follows:
"(c) The Notes shall be subject to special mandatory redemption
at the Redemption Price on the next succeeding Interest Payment Date
after which notice can be given following payment of an Excess Cash
Flow payment (made pursuant to Section 6.12(e) hereof) in an amount
for each Series of Notes equal to its Pro-Rata share of the Excess
Cash Flow payment. The amount of any redemptions made pursuant to
this subsection 3.01(c) shall decrease the aggregate amount of sinking
fund redemptions in the reverse order of the dates upon which such
sinking fund payments are to be made."
8. ELIMINATION OF SPECIAL MANDATORY REDEMPTION RIGHTS FOR SALES OF
EQUITY SECURITIES. Effective on the Effective Date, Section 3.01(f) of the
Indenture is deleted from the Indenture and shall no longer apply to the
Indenture or the Notes.
9. WAIVER OF RIGHT TO TENDER NOTES. Any rights that the Holders may
have to tender the Notes for purchase by the Company pursuant to Section 3.06
of the Indenture are hereby waived to the extent that any such rights would
be triggered by the Merger or the following transactions contemplated
thereby: (i) the issuance of the Gantos Common Shares and Warrants in the
Merger, (ii) the exercise of the Warrants, (iii) the purchase and sale of the
Gantos Common Shares underlying the Warrants and (iv) the resale of Gantos
Common Shares and Warrants to employees of Holding or Hit or Miss Inc. as
described in the Company's registration statement.
10. AMENDMENT TO MAINTENANCE OF PROPERTIES; COMPLIANCE WITH LAWS
PROVISIONS. Effective on the Effective Date, Section 6.05, line 6 of the
Indenture is amended by the insertion of the parenthetical, "(I.E., the sale
of women's clothing)", following the phrase "maintain and operate the same
general businesses which it is presently conducting" and before the
semi-colon.
11. WAIVER OF NET WORTH COVENANT. The Company shall not be in default
of or be deemed to have breached the covenant regarding net worth of the
Company and its Subsidiaries set forth in Section 6.12(b) of the Indenture as
a result of the consummation of the Merger and the transactions contemplated
thereby. Further, effective on the Effective Date, Section 6.12(b) of the
Indenture is amended to read as follows:
"(b) MINIMUM NET WORTH. Not permit the Net Worth of the Company and
its Subsidiaries, on a Consolidated basis, at the end of any fiscal quarter
of the Company specified below to be less than the respective amounts set
forth below:
3
<PAGE>
<TABLE>
<CAPTION>
Period Minimum
------ -----------
<S> <C>
Second Fiscal Quarter - 1998
Through Third Fiscal Quarter - 2000" $ 7,500,000
Fourth Fiscal Quarter - 2000 and
Thereafter $10,000,000;
</TABLE>
provided, however, that if the Company is required under applicable
purchase accounting rules to revise its financial statements in a material
manner from and after the Effective Date, the Company and the Trustee shall
endeavor in good faith to amend this Section 6.12(b) to revise the Net
Worth numbers set forth above."
12. AMENDMENT TO COVENANTS REGARDING THE POLICY SECTION. Effective on
the Effective Date, the first two lines of Section 6.13 of the Indenture
beginning "The Company will," and ending "of the Company," are amended to
read as follows:
"The Company will, for so long as L. Douglas Gantos ("Mr.
Gantos") remains an officer, director or consultant of the Company,"
13. WAIVER OF RESTRICTION REGARDING FUTURE DEBT OBLIGATIONS. The
Company shall not be in default of or be deemed to have breached the
restrictions on future debt obligations of the Company set forth in Section
6.14(a) of the Indenture as a result of the consummation of the Merger and
the transactions expressly contemplated thereby. Further, effective on the
Effective Date, Sections 6.14(b) and (c) are deleted from the Indenture and
shall no longer apply to the Indenture or the Notes. Moreover, effective on
the Effective Date, Section 6.14(a) of the Indenture is amended to read as
follows:
"(a) Notwithstanding anything herein to the contrary, the Company and
its Subsidiaries may issue Senior Debt Obligations only if the Company has
fulfilled the obligations of Section 3.06 regarding purchases of the Notes.
Notwithstanding the preceding sentence or anything herein to the contrary,
and without compliance with Section 3.06, the Company and its Subsidiaries
may (i) issue debt that is secured by any assets of the Company, provided
that the Company's and its Subsidiaries' aggregate secured debt, including
pursuant to the Revolving Credit Agreement, any Replacement Credit
Agreement and any other secured debt, shall not exceed $60,000,000 in
principal amount or (ii) issue Senior Debt Obligations, provided that the
aggregate amount of the Company's and its Subsidiaries' secured debt and
Senior Debt Obligations may not exceed $60,000,000 in principal amount."
14. WAIVER OF RESTRICTION REGARDING MULTIEMPLOYER PLANS. The Company
shall not be in default of or be deemed to have breached the restrictions on
adopting, maintaining or contributing to a Pension Plan or Multiemployer Plan
of the Company set forth in Section 6.15(f) of the Indenture as a result of
the consummation of the Merger and the transactions contemplated thereby,
including
4
<PAGE>
without limitation the assumption of and future performance under Hit or
Miss' current multiemployer plan.
15. AMENDMENT TO ADDITIONAL COVENANTS.
(a) Effective on the Effective Date, Section 6.15(c), line 7 of the
Indenture is amended by the insertion of the phrase "or any substantially
similar provision of a Replacement Credit Agreement" following the phrase
"Section 7.06 of the Revolving Credit Agreement" and before the semi-colon.
Further, effective on the Effective Date, Sections 6.15(d) and 6.15(e)(i)
of the Indenture are deleted in their entireties.
(b) Effective as of the Effective Date, Section 6.15(e)(ii), line 1
of the Indenture, is amended by the insertion of the phrase "or acquire"
following the phrase "The Company may form."
(c) Effective on the Effective Date, Section 6.15(g) of the Indenture
is amended and restated to read as follows:
"The Company shall not alter the nature of its business
(I.E., the sale of women's clothing) as operated on the date
of this Indenture in any material respect."
(d) Effective on the Effective Date, Section 6.15(h) of the Indenture
is amended by the insertion of the phrase "Subject to Article XI," at the
beginning of the section and the insertion of the phrase "or any
substantially similar provision of a Replacement Credit Agreement" at the
end of the section prior to the period.
16. AMENDMENTS TO EVENTS OF DEFAULT SECTION.
(a) Effective on the Effective Date, Section 8.01(a)(ii), line 1 of
the Indenture is amended by the deletion of the words "or 3.06".
(b) Effective on the Effective Date, Section 8.01(a)(vii), line 4 of
the Indenture is amended by the deletion of the word "or" after the
semicolon.
(c) Effective on the Effective Date, Section 8.01(a)(viii), line 6 of
the Indenture is amended by the deletion of the period and the addition of
a semicolon after the word "days".
(d) Effective on the Effective Date, new Sections 8.01(a)(ix) and
8.01(a)(x) shall be added to read as follows:
5
<PAGE>
"(ix) an Event of Default as such term is defined
under the Senior Subordinated Note due October 1, 2004 (the
"TJX Note") issued by Hit or Miss Inc. to The TJX Companies,
Inc. shall occur under such TJX Note; or
(x) any holder of any portion of the TJX Note shall
elect to have all or any portion of such holder's portion of
the TJX Note redeemed pursuant to the terms of Section 3.7
of the TJX Note."
17. AMENDMENT TO UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL
AND INTEREST SECTION. Effective on the Effective Date, Section 8.09, lines
6-8 of the Indenture is amended by the deletion of the words "or in the case
of a tender in accordance with Section 3.06 of this Indenture, on such
Purchase Date" from the parenthetical.
18. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants (which representations and warranties shall survive the execution
and delivery of this Supplemental Indenture) as of the date hereof that:
(a) All representations and warranties contained in the Indenture are
true and correct in all material respects as of the date of this
Supplemental Indenture 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) The Company has the corporate power and authority to execute,
deliver and carry out the terms and provisions of this Supplemental
Indenture and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Supplemental Indenture.
(c) This Supplemental Indenture has been duly executed and delivered
and constitutes the legal, valid and binding obligation of the Company, 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.
(d) 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 Company in
connection with the execution, delivery, performance, validity or
enforcement of this Supplemental Indenture, 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 Form 10-Q or a Form 10-K with the Securities
and Exchange Commission.
6
<PAGE>
(e) The execution, delivery and performance of this Supplemental
Indenture by the Company will not violate any provision of the certificate
or articles of incorporation or bylaws of the Company (before or
immediately after the Effective Date) 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 Company or any of its
subsidiaries, or, after the Effective Date, violate, result in the breach
of or constitute a default under any indenture, agreement or other
instrument to which the Company or any of its subsidiaries or any of their
respective properties or assets are or may be bound.
(f) After giving effect to this Supplemental Indenture after the
Effective Date, the Company is in compliance with all of the various
covenants and agreements applicable to it set forth in the Indenture.
(g) After giving effect to this Supplemental Indenture after the
Effective Date, 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 Indenture.
(h) The Company has no defense to or setoff, counterclaim or claim
against payment of the Notes or enforcement of the Indenture or the Notes
based upon a fact or circumstance existing or occurring on or prior to the
date of this Supplemental Indenture.
19. CONDITIONS PRECEDENT. Notwithstanding any term or provision of
this Supplemental Indenture to the contrary, no amendment set forth in this
Supplemental Indenture shall become effective until the Trustee shall have
determined that each of the following conditions precedent shall have been
satisfied, such determination to be conclusively evidenced by the Trustee's
execution and delivery of this Supplemental Indenture:
(a) The Company shall have delivered to the Trustee a copy of the
resolution of the Company, certified by the Secretary or an Assistant
Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such
certification, that this Supplemental Indenture has been authorized by the
Company. The Company shall have also delivered to the Trustee a
certification of an officer of the Company that all of the conditions
precedent to the effectiveness of this Indenture Supplement shall have been
met as of the date of such certificate and that the representations and
warranties set forth in Section 18 of this Supplemental Indenture are true
as of the Effective Date.
(b) The Trustee shall have received an Opinion of Counsel stating
that the execution of this Supplemental Indenture is authorized or
permitted by the Indenture.
(c) Counterparts of the separate letter agreements, dated the date of
this Supplemental Indenture, between the Company and holders representing
85% or more of the Outstanding Notes, pursuant to which each such holder
has consented to the amendments
7
<PAGE>
contained in this Supplemental Indenture, shall have been duly executed
and delivered on behalf of the Company and each such holder, and such
agreements shall be in full force and effect.
(d) The Trustee or its counsel shall have been provided true and
accurate copies of the Merger Agreement and such other documents relating
to the Merger, the Company or Holding as either of them may reasonably
request from the Company.
(e) Counterparts of this Supplemental Indenture shall have been duly
executed and delivered on behalf of the Company and the Trustee.
(f) Counterparts of (i) the Subordination Agreement, dated as of the
Effective Date, made by The TJX Companies, Inc. in favor of the Trustee for
the benefit of each holder of the Notes and (ii) the Guaranty Agreement,
dated as of the Effective Date, made by Hit or Miss Inc. in favor of the
Trustee for the benefit of each holder of the Notes shall have been duly
executed and delivered on behalf of the Trustee.
(g) The Company shall have obtained the consent of Fleet Bank, N.A.
under the Revolving Credit Agreement to this Supplemental Indenture.
20. CONDITION SUBSEQUENT. In the event that the Merger shall not be
consummated as contemplated by the Merger Agreement, as such Merger Agreement
may be amended from time to time after the date of this Supplemental
Indenture, by September 30, 1998, no amendment set forth in this Supplemental
Indenture shall be effective and the terms of the Indenture shall be enforced
without giving effect to the terms of this Supplemental Indenture.
21. EFFECTIVE DATE. Subject to Section 20, the Effective Date shall be
the date this Supplemental Indenture is executed and delivered by the parties
to this Supplemental Indenture.
22. ADDITIONAL EVENT OF DEFAULT. It shall constitute an Event of
Default under the Indenture if any of the representations and warranties of
the Company under this Supplemental Indenture shall prove to have been
incorrect in any material respect when made.
23. NO OTHER CHANGE. Except as modified by this Supplemental
Indenture, the Indenture shall continue in full force according to its terms
and is hereby ratified.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
GANTOS, INC.
By: /s/ Arlene H. Stern
----------------------------------
Its: President and CEO
---------------------------------
Attest:
/s/ Joseph Giudice
- -----------------------------------
Name: Joseph Giudice
------------------------------
Title: Senior V.P. Operations
-----------------------------
STATE STREET BANK AND TRUST COMPANY
By: Susan T. Keller
----------------------------------
Its: Vice President
---------------------------------
9
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
Before me, a Notary Public, in and for said State and County, duly
commissioned and qualified, personally appeared __________________________,
with whom I am personally acquainted and who, upon oath, acknowledged
him/herself to be the ____________________ of ___________________________,
and that as such officer, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by him/herself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand on this ________ day
of _________________, 199 .
-----------------------------
Notary Public
My Commission Expires:
STATE OF CONNECTICUT)
) ss.:
COUNTY OF HARTFORD )
Before me, a Notary Public, in and for said State and County, duly
commissioned and qualified, personally appeared Susan T. Keller, with whom I
am personally acquainted and who, upon oath, acknowledged him/herself to be
the Vice President of State Street Bank and Trust Co., and that such
officer, being authorized to do so, executed the foregoing instrument for the
purposes therein contained by signing the name of the corporation by
him/herself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand on this __________
day of ___________________, 199 .
/s/ Dawn P. Heintz
----------------------------
Notary Public
My Commission Expires: Dawn P. Heintz
Notary Public [SEAL]
My commission expires May 31, 2002
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ELLIOTT ASSOCIATES, L.P.
712 FIFTH AVENUE
NEW YORK, NEW YORK 10019
As of June 30, 1998
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in
accordance with Section 10.02 of the Indenture, dated as of April 1, 1995
between Company and Trustee, as successor trustee, as amended by Supplemental
Indenture No. 1, dated as of December 15, 1997 ("Supplemental Indenture No.
1" and, together with the Indenture, the "Indenture"), to the terms of
Supplemental Indenture No. 2, dated as of the date hereof ("Supplemental
Indenture No. 2").
In addition, this letter hereby confirms the consent of the undersigned
that payment of the Pro-Rata share of the principal amount of the Notes (as
defined in the Indenture) due to be paid on the July 1, 1998 sinking fund
redemption date ($774,725.87), as set forth in Section 3.01(b) of the
Indenture, may be postponed until such time as the Merger (as defined in
Supplemental Indenture No. 2) has been consummated; PROVIDED, HOWEVER, that
in no event shall the payment of such amount be postponed beyond September
25, 1998. Interest shall accrue on the principal amount of the Notes
postponed hereby at the rate of 12.75% per annum until payment is made.
Within five (5) days after the date of this letter, the Company shall
issue to the undersigned warrants (substantially in the form annexed hereto)
exercisable until June 30, 2003 to purchase the undersigned's pro rata
portion (based on the principal amount of the Notes which sign letters
consenting to the postponement of the July 1, 1998 payment of principal under
the Notes) of 150,000 Gantos Common Shares at an exercise price of $1.625 per
share as consideration for postponing the July 1, 1998 payment of principal
under the Notes. The payment of such consideration shall not change the
amount of principal and interest due with respect to the outstanding Notes.
The Company shall use its reasonable good faith efforts to register the
Gantos Common Shares underlying the warrants on the Company's currently filed
registration statement on Form S-4. If the Company is unable to register the
Gantos Common Shares thereon, the Company shall register the Gantos Common
Shares underlying the warrants within sixty (60) days after the consummation
of the Merger. The Company shall use its best efforts to keep the
registration statement registering
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such Gantos Common Shares (the "Registration Statement") continuously
effective until the earlier of (x) the date when all shares covered by the
Registration Statement have been sold or (y) the date the warrants cease to
be exercisable. The Company shall use its best efforts to list the Gantos
Common Shares underlying the warrants on any national securities exchange or
Nasdaq market, if any, on which the Gantos Common Shares are then listed or
quoted. The Company shall use its best efforts to register or qualify, no
later than the effective date of the Registration Statement under the
Securities Act of 1933, all shares covered by the Registration Statement
under the blue sky laws of such jurisdictions as any holder of the warrants
shall reasonably request, and do any and all other acts and things which may
be necessary or advisable to enable such holder to consummate the disposition
of the shares owned by such holder in such jurisdictions, provided that the
Company will not be required to register or qualify any shares in any
jurisdiction where such registration or qualification would (i) require it to
qualify generally to do business in such jurisdiction, (ii) subject it to
taxation in such jurisdiction, (iii) require it to consent to service of
process in any such jurisdiction, provided it has not already so consented,
or (iv) require it to amend the terms of the warrants or of any other class
of the Company's securities.
The Company hereby agrees that it shall not voluntarily prepay all or
part of the principal amount due under the TJX Note prior to the payment in
full of the Notes.
In addition, as additional consideration for postponing the July 1, 1998
payment of principal under the Notes, the Company shall pay the legal fees
and expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of the
undersigned incurred in connection with (i) the negotiation of Supplemental
Indenture No. 2 and this letter, (ii) any waivers or agreements with the
Company related thereto and (iii) any related due diligence, including
without limitation the review of the Company's Registration Statement on Form
S-4, the Subordination Agreement, the Guaranty Agreement and the form of
warrant.
The undersigned shall be provided true and accurate copies of the Merger
Agreement and such other documents relating to the Merger, the Company or
Holding as the undersigned may reasonably request from the Company.
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If this letter is acceptable, please so indicate by countersigning this
letter in the places indicated.
ELLIOTT ASSOCIATES, L.P.
By: Braxton Associates, L.P., as general partner
By: Braxton Associates, Inc., as general partner
By:
-------------------------------------
An Authorized Signator
Accepted:
GANTOS, INC.
By:
--------------------------------
Its:
--------------------------
Accepted:
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------
Its:
--------------------------
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[LETTERHEAD]
June 30, 1998
Gantos, Inc.
1266 East Main Street, 5th Floor
Stamford, Connecticut 06902
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Ladies and Gentlemen:
This letter hereby confirms the consent of the undersigned, in accordance
with Section 10.02 of the Indenture, dated as of April 1, 1995 between Company
and Trustee, as successor trustee, as amended by Supplemental Indenture No. 1,
dated as of December 15, 1997 ("Supplemental Indenture No. 1" and, together with
the Indenture, the "Indenture"), to the terms of Supplemental Indenture No. 2,
dated as of the date hereof ("Supplemental Indenture No. 2").
In addition, this letter hereby confirms the consent of the undersigned
that payment of the Pro-Rata share of the principal amount of the Notes due to
be paid on the July 1, 1998 sinking fund redemption date ($774,725.87), as set
forth in Section 3.01(b) of the Indenture, may be postponed until such time as
the Merger (as defined in Supplemental Indenture No. 2) has been consummated;
PROVIDED, HOWEVER, that in no event shall the payment of such amount be
postponed beyond September 25, 1998. Interest shall accrue on the principal
amount of the Notes postponed hereby at the rate of 12.75% per annum until
payment is made.
Within five (5) days after the date of this letter, the Company shall issue
to the undersigned warrants exercisable until June 30, 2003 to purchase the
undersigned's pro rata portion (based on the principal amount of the Notes which
sign letters consenting to the postponement of the July 1, 1998 payment of
principal under the Notes) of 150,000 Gantos Common Shares at an exercise price
of $1.625 per share as consideration for postponing the July 1, 1998 payment of
principal under the Notes. The payment of such consideration shall not change
the amount of principal and interest due with respect to the outstanding Notes.
The Company shall use its reasonable good faith efforts to register the Gantos
Common Shares underlying the warrants on the Company's currently filed
registration statement on Form S-4. If the Company is unable to register the
Gantos Common Shares thereon, the Company shall use its reasonable good faith
efforts to register the Gantos Common Shares underlying the warrants within
sixty (60) days after the consummation of the Merger.
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If this letter is acceptable, please so indicate by countersigning this
letter in the places indicated.
[NAME OF HOLDER]
By: ____________________________
Its: __________________________
Accepted:
GANTOS, INC.
By: ______________________________
Its: ___________________________
Accepted:
STATE STREET BANK AND TRUST COMPANY
By: ______________________________
Its: ___________________________
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WARRANT
WARRANT NO. WARRANTS
----- -----
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE
UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION
UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
GANTOS, INC.
This warrant certificate (the "WARRANT CERTIFICATE") certifies that, for
value received, [NAME OF HOLDER] or registered assigns under Section 8 hereof
(the "HOLDER") is the owner of [NUMBER OF WARRANTS] specified above (the
"WARRANTS") each of which entitles the Holder thereof to purchase one (1)
fully paid and nonassessable share of common stock, $ .01 par value (the
"COMMON STOCK"), of Gantos, Inc., a corporation organized
under the laws of the State of Michigan (the "COMPANY"), or such other number
of shares as may be determined pursuant to an adjustment in accordance with
Section 4 hereof, at the price per share set forth in Section 4 hereof,
subject to adjustment from time to time pursuant to Section 4 hereof (the
"WARRANT PRICE") and subject to the provisions and upon the terms and
conditions set forth herein.
1. TERM OF WARRANT.
Each Warrant is exercisable in full for a period of five (5) years
beginning on the date hereof and ending on June 30, 2003.
2. METHOD OF EXERCISE AND PAYMENT; ISSUANCE OF NEW WARRANT
CERTIFICATE; CONTINGENT EXERCISE.
<PAGE>
(a) In connection with any exercise pursuant to Section 1 hereof,
this Warrant Certificate shall be surrendered (with the notice of exercise
form attached hereto as EXHIBIT 1 (the "NOTICE OF EXERCISE") duly executed)
at the principal office of the Company together with the payment to the
Company of cash or a certified check or a wire transfer in an amount equal to
the then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased.
(b) NET ISSUE ELECTION. The holder hereof may elect to receive,
without the payment by such holder of any consideration (other than the
surrender referred to in this Section 2(b)), shares equal to the value of this
Warrant or any portion hereof (as determined below) by the surrender of this
Warrant or such portion to the Company, with the Notice of Exercise duly
executed by such holder, at the office of any duly appointed transfer agent for
the Common Stock or at the office of the Company. Thereupon, the Company shall
issue to such holder such number of fully paid and nonassessable shares of
Common Stock as is computed using the following formula:
X = Y (A-B)
--------
A
where X = the number of shares of Common Stock to be issued to such holder
pursuant to this Section 2(b).
Y = the number of shares of Common Stock covered by this Warrant in
respect of which the net issue election is made pursuant to this Section
2(b).
A = the Fair Market Value (as defined below) of one share of Common
Stock.
B = the Warrant Price then in effect under this Warrant at the time
the net issue election is made pursuant to this Section 2(b).
As used herein, "FAIR MARKET VALUE" per share of Common Stock as of
any date shall mean the numerical average of the fair market value per share
of Common Stock over a period of 21 business days consisting of the business
day on which the Notice of Exercise is received by the Company and the 20
consecutive business days prior to such date. The fair market value per
share of Common Stock for any day shall mean the average of the closing
prices of the Company's Common Stock sold on all securities exchanges on
which the Common Stock may at the time be listed or as quoted on the Nasdaq
National Market, or, if there have been no sales on any such exchange or any
such quotation on any day, the average of the highest bid and lowest asked
prices on all such exchanges or such system at the end of such day, or, if
any day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq system as of 4:00 p.m., Boston
time, or, if on any day that Common Stock is not quoted in the Nasdaq system,
the average of the highest bid and lowest asked price on such day in the
domestic over-the-counter market as reported by the
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National Quotation Bureau, Incorporated, or any similar successor
organization. If at any time the Common Stock is not listed on any
securities exchange or quoted in the Nasdaq system or the over-the-counter
market, the current fair market value of Common Stock shall be the highest
price per share which the Company could obtain from a willing buyer (not a
current employee or director) for shares of Common Stock sold by the Company,
from authorized but unissued shares, as determined in good faith by the Board
of Directors of the Company.
(c) The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant Certificate
shall have been surrendered and payment made for such shares as aforesaid. In
the event of any exercise of the rights represented by this Warrant Certificate,
certificates for the shares of Common Stock so purchased shall be delivered to
the Holder hereof within ten (10) days thereafter and, unless all of the
Warrants represented by this Warrant Certificate have been fully exercised or
have expired pursuant to Section 1 hereof, a new Warrant Certificate
representing the shares of Common Stock, if any, with respect to which the
Warrants represented by this Warrant Certificate shall not then have been
exercised, shall also be issued to the Holder hereof within such ten (10) day
period.
3. COMMON STOCK FULLY PAID; RESERVATION OF SHARES.
All Common Stock which may be issued upon the exercise of the Warrants
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of shares of its Common Stock to provide for
the exercise of the Warrants.
4. WARRANT PRICE; ADJUSTMENT OF WARRANT PRICE AND NUMBER
OF SHARES.
The Warrant Price shall be $1.625 per share of Common Stock, and the
Warrant Price and the number of shares of Common Stock purchasable upon exercise
of the Warrants shall be subject to adjustment from time to time, as follows:
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(a) RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any
reclassification or change of outstanding securities of the class issuable
upon exercise of the Warrants, or in case of any consolidation or merger of
the Company with or into another corporation or entity, other than a
consolidation or merger with another corporation or entity in which the
Company is the continuing corporation and which does not result in any
reclassification, conversion or change of outstanding securities issuable
upon exercise of the Warrants, the Company, or such successor corporation, as
the case may be, shall execute a new warrant certificate (the "NEW WARRANT
CERTIFICATE"), providing that the Holder of this Warrant
Certificate shall have the right to exercise such new warrants and procure
upon such exercise, in lieu of each share of Common Stock theretofore
issuable upon exercise of the Warrants, the kind and amount of shares of
stock, other securities, money and property receivable upon such
reclassification, conversion, change, consolidation, or merger by a holder of
one share of Common Stock. Such New Warrant Certificate shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4. The provisions of this Section
4(a) shall similarly apply to successive reclassifications, changes,
consolidations, mergers and transfers.
(b) SUBDIVISIONS, COMBINATIONS AND STOCK DIVIDENDS. If the Company
shall subdivide or combine its Common Stock, or shall pay a dividend with
respect to Common Stock payable in, or make any other distribution with respect
to its Common Stock consisting of, shares of Common Stock, then the Warrant
Price shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to that price
(rounded to the nearest $.01) determined by multiplying the Warrant Price in
effect immediately prior to such date of determination by a fraction (i) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution and (ii) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution. Such adjustment
shall be made successively whenever such a dividend or distribution occurs.
Upon each adjustment in the Warrant Price pursuant to this Section 4(b)
hereof, the number of shares of Common Stock purchasable hereunder shall be
adjusted to the product obtained by multiplying the number of shares purchasable
immediately prior to such adjustment in the Warrant Price by a fraction (i) the
numerator of which shall be the Warrant Price immediately prior to such
adjustment and (ii) the denominator of which shall be the Warrant Price
immediately thereafter.
(c) MINIMUM ADJUSTMENT. No adjustment of the Warrant Price or the
number of shares of Common Stock purchasable hereunder shall be made if the
amount of any such Warrant Price adjustment would be an amount less than $.01,
but any such amount shall be carried forward and an adjustment in respect
thereof shall be made at the time of, and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate an increase or decrease of $.01 or more.
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5. NOTICE OF ADJUSTMENTS.
Whenever any adjustment shall be made pursuant to Section 4 hereof, the
Company shall prepare a certificate signed by its chief financial officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
the Warrant Price after giving effect to such adjustment and the number of
shares of Common Stock then purchasable upon exercise of the Warrants, and shall
cause copies of such certificate to be mailed to the Holder hereof at the
address specified in Section 9(d) hereof, or at such other address as may be
provided to the Company in writing by the Holder hereof.
6. COMPLIANCE WITH SECURITIES ACT.
The Holder of this Warrant Certificate, by acceptance hereof, agrees that
the Warrants and the shares of Common Stock to be issued upon exercise thereof
are being acquired for investment and that it will not offer, sell or otherwise
dispose of the Warrants or any shares of Common Stock to be issued upon exercise
thereof except under circumstances which will not result in a violation of the
Act or applicable state securities or blue sky laws. Upon exercise of the
Warrants, the Holder hereof shall, if requested by the Company, confirm in
writing that the shares of Common Stock so purchased are being acquired for
investment and not with a view toward distribution or resale. This Warrant
Certificate and all shares of Common Stock issued upon exercise of the Warrants
(unless registered under the Act) shall be stamped or imprinted with a legend
substantially in the following form:
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE
UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION
UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
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7. TRANSFER.
Subject to compliance with the terms of Section 6 above, the Warrants and
all rights under this Warrant Certificate are transferable, in whole or in part,
at the principal office of the Company by the Holder hereof, in person or by its
duly authorized attorney, upon surrender of this Warrant Certificate properly
endorsed (with the instrument of transfer form attached hereto as EXHIBIT 2 duly
executed), together with payment of all transfer taxes, if any, payable in
connection herewith. Each Holder of this Warrant Certificate, by taking or
holding the same, consents and agrees that this Warrant Certificate, when
endorsed in blank, shall be deemed negotiable; provided, however, that the last
Holder of this Warrant Certificate as registered on the books of the Company may
be treated by the Company and all other persons dealing with this Warrant
Certificate as the absolute owner of the Warrants for any purposes and as the
person entitled to exercise the rights represented by this Warrant Certificate
or to transfer the Warrants on the books of the Company, any notice to the
contrary notwithstanding, unless and until such Holder seeks to transfer
registered ownership of the Warrants on the books of the Company and such
transfer is effected.
8. MISCELLANEOUS.
(a) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant
Certificate and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement or bond reasonably satisfactory in form and amount to the
Company or, in the case of mutilation, on surrender and cancellation of this
Warrant Certificate, the Company, at its expense, will execute and deliver, in
lieu of this Warrant Certificate, a new warrant certificate of like tenor.
(b) NOTICE OF CAPITAL CHANGES. In case:
(i) the Company shall declare any dividend or distribution
payable to the holders of shares of Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of its assets to,
another corporation or business organization; or
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company.
then, in any one or more of said cases, the Company shall give the Holder hereof
prior written notice of such event, in the manner set forth in Section 8(c)
below, at least 30 days prior to the date on which a record shall be taken for
such dividend or distribution or for determining shareholders entitled to vote
upon such reorganization, reclassification, consolidation, merger,
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sale, dissolution, liquidation, winding up or the date when any such
transaction shall take place, as the case may be.
(c) NOTICE. Any notice to be given to either party under this
Warrant Certificate shall be in writing and shall be deemed to have been given
to the Company or the Holder hereof, as the case may be, when delivered in hand
or when sent by first class mail, postage prepaid, addressed, if to the Company,
at its principal office and, if to the Holder hereof, at its address as set
forth in the Company's books and records or at such other address as the Holder
hereof may have provided to the Company in writing.
(d) NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation, Bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Warrant Certificate.
(e) WARRANT HOLDER NOT STOCKHOLDER. This Warrant Certificate shall
not confer upon the Holder hereof any right to vote or to consent to or receive
notice as a stockholder of the Company, as such, in respect of any matters
whatsoever, or any other rights as a stockholder, prior to the exercise hereof.
(f) GOVERNING LAW; JURISDICTION. This Warrant Certificate shall be
deemed to be a contract made under, and shall be construed in accordance with,
the laws of the State of Delaware without giving effect to conflict of laws
principles except to the extent that the corporate laws of the State of Michigan
are mandatorily applicable thereof. The Company and the Holder of the Warrant
Certificate by acceptance hereof, each hereby agrees that the state and federal
court of New York shall have jurisdiction to hear and determine any claims or
disputes between the Holder and the Company pertaining directly or indirectly to
this Warrant Certificate and all documents, instruments and agreements executed
pursuant hereto, or to any matter arising therefrom (unless otherwise expressly
provided for therein). To the extent permitted by law, the Company and the
Holder of the Warrant Certificate by acceptance hereof, each hereby expressly
submits and consents in advance to such jurisdiction in any action or proceeding
commenced by the Company or any Holder in any of such courts, and agrees that
service of such summons and complaint or other process or papers may be made by
registered or certified mail addressed to such party at the address to which
notices are to be sent to such party pursuant to this Agreement. To the extent
permitted by law, should the Company or the Holder of this Warrant Certificate,
as the case may be, after being so served, fail to appear or answer to any
summons, complaint, or process or papers so served within 30 days after the
mailing thereof, such party shall be deemed in default and an order and/or
judgment may be entered against such party as demanded or prayed for in such
summons, complaint, process or papers. The exclusive choice of forum set forth
in this Section 8(f) shall not be deemed to preclude the enforcement of any
judgment
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obtained in such forum or the taking of any action to enforce the same
in any other appropriate jurisdiction.
[THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK]
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The Company has caused this Warrant Certificate to be executed as of this
[__] day of [_____], 1998.
GANTOS, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
-------------------------------
Attest:
By:
------------------------------
Name:
---------------------------
Title:
--------------------------
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EXHIBIT 1
NOTICE OF EXERCISE
TO: GANTOS, INC.
1. The undersigned hereby irrevocably elects to purchase ____________________
(_________) shares of the Common Stock, $.01 par value per share, of Gantos,
Inc. covered by Warrant No.___ according to the terms thereof and herewith makes
payment of the Warrant Price of such shares in full.
2. Specify method of exercise by check mark:
__ a. Such payment is hereby made in the amount of $_______ by (i)
cash, (ii) wire transfer or (iii) certified or bank check payable to
Gantos, Inc.
__ b. The holder elects to receive the number of shares of Common
Stock for the value (as determined pursuant to Section 2(b) of the
Warrant Certificate) of the Warrant or the portion thereof specified
in 1. above.
3. Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
____________________________
(Name)
____________________________
(Address)
------------------
Signature
Dated: _______________
<PAGE>
EXHIBIT 2
FORM OF ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto the rights represented by the within Warrant Certificate to
purchase [___________] shares of Common Stock of Gantos, Inc. to which the
within Warrant Certificate relates and appoints _______________________ to
transfer such rights on the books of Gantos, Inc. with full power of
substitution in the premises.
Dated: Signature
--------------------- ---------------------------
2
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AMENDMENT NO. 9 TO CREDIT AGREEMENT
AMENDMENT NO. 9 TO CREDIT AGREEMENT, dated as of July 8, 1998 (this
"AMENDMENT"), among GANTOS, INC., a Michigan corporation (the "BORROWER"), the
lenders named therein (each individually, "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, amendment no. 2, dated March 18, 1997, amendment
no. 3, dated October 8, 1997, amendment no. 4, dated as of February 1, 1998,
amendment no. 5, dated as of February 27, 1998, amendment no. 6, dated as of
March 30, 1998, amendment no. 7, dated as of April 29, 1998, amendment no. 8,
dated as of April 30, 1998 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 effective as of July 8, 1998, as follows:
(a) The definition of "Availability appearing in Article I of the
Credit Agreement is amended and restated in its entirety as
follows:
(i) From the date hereof through October 12, 1998:
"AVAILABILITY" shall mean, at any time, an amount equal to
(a) the lesser of (i) the Total Commitment and (ii) the Borrowing Base
MINUS (b) the sum of (i) all
<PAGE>
Loans outstanding at such time, (ii) the Standby Letter of Credit
Usage at such time, (iii) fifty-five percent (55%) of the Trade
Letter of Credit Usage at such time and (iv) a reserve equal to the
sum of (x) $1,000,000, plus (y) all other reserves which the Agent
in good faith deems in its reasonable discretion to be necessary
and appropriate to maintain with respect to the account of the
Borrower, including, without limitation, shrinkage reserves,
reserves for environmental liabilities, reserves for judgments,
decrees, fines and penalties rendered by a court or other tribunal
against any Credit Party (excluding therefrom amounts which an
insurance carrier has affirmatively acknowledged are fully covered
by insurance or with respect to which an insurance carrier is
precluded from denying coverage or liability) and any amounts which
the Agent or any Lender may be obligated to pay in the future for
the account of the Borrower.
(ii) From October 13, 1998 and thereafter:
"AVAILABILITY" shall mean, at any time, an amount equal to
(a) the lesser of (i) the Total Commitment and (ii) the Borrowing Base
plus an amount equal to the lesser of (x) ten percent (10%) of the
value (based on the lower of cost (on a FIFO basis) and current market
value) of then existing Eligible Inventory and (y) $2,000,000, MINUS
(b) the sum of (i) all Loans outstanding at such time, (ii) the
Standby Letter of Credit Usage at such time, (iii) fifty-five percent
(55%) of the Trade Letter of Credit Usage at such time, (iv)
$3,500,000 and (v) an amount equal to all reserves which the Agent in
good faith deems in its reasonable discretion to be necessary and
appropriate to maintain with respect to the account of the Borrower,
including, without limitation, shrinkage reserves, reserves for
environmental liabilities, reserves for judgments, decrees, fines and
penalties rendered by a court or other tribunal against any Credit
Party (excluding therefrom amounts which an insurance carrier has
affirmatively acknowledged are fully covered by insurance or with
respect to which an insurance carrier is precluded from denying
coverage or liability) and any amounts which the Agent or any Lender
may be obligated to pay in the future for the account of the Borrower.
(b) The definition of "Borrowing Base" appearing in Article I of the
Credit Agreement is amended and restated in its entirety as follows:
(i) From the date hereof through October 12, 1998:
"BORROWING BASE" shall mean an amount equal to the sum of
(a) ninety percent (90%) of the Net Amount of Eligible Receivables
plus (b) sixty five percent (65%) of Eligible Inventory valued at the
lower of cost (on a FIFO basis) and current market value minus the
aggregate amount of all outstanding gift certificates sold by the
Borrower; provided that the amount of Eligible Inventory (valued as
aforesaid) included in the Borrowing Base shall at no time exceed
$28,500,000.
2
<PAGE>
(ii) From October 13, 1998 and thereafter:
"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 the period
commencing on October 1, 1997 and ending on January 31, 1999, and
each four month period occurring thereafter 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
basis) and current market value and (2) at any time during the
period commencing on February 1, 1999 and ending on September 30,
1999, and each eight month period occurring thereafter 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 definition of "Change of Control" appearing in Article I of
the Credit Agreement is amended as follows:
(a) The word "or" is deleted after subsection (i) and before
subsection (ii) and a comma is inserted in lieu thereof, (b) at the
end of subsection (ii) the period is deleted and the words "or (iii)"
are inserted in lieu thereof and (c) after "or (iii)" the following
text is added:
"Arlene H. Stern or a replacement reasonably satisfactory to the
Agent is no longer the President and the Chief Executive Officer of
the Borrower performing the functions thereof."
(d) A new sentence shall be added to the end of Section 2.06(b) of
the Credit Agreement:
(d) The Reduction Fee shall become immediately due and
payable to the Agent on behalf of each Lender in the event that Fleet
Bank, N.A. assigns its interests, rights and obligations under the
Loan Documents, including with respect to the Loans and the other
Obligations to Enhanced Retail Funding, LLC.
(e) Section 6.05(j) is amended as follows:
3
<PAGE>
(a) The word "and" is deleted after subsection (i) and
before subsection (ii) and a comma is inserted in lieu thereof, (b) at
the end of subsection (ii) the period is deleted and the words "and
(iii)" are inserted in lieu thereof and (c) after "and (iii)" the
following text is added:
"Commencing October 1, 1998, and on each day thereafter, a daily
borrowing base 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 the duly authorized financial officer of the Borrower)
demonstrating compliance as at the close of business of the preceding
day with the Borrowing Base and the Availability and utilizing the
preceding day=s amounts for inventory and Receivables; provided that
if on October 15, 1998 no Default exists, then the Borrower shall not
be required to comply with this subsection (iii) thereafter."
(f) Section 11.03(c) is amended by adding the following sentence at
the end thereof:
Notwithstanding the foregoing, the Borrower=s consent shall not
be required in the event that Fleet Bank, N.A. assigns all or a
portion of its interests, rights and obligations under this Agreement
and the other Loan Documents to Enhanced Retail Funding, LLC or any
affiliate.
(g) From the date hereof through October 12, 1998, the applicability
and effectiveness of Sections 7.09, 7.10 and 7.11 (as amended in "Amendment No.
3 to Credit Agreement" dated as of October 8, 1997) shall be suspended and on
October 13, 1998 and at all times thereafter such Sections shall be applicable
and fully effective.
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:
(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 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) 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.
(c) 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,
4
<PAGE>
insolvency, moratorium and other similar laws affecting the enforcement of
creditors= rights generally and by general equity principles.
(d) 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 or the filing of this Amendment as an exhibit to any other
report or registration statement filed or to be filed with the Securities and
Exchange Commission.
(e) 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.
(f) After giving effect to this Amendment, 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.
(g) After giving effect to this Amendment, 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.
(h) 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. As of July 7, 1998, the outstanding principal amount of Loans is
$23,709,332.88 and the aggregate amount of outstanding Letters of Credit is
$1,814.014.82 (consisting of $1,714,014.82 of Trade Letter of Credit Usage and
$100,000 of Standby Letter of Credit Usage).
4. CONDITIONS PRECEDENT. Notwithstanding any term or provision of
this Amendment to the contrary, the amendments set forth in Paragraph 2 hereof
shall become effective as of July 8, 1998 if, and only if, the Agent shall have
determined that each of the following conditions precedent shall have been
satisfied:
(a) 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
5
<PAGE>
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.
(b) 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).
(c) Counterparts of this Amendment shall have been duly executed and
delivered on behalf of the Borrower, the Lenders and the Agent.
(d) The Agent shall have received a Junior Participation Agreement
entered into by Enhanced Retail Funding, LLC and Fleet Bank, NA and the Agent
shall have received the letter of credit provided for therein.
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 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).
8. MISCELLANEOUS. The Borrower agrees to request a loan to pay any
outstanding fees set forth in the fee letter attached hereto as Exhibit A owed
to Enhanced Retail Funding, LLC. The Agent will advance to the Borrower such
funds upon such request to the extent there is, at such time, sufficient
Availability to do so after giving effect to such advance. The Borrower
consents to Fleet Bank, N.A. entering into the Junior Participation Agreement
dated as of the date hereof with Enhanced Retail Funding, LLC and agrees that
Fleet Bank, N.A. may grant to Enhanced Retail Funding, LLC the rights granted
thereunder.
6
<PAGE>
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:
7
<PAGE>
Enhanced Retail Funding, LLC
40 Broad Street
Boston, Massachusetts 02109
Dated as of: July 8, 1998
Gantos, Inc.
1266 East Main Street
5th Floor
Stamford, CT 06902
Attn: Arlene H. Stern, President and CEO
Dear Arlene:
Reference is made to the Revolving Credit Agreement between Gantos, Inc.
("Gantos"), as Borrower and Fleet Bank, N.A. ("Fleet"), as Agent and Lender,
dated as of March 10, 1995, as amended, supplemented, and/or modified from time
to time in accordance with the provisions thereof, (as so amended and in effect,
the "Loan Agreement"). Terms defined in the Loan Agreement and not otherwise
defined herein have the same meanings herein as specified therein.
The undersigned is pleased to advise Gantos of its agreement to provide Fleet
with an irrevocable standby letter of credit in the face amount of $3,350,000
and with an expiration date of October 20, 1998 (the "Letter of Credit"). This
Letter of Credit is a condition precedent to Fleet's further amendment of the
Loan Agreement to, INTER ALIA, increase Availability of Loans under the
Borrowing Base for the period through October 12, 1998, as more fully set forth
in Amendment No. 9 to the Credit Agreement of even date herewith ("Amendment
No. 9"). The terms and conditions for the issuance of the Letter of Credit are
contained in the Junior Participation Agreement of even date herewith (the
"Participation Agreement") entered into between Fleet and the undersigned.
In consideration for the undersigned's provision of the Letter of Credit and its
commitments, obligations and agreements which will allow Gantos increased
liquidity from its asset base, which will, in turn, enhance Gantos' ability to
consummate a merger with Hit or Miss, Inc., and for other valuable
consideration, the receipt and sufficiency of which are acknowledged, by its
signature below, Gantos hereby agrees with the undersigned as follows:
-1-
<PAGE>
1. Gantos agrees that on the date of and as a condition to the issuance of the
Letter of Credit it will pay to the undersigned in immediately available funds a
fee equal to $167,500. In addition, Gantos agrees that on the 30th calendar day
after the issuance of the Letter of Credit it will pay to the undersigned in
immediately available funds a fee equal to $33,500. In addition, Gantos agrees
that on each of the 60th calendar day and the 90th calendar day after the
issuance of the Letter of Credit it will pay to the undersigned in immediately
available funds a fee equal to $33,500, PROVIDED, HOWEVER, that this fee due on
each of the 60th day and the 90th day after the issuance of the Letter of Credit
will not be payable if, on or before the date such fee payment is due, all of
the Obligations under the Loan Agreement have been paid in full as a result of
the merger between Gantos and Hit or Miss, Inc.
2. Gantos agrees that on the date of and as a condition to the issuance of the
Letter of Credit, it will pay to the undersigned all of the issuer's costs of
issuance for the Letter of Credit (presently calculated at 1% per year,
prorated), in addition to any and all other sums due hereunder.
3. Gantos agrees to pay to the undersigned during the term of the Letter of
Credit a monthly monitoring fee of $1,500. The first $1,500 monthly monitoring
fee shall be due and payable on the date of the issuance of the Letter of
Credit. Subsequent $1,500 monthly monitoring fees will be due and payable on
the first business day of each subsequent calendar month during the term of the
Letter of Credit or, if Fleet draws on the Letter of Credit in any amount, until
all Obligations under the Loan Agreement, including, without limitation, amounts
payable to the undersigned under the Junior Participation Agreement, are paid in
full.
4. Gantos agrees to pay all of the undersigned's expenses (including
out-of-pocket expenses) for due diligence and for all other expenses related
to this transaction, including, without limitation, legal fees and expenses,
accountants fees and expenses, costs of appraisals and inspections, filing
fees, credit check fees, recording fees, and similar fees and expenses up to
$50,000. The undersigned acknowledges that it has already received a $20,000
deposit towards the expenses outlined in this Paragraph 4. On the date of
and as a condition to the issuance of the Letter of Credit, Gantos agrees to
pay to the undersigned in immediately available funds the remaining $30,000
payable on account of the expenses outlined in this Paragraph 4. Any
remaining unused funds will be returned to Gantos after a final accounting of
all the expenses incurred in connection with this transaction.
5. Gantos acknowledges that Fleet has agreed in the Participation Agreement,
and under the latest amendment to the Loan Agreement, to make available from the
line of credit under the Loan Agreement the amounts necessary to pay the above
fees and expenses, provided, in all instances, that there is adequate
Availability under the terms and conditions of the Loan Agreement (as amended by
Amendment No. 9) to advance such funds. Gantos agrees to request such funds
under its line of credit under the Loan Agreement (as amended by Amendment
No. 9) to pay all of the fees and expenses owed
-2-
<PAGE>
to the undersigned. The failure of Gantos to have adequate Availability
under its line of credit will not excuse Gantos from its obligation to pay
the fees and expenses owed to the undersigned, and nothing herein shall be
construed as a waiver, in whole or in part, by the undersigned of its right
to any of the fees and expenses due from Gantos to the undersigned under this
letter agreement.
If you are in agreement with the above, please indicate such agreement by your
signature below. Upon your execution below, this letter will become a binding
agreement between the parties hereto.
Sincerely,
ENHANCED RETAIL FUNDING, LLC
By:_____________________________
Name:
Title:
AGREED AND ACCEPTED this _____________ day of _____________, 1998.
GANTOS, INC.
By:________________________________
Arlene H. Stern
President and Chief Executive Officer
-3-
<PAGE>
1998 Gantos, Inc. Executive Bonus Plan (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 1, 1998.
"FISCAL 1998" is Corporation's fiscal year ending January 30, 1999.
"FISCAL 1998 TARGET" is the Fiscal 1998 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 1998 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 1998 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
(1) Adopted by the Gantos, Inc. Board of Directors on May 19, 1998.
<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 Arlene H. Stern, Joseph
Giudice, Dennis Horstman, Neal Gottfried, David Nelson, Vicki Boudreaux and Hope
Grey. 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 1998 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 1998 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
1998 for any other reason, such Participant will receive no bonus under the
Plan.
4. FISCAL 1998 ANNUAL BONUS.
(a) If Corporation's Fiscal 1998 Profit exceeds the Fiscal 1998 Target,
the Fiscal 1998 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 1998 for Corporation (the
"Bonus Pool").
(b) Fifty percent of the Bonus Pool will be automatically earned and
payable upon achievement of Fiscal 1998 Profits in excess of the Fiscal 1998
Target. This 50% portion will be paid to each Participant in proportion to the
1998 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 1998 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.
6. STOCK OPTIONS. The Plan does not cover stock option grants, which
will be subject to the Board's discretion.
2
<PAGE>
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 1998.
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF GANTOS, INC. AS OF, AND FOR THE SIX MONTH PERIOD
ENDED AUGUST 1, 1998 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-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 775
<SECURITIES> 0
<RECEIVABLES> 16,695
<ALLOWANCES> 492
<INVENTORY> 26,640
<CURRENT-ASSETS> 51,980
<PP&E> 63,564
<DEPRECIATION> 50,247
<TOTAL-ASSETS> 65,297
<CURRENT-LIABILITIES> 17,931
<BONDS> 31,339
0
0
<COMMON> 77
<OTHER-SE> 15,950
<TOTAL-LIABILITY-AND-EQUITY> 65,297
<SALES> 70,822
<TOTAL-REVENUES> 70,822
<CGS> 59,289
<TOTAL-COSTS> 59,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,725
<INCOME-PRETAX> (5,697)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,697)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
