<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 October 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
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Commission file number 0-14577
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Gantos, Inc.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Michigan 38-1414122
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1266 E. Main Street, Fifth Floor, Stamford, Connecticut 06902
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
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 December 10, 1998: 7,670,027
Page 1 of 14
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GANTOS, INC.
<TABLE>
<CAPTION>
Page
Number
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
CONDENSED FINANCIAL STATEMENTS
Statements of Operations 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-11
Quantitative and Qualitative Disclosures
about Market Risk 11
PART II. OTHER INFORMATION
Changes in Securities and Use of Proceeds 12
Exhibits and Reports on Form 8-K 12-13
Signatures 14
</TABLE>
Page 2 of 14
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GANTOS, INC.
STATEMENT OF OPERATIONS
(Amounts in thousands, except per share and store data)
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------- ---------------------------
OCT. 31, NOV. 1, OCT. 31, NOV. 1.
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $35,446 $35,478 $106,267 $116,858
Cost of sales (including
buying, distribution and
occupancy costs) ($29,215) ($30,027) ($88,503) ($96,895)
------------------------------------------------------------------------
Gross income $6,231 $5,451 $17,764 $19,963
Selling, general and
administrative expenses ($8,672) ($9,432) ($26,310) ($28,680)
Merger termination expense ($784) - ($784) -
Finance charge and other
revenue $996 $1,164 $3,128 $3,593
------------------------------------------------------------------------
Operating loss ($2,229) ($2,817) ($6,202) ($5,124)
Interest expense ($1,788) ($571) ($3,512) ($1,523)
------------------------------------------------------------------------
Loss before income taxes ($4,017) ($3,388) ($9,714) ($6,647)
Income taxes - - - -
------------------------------------------------------------------------
Net loss ($4,017) ($3,388) ($9,714) ($6,647)
------------------------------------------------------------------------
------------------------------------------------------------------------
Per share amounts: ($0.52) ($0.45) ($1.27) ($0.88)
Net loss per share
(basic and diluted)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average shares 7,662,218 7,550,074 7,627,635 7,545,703
outstanding
(basic and diluted)
Stores open at end of period 115 116 115 116
</TABLE>
See accompanying notes to condensed financial statements.
Page 3 of 14
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GANTOS, INC.
BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
OCT. 31, JAN. 31, NOV. 1,
1998 1998 1997
(unaudited) (unaudited)
-------- ----------- --------
<S> <C> <C> <C>
ASSETS
- ------ ----------------------------------------------
Current assets:
Cash and cash equivalents $ 1,175 $ 1,295 $ 1,127
Accounts receivable, less 16,829 18,607 18,679
Allowance for doubtful accounts of
$517, $591 and $625 at October 31,1998,
January 31,1998 and November 1,1997,respectively
Merchandise inventory 38,026 22,540 38,264
Prepaid expenses and other 12,181 8,205 3,092
----------------------------------------------
Total current assets 68,211 50,647 61,162
----------------------------------------------
Property and equipment, at cost:
Leasehold improvements 31,119 30,506 29,026
Furniture and fixtures 31,752 32,034 29,422
Other 716 122 2,676
----------------------------------------------
Total property and equipment 63,587 62,662 61,124
Less - Accumulated depreciation
and amortization (51,233) (48,115) (47,211)
----------------------------------------------
Net property and equipment 12,354 14,547 13,913
----------------------------------------------
Total assets $ 80,565 65,194 $ 75,075
----------------------------------------------
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 20,859 7,644 16,051
Accrued expenses and other 7,188 8,472 8,327
----------------------------------------------
Total current liabilities 28,047 16,116 24,378
Long-term debt 40,365 27,398 24,769
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
7,670,027 issued and outstanding at
October 31, 1998, 7,583,000 issued and
outstanding at January 31, 1998 and 7,547,000
issued and outstanding at November 1, 1997 77 76 76
Additional paid-in capital 41,162 40,977 40,910
Accumulated deficit (29,086) (19,373) (15,059)
----------------------------------------------
Total shareholders' equity 12,153 21,680 25,928
Commitments - - -
----------------------------------------------
Total liabilities and shareholders' equity 80,565 65,194 75,075
----------------------------------------------
----------------------------------------------
</TABLE>
Page 4 of 14
See accompanying notes to condensed financial statements.
<PAGE>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
(unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------
Oct. 31, Nov. 1,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss (9,714) (6,647)
Adjustments to reconcile net loss to
net cash used by operating activities: -
Cash used for facilities closings (399)
Depreciation and amortization 3,116 3,656
Restricted stock compensation expense 73
Other 40
Changes in assets and liabilities:
Accounts receivable 1,778 3,293
Merchandise inventories (15,486) (15,891)
Prepaid expenses and other (3,976) 79
Accounts payable 13,215 5,303
Accrued expenses and other (1,284) (2,040)
------- -------
Total adjustments (2,597) (5,926)
Net cash used by operating activities (12,311) (12,573)
------- -------
Cash flows from investing activities:
Capital expenditures (924) (3,430)
------- -------
Net cash flows used by investing activities (924) (3,430)
------- -------
Cash flows from financing activities:
Principal payments under capital lease
obligations and other long-term debt (1,578) (3,344)
Issuance of common shares 175 59
Borrowings under revolving credit notes payable 126,633 156,301
Repayments under revolving credit notes payable (112,088) (140,129)
Other (27) (103)
------- -------
Net cash used by financing activities 13,115 12,784
------- -------
Net decrease in cash and cash equivalents (120) (3,219)
Cash and cash equivalents at beginning of period 1,295 4,345
------- -------
Cash and cash equivalents at end of period 1,175 1,126
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for :
Interest (net of amount capitalized) $ 2,480 $ 1,367
</TABLE>
See accompanying notes to condensed financial statements.
Page 5 of 14
<PAGE>
GANTOS, INC.
NOTES TO CONDENSED 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 for a fair statement of the
results of the interim periods presented and necessary to present fairly
the financial position as of October 31, 1998, January 31, 1998 and
November 1, 1997, the results of operations for the thirteen and
thirty-nine weeks ended October 31, 1998 and November 1, 1997, and cash
flows for the thirty-nine weeks ended October 31, 1998 and November 1,
1997. All adjustments are of a normal and recurring nature.
The results of operations for the thirteen and thirty-nine week periods
ended October 31, 1998 and November 1, 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
period presented.
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. On November 20, 1998, the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation and Paragon Capital LLC (the
"Foothill/Paragon Facility"), replacing its Revolving Credit Agreement with
Fleet Bank N.A. The Foothill/Paragon Facility expires November 20, 2001,
and it provides the Company with revolving credit loans and letters of
credit up to $40 million, subject to a borrowing base formula and lender
reserves (as defined in the agreement). Undrawn and unreimbursed letters of
credit under the facility may not exceed $5,000,000 in face amount. Loans
under the Foothill/Paragon Facility generally bear interest at Norwest Bank
Minnesota's base rate plus 1.5%, except for special advances based on a
higher inventory advance rate and special advances available in December
1998 and January 1999 based on bank card receivables, which bear interest
at the base rate plus 4.0%. The interest is payable in arrears on the first
day of each month. As of December 8, 1998, the Norwest Bank Minnesota base
rate was 7.75%.
The Foothill/Paragon Facility carries annual commitment fees, payable
monthly, of 0.5% of the difference between $40 million and the average
amount outstanding under the facility (including the face amount of
letters of credit) and 1.5% of the face amount of outstanding letters of
credit. The Company also paid a $400,000 origination fee to
Foothill/Paragon and a $200,000 termination fee to Fleet Bank at closing
and must pay annual fees to Foothill/Paragon of $200,000 and $100,000 on
November 20, 1999 and November 20, 2000, respectively. The Company must
also pay servicing fees of $6,000 a month, which increase to $12,000 a
month if the Company requests any special advances. The Foothill/Paragon
Facility also provides for a $1,200,000, $800,000 or $400,000
termination fee if the credit facility is terminated before November 20,
1999, November 20, 2000 or November 20, 2001, respectively.
The Foothill/Paragon Facility is secured by substantially all of the
Company's assets. The Foothill/Paragon Facility contains, among other
things, covenants with respect to (i) additional indebtedness, (ii)
prohibitions on making distributions (including dividends), (iii)
investments, (iv) minimum earnings before interest, taxes, depreciation and
Page 6 of 14
<PAGE>
amortization, and (v) maximum capital expenditures.
As of December 8, 1998, the Company had $34.3 million in borrowings and
$1.5 million in letters of credit outstanding under the Foothill/Paragon
Facility, and approximately $4.2 million was available for borrowing under
the Foothill/Paragon 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
effective as of June 30, 1998 to cure potential defaults under the
Indenture. 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 $4.5
million at the end of each quarter through the third quarter of fiscal 2000
and $6.0 million at the end of each subsequent quarter. As of October 31,
1998, the Company's net worth was approximately $12.2 million. As of
December 8, 1998, approximately $6.2 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 May 1, 1999 and 50% of their regularly scheduled January 1,
1999 payment of principal, totaling approximately $372,500, until February
15, 1999. 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 $0.75 per share and 225,000 of the Company's Common
Shares at an exercise price of $0.01 per share. In addition, the Company
has filed a registration statement on Form S-3 to register the resale of
the Common Shares issuable upon exercise of those warrants. If the
Company's 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, there can be no assurance that the Company
will be able to meet the financial covenants under its borrowing
arrangements 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 thirty-nine weeks ended October 31, 1998, the
Company incurred a loss of $9.7 million and has experienced a tightening of
trade credit. See also Note 4. 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 Foothill/Paragon Facility and
the Indenture, support from trade creditors, changes in comparable store
sales, and future profitable operations.
6. During the thirteen weeks ended October 31, 1998, the Company recorded a
Merger Termination Expense of approximately $784,000. During the third
quarter the Board of Directors authorized the Company to terminate its
proposed merger with HOM Holding, Inc. and Hit or Miss, Inc., pursuant
to the Agreement and Plan of Merger between them. As a result of the
termination, the Company expensed the accrued costs of the proposed
merger, including financial advisor and professional fees.
7. On November 17, 1998 the Company Filed an amended 10K/A for the year-ended
January 31, 1998 and a 10Q/A for the period ended July 31, 1998. The
Statement of Operations, Cash Flow and Balance Sheet reflect these
restatements.
Page 7 of 14
<PAGE>
GANTOS, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998, COMPARED TO THIRTEEN AND
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997.
The following table indicates the percentage relationships to net sales of
various revenue and expense items for the thirteen and thirty-nine week periods
ended October 31, 1998 and November 1, 1997.
<TABLE>
<CAPTION>
AS A PERCENT OF NET AS A PERCENT OF NET
SALES FOR THE THIRTEEN SALES FOR THE THIRTY-
WEEKS ENDED NINE WEEKS ENDED
--------------------------- ---------------------------
OCT. 31, NOV. 1, OCT. 31, NOV. 1,
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) (82.4)% (84.6)% (83.3)% (82.9)%
Gross income 17.6% 15.4% 16.7% 17.1%
Selling, general and administrative (24.5)% (26.6)% (24.8)% (24.5)%
expense
Merger termination expense (2.2)% 0.0% (0.7)% 0.0%
Finance charge and other revenue 2.8% 3.3)% 2.9% 3.1%
Operating loss (6.3)% (7.9)% (5.8)% (4.4)%
Interest expense (5.0)% (1.6)% (3.3)% (1.3)%
Loss before income taxes (11.3)% (9.5)% (9.1)% (5.7)%
</TABLE>
Net sales for stores and comparative stores for the thirteen weeks ended October
31, 1998 were approximately $35.4 million, substantially the the same as net
sales of approximately $35.5 million in the same period of the prior fiscal
year. The Company opened a new store in April 1997 and another in October 1997.
One store was closed in January 1998.
Net sales for the thirty-nine weeks ended October 31, 1998 were approximately
$106.3 million, a decrease of approximately 10.6 million, or 9.1% compared to
net sales of approximately $116.9 million in the same period of the prior fiscal
year. Net sales for stores in operation throughout both periods decreased 9.4%.
The 9.4% decrease in comparable store sales is comprised of a 7.3% 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 2.2% decrease in average sales dollars per
unit, partially offset by a 0.2% increase due to a change
Page 8 of 14
<PAGE>
in merchandise mix.
Cost of sales decreased $0.8 million in the thirteen weeks ended October 31,
1998 compared to the prior fiscal year. Cost of sales, as a percent of net
sales, decreased to 82.4% in the thirteen weeks ended October 31, 1998, compared
to 84.6% in the same period in the prior fiscal year. Cost of sales decreased
$8.4 million in the thirty-nine weeks ended October 31, 1998 compared to the
prior fiscal year. Cost of sales, as a percent of net sales, increased to 83.3%
in the thirty-nine weeks ended October 31, 1998, compared to 82.9% in the same
period in the prior fiscal year. The increase in cost of sales, as a percent of
net sales, for the thirty-nine weeks ended October 31, 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. The decrease in cost of sales
as a percent of net sales, for the thirteen weeks ended October 31, 1998 is
primarily the result of lower net markdowns, partially offset by lower vendor
allowances for the period compared to a year ago.
Selling, general and administrative (SG&A) expense for the thirteen weeks
ended October 31, 1998 decreased approximately $760,000 compared to the same
period in the prior fiscal year. The decrease in SG&A is partly due to 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 decreased from 26.6%
to 24.5% for the thirteen weeks ended October 31, 1998 primarily as a result
of the reductions described above.
Selling, general and administrative (SG&A) expense for the thirty-nine weeks
ended October 31, 1998 decreased approximately $2,371,000 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. The decrease in SG&A is
also due to lower payroll and the related taxes primarily at the store
locations due to the decreased sales volume, a decrease in depreciation due
to the age of the assets and the relocation costs included in the prior year.
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 24.5% to 24.8% for the thirty-nine weeks ended
October 31, 1998 primarily as a result of lower sales, partially offset by
the reductions described above.
Finance charge and other revenue decreased approximately $168,000 to 2.8% of net
sales and approximately $465,000 to 2.9% of net sales for the thirteen and
thirty-nine weeks ended October 31, 1998, respectively, compared to the same
periods in the prior fiscal year. The decreases in both the thirteen and
thirty-nine weeks ended October 31, 1998 were partially due to new legal limits
on late fees, and a decrease in finance charge income during the first three
quarters 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 for
the thirty-nine weeks. Finance charge income is expected to remain lower than
last year due to sales volume.
During the thirteen weeks ended October 31, 1998, the Company recorded a
Merger Termination Expense of approximately $784,000. During the third
quarter the Board of Directors authorized the Company to terminate its
proposed merger with HOM Holding, Inc. and Hit or Miss, Inc., pursuant to the
Agreement and Plan of Merger between them. As a result of the termination,
the Company expensed the accrued costs of the proposed merger, including
financial advisor and professional fees.
Interest expense for the thirteen and thirty-nine weeks ended October 31, 1998
increased approximately $1,217,000 and $1,989,000, 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 and fees associated with the
extension of the credit agreement and its replacement with the Foothill/Paragon
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 Company continues to recognize valuation allowances for net operating
loss carry forward.
These factors resulted in a net loss of approximately $4.0 million, or $0.52 per
share, for the thirteen weeks ended
Page 9 of 14
<PAGE>
October 31, 1998, compared to a net loss of approximately $3.4 million, or
$0.45 per share, in the same period of the prior year. For the thirty-nine
weeks ended October 31, 1998, the Company reported a net loss of
approximately $9.7 million, or $1.27 per share, compared to net loss of
approximately $6.6 million, or $0.88 per share, in the same period of the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $12.3 million through the third
quarter of 1998 compared to $12.6 million in the same period a year ago. The
decrease was primarily due to a larger increase in accounts payable this year
due to improved trade credit. a smaller decrease in accrued expenses and other
this year due to the timing of payments and the effects of lower sales volumes,
a smaller increase in merchandise inventories this year, and cash used last year
for facilities closings. These amounts were partially offset by the increase in
prepaid expenses and other this year compared to a decrease last year due to the
payment of various fees and expenses in connection with the refinancing of the
Company's revolving credit facility this year and the timing of payments, and
the greater net loss this year (net of non-cash items). 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 end of
the fiscal year ending January 30, 1999.
Capital expenditures through the third quarter of 1998 were approximately
$924,000, compared to approximately $3,430,000 for the same period in 1997.
Capital expenditures in fiscal 1998 were primarily for remodeling one store.
Net cash provided by financing activities through the third quarter of 1998 was
approximately $13.1 million, compared to approximately $12.8 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 May
1, 1999) and increased borrowing under the Fleet Facility. Cash provided in 1998
represents approximately $1.6 million in payments made on the long-term notes,
offset by net borrowings of $14.5 million ($126.6 million in total borrowings,
$112.1 million in total payments) under the Fleet Facility. In the same period
of 1997, the Company made $3.3 million in payments on the long-term notes
(including a $1.8 million "alternative cash flow payment") and borrowed $16.2
million ($156.3 million in total borrowings, $140.1 in total payments) under the
Fleet Facility.
The Company had a revolving credit agreement (the "Fleet Facility") with Fleet
Bank N.A. (formerly NatWest Bank N.A.) , which was replaced effective November
20, 1998 with a Loan and Security Agreement with Foothill Capital Corporation
and Paragon Capital LLC (the "Foothill/Paragon Facility"). The Foothill/Paragon
Facility expires November 20, 2001, and it provides the Company with revolving
credit loans and letters of credit up to $40 million, subject to a borrowing
base formula and lender reserves (as defined in the agreement). Undrawn and
unreimbursed letters of credit under the facility may not exceed $5,000,000 in
face amount. See Note 4 to the Financial Statements in this Report for a
description of the Foothill/Paragon Facility. As of December 8, 1998, the
Company had $34.3 million in borrowings and $1.5 million in letters of credit
outstanding under the Foothill/Paragon Facility, and approximately $4.2 million
was available for borrowing under the Foothill/Paragon Facility. During the
first three quarters of 1998, the weighted average interest rate under the Fleet
Facility was 8.96%. As of December 8, 1998, the weighted average interest rate
under the Paragon/Foothill Facility was 9.25%.
As of December 8, 1998, approximately $6.2 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
November 15, 1998 payment of principal, totaling approximately $745,000, until
May 1, 1999 and 50% of their regularly scheduled January 1, 1999 payment of
principal, totaling approximately $372,500, until February 15, 1999. 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 $0.75
per share and 225,000 of the Company's Common Shares at an exercise price of
$0.01 per share. In addition, the Company has filed a registration statement on
Form S-3 to register the resale of the Common Shares issuable upon exercise of
those warrants.
If the Company's 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
Page 10 of 14
<PAGE>
addition, there can be no assurance that the Company will be able to meet the
financial covenants under the borrowing agreements for the next 12 months
unless sales and trade credit substantially improve.
Each of the above statements regarding future revenues, expenses or business
plans (including statements regarding the sufficiency of the Company's cash
resources to meet future liquidity needs and future compliance with financial
covenants) may be a "forward looking statement" within the meaning of the
Securities Exchange Act of 1934. Such statements are subject to important
factors and uncertainties that could cause actual results to differ materially
from those in the forward-looking statement including the level of support of
the Company's trade creditors and factors, general trends in retail clothing
apparel purchasing, especially during the Christmas season, the Company's
comparable store sales changes, and the factors set forth in this Management's
Discussion and Analysis of Results of Operations and Financial Condition.
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. Through October
31, 1998, the Company has spent $12,000 to modify its mangement information
systems to become Year 2000 compliant. 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.
The Company considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity
Instruments." The Company had no holdings of derivative financial or
commodity based instruments at October 31, 1998. A review of the Company's
other financial instruments and risk exposures at October 31, 1998 indicated
that the Company had exposure to interest rate risk. At October 31, 1998,
the Company concluded that near term changes to interest rates should not
materially effect the Company's financial position, results of operations or
cash flows.
Page 11 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 May 1, 1999 and 50% of their regularly
scheduled January 1, 1999 payment of principal, totaling approximately $372,500,
until February 15, 1999. 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 $0.75 per share and the Company revised the exercise price of
such warrants as of June 30, 1998 and November 12 1998, and on November 13, 1998
the Comany issued such holders warrrants exercisable until June 30th and
November 12, 2003 to purchase 225,000 fof the Company's Common Shares at an
exercise price of $0.01 per share. In addition, the Company has filed a
registration statement on Form S-3 to register the resale of the Common Shares
issuable upon exercise of those warrants. 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.
As discussed in Note 6 to the Financial Statements, the Company terminated its
proposed merger with Hit or Miss, Inc. and HOM Holding, Inc. As a result, at a
meeting of the Company's Board of Directors held on November 13, 1998, the Board
amended and restated the Bylaws of the Company to remove the amendments adopted
at the April 20, 1998 and May 8, 1998 meetings of the Board, related to the
merger and described in Part II, Item 2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended May 2, 1998. Those amendments related to the
size and composition of, and voting by, the Company's Board of Directors and
committees of the Board.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits.
---------
3(ii) Amended and Restated Bylaws, as amended November
13, 1998. incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form
S-3 (file no. 333-68545), filed with the
Securities and Exchange Commission on December 8,
1998.
4.1 Restated 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 Agreement,
dated as of June 30, 1998 among Gantos, Inc.,
State Street Bank and Trust Company and Elliott
Associates, L.P., incorporated by reference to
Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
4.2 Agreement dated as of September 24-25, 1998
between Gantos, Inc. and State Street Bank and
Trust Company and form of Agreement, dated as of
September 24, 1998, between Gantos, Inc., and
various holders of Notes issued under the
Indenture. [deferring July 1, 1998 payments and
merger deadline to November 15, 1998 incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (file no.
333-68545), filed with the Securities and
Exchange Commission on December 8, 1998.
4.3 Form of Agreement, dated as of November, 1998,
between Gantos, Inc., and various holders of Notes
issued under the Indenture. [deferring July 1,
1998 payments to May 1, 1999 and 50% of January 1,
1999 payment to February 15, 1999 and promising
warrant repricing and new warrants] incorporated
by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-3 (file no.
333-68545), filed with the Securities and
Exchange Commission on December 8, 1998.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4.4 Form of Revised $0.75 Common Stock Purchase
Warrant,dated as of July 1, 1998, issued to
consenting noteholders, incorporated by reference
to Exhibit 4.8 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
4.5 Form of $0.01 Common Stock Purchase Warrant, dated
as of November 13, 1998, issued to consenting note
holders, incorporated by reference to Exhibit
4.9 to the Company's Registration Statement on
Form S-3 (file no. 333-68545), filed with the
Securities and Exchange Commission on December 8,
1998.
10.1 Amendment, dated as of May 19, 1998, to Letter
Agreement, dated as of June 20, 1996, between
Gantos, Inc. and Arlene H. Stern.
10.2 Amendment, dated as of October 2, 1998, to Letter
Agreement, dated as of September 3, 1996, between
Gantos, Inc. and Vicki Boudreaux.
10.3 Loan and Security Agreement, dated as of November
20, 1998, among Gantos, Inc., the financial
institutions named therein, and Foothill Capital
Corporation, as Agent, incorporated by reference
to Exhibit 4.10 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
27.1 Financial Data Schedule
(b) On November 4, 1998, Gantos, Inc. filed a Current
Report on Form 8-K, reporting in Item 5 that on
November 3, 1998, Gantos, Inc. announced that it
had executed a commitment letter to refinance the
working capital facilities of the Company into a
$40 million facility with Foothill Capital
Corporation and Paragon Capital LLC. The Company
also announced that it had terminated its proposed
merger with HOM Holding, Inc., the sole
stockholder of Hit or Miss, Inc., in accordance
with the terms of the Agreement and Plan of Merger
by and among the Company, Hit or Miss, Inc. and
HOM Holding, Inc. The termination was effective
November 2, 1998. No financial statements were
filed.
</TABLE>
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: December 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
<TABLE>
<S> <C> <C>
(b) Exhibits.
3(ii) Amended and Restated Bylaws, as amended November
13, 1998. incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form
S-3 (file no. 333-68545), filed with the
Securities and Exchange Commission on December 8,
1998.
4.1 Restated 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 Agreement,
dated as of June 30, 1998 among Gantos, Inc.,
State Street Bank and Trust Company and Elliott
Associates, L.P., incorporated by reference to
Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
4.2 Agreement dated as of September 24-25, 1998
between Gantos, Inc. and State Street Bank and
Trust Company and form of Agreement, dated as of
September 24, 1998, between Gantos, Inc., and
various holders of Notes issued under the
Indenture. [deferring July 1, 1998 payments and
merger deadline to November 15, 1998 incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (file no.
333-68545), filed with the Securities and
Exchange Commission on December 8, 1998.
4.3 Form of Agreement, dated as of November, 1998,
between Gantos, Inc., and various holders of Notes
issued under the Indenture. [deferring July 1,
1998 payments to May 1, 1999 and 50% of January 1,
1999 payment to February 15, 1999 and promising
warrant repricing and new warrants] incorporated
by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-3 (file no.
333-68545), filed with the Securities and
Exchange Commission on December 8, 1998.
4.4 Form of Revised $0.75 Common Stock Purchase
Warrant,dated as of July 1, 1998, issued to
consenting noteholders, incorporated by reference
to Exhibit 4.8 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998. incorporated by reference to
Exhibit 4.8 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
4.5 Form of $0.01 Common Stock Purchase Warrant, dated
as of November 13, 1998, issued to consenting note
holders, incorporated by reference to Exhibit
4.9 to the Company's Registration Statement on
Form S-3 (file no. 333-68545), filed with the
Securities and Exchange Commission on December 8,
1998.
10.1 Amendment, dated as of May 19, 1998, to Letter
Agreement, dated as of June 20, 1996, between
Gantos, Inc. and Arlene H. Stern.
10.2 Amendment, dated as of October 2, 1998, to Letter
Agreement, dated as of September 3, 1996, between
Gantos, Inc. and Vicki Boudreaux.
10.3 Loan and Security Agreement, dated as of November
20, 1998, among Gantos, Inc., the financial
institutions named therein, and Foothill Capital
Corporation, as Agent, incorporated by reference
to Exhibit 4.10 to the Company's Registration
Statement on Form S-3 (file no. 333-68545), filed
with the Securities and Exchange Commission on
December 8, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT A
---------
GANTOS, INC.
1266 EAST MAIN STREET, 5TH FLOOR
STAMFORD, CONNECTICUT 06902
May 19, 1998
Arlene H. Stern
7 Lucy Way
Simsbury, Connecticut 06070
Dear Ms. Stern:
We have entered into a letter agreement, dated June 20, 1996, as amended by
the Termination Agreement dated as of May 12, 1998 (the "Agreement"), with
respect to your employment with Gantos, Inc. ("Gantos"). As a result of the
Company's fiscal 1997 financial results, you have offered to waive your minimum
bonus under the Agreement for fiscal 1997, and you and Gantos desire to revise
the Agreement to delete the requirement to pay such bonus for fiscal 1997. This
letter (the "Amendment") states our agreement with respect to the changes to the
Agreement and is entered into in exchange for good and valuable consideration,
the receipt and adequacy of which are acknowledged by both of us.
- SALARY AND BONUS. The Agreement is amended by substituting the
following for Paragraph 3(d) of the Agreement:
"(d) If you are employed by Gantos at the end of the applicable fiscal
year, you will receive a minimum bonus of $75,000 with respect to each of
fiscal 1996 and 1998. Therefore, if you are employed by Gantos at the end
of the applicable fiscal year, with respect to each of fiscal 1996 and
1998, Gantos will pay to you the excess, if any, of $75,000 over the amount
paid or payable to you pursuant to Paragraph 3.(b) and Paragraph 3.(c).
Conversely, if the amount paid or payable to you pursuant to
Paragraph 3.(b) and Paragraph 3.(c) is at least $75,000, no payment will be
made under this Paragraph 3.(d) with respect to that fiscal year."
- NO OTHER CHANGE. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
<PAGE>
Ms. Arlene II. Stern
May 19, 1998
Page 2
- COUNTERPARTS. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidenced by signed copies transmitted by telecopier
or facsimile transmission.
If this letter correctly expresses our mutual understanding, please sign
and date the enclosed copy and return it to us.
Very truly yours,
GANTOS, INC.
By:
--------------------------------------
Its:
---------------------------------
The terms of this agreement
are accepted and agreed to
on May 19, 1998:
Arlene H. Stern
<PAGE>
EXHIBIT A
GANTOS, INC.
1266 EAST MAIN STREET, 5TH FLOOR
STAMFORD, CONNECTICUT 06902
October 2, 1998
Ms. Vicki Boudreaux
18 Pinecrest Road
Enfield, Connecticut 06082
Dear Vicki:
We have entered into a letter agreement, dated September 3, 1996 (the
"Agreement"), with respect to your employment with Gantos, Inc. ("Gantos"). In
connection with your continued employment by Gantos, you and Gantos desire to
extend the severance provisions of the Agreement by two years. This letter (the
"Amendment") states our agreement with respect to the changes to the Agreement
and is entered into in exchange for good and valuable consideration, the receipt
and adequacy of which are acknowledged by both of us.
1. SEVERANCE. The Agreement is amended by substituting the following for
the first and second to last sentences of Paragraph 5 of the Agreement:
"You will receive six (6) months separation pay as your exclusive severance
benefits in the event that your employment is terminated without cause (and
other than pursuant to your death or disability) on or before September 16,
2000."
"Payment on account of death or disability or for termination without cause
after September 16, 2000 will be in accordance with the Company's policies
concerning these areas."
2. NO OTHER CHANGE. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
<PAGE>
Ms. Vicki Boudreaux
October 2, 1998
Page 2
3. COUNTERPARTS. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidenced by signed copies transmitted by telecopier
or facsimile transmission.
If this letter correctly expresses our mutual understanding, please sign
and date the enclosed copy and return it to us.
Very truly yours,
GANTOS, INC.
By:
------------------------------------
Its:
--------------------------------
The terms of this agreement
are accepted and agreed to
on ____________________:
Vicki Boudreaux
<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 NINE MONTH PERIOD ENDED
OCTOBER 31, 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> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 1,175
<SECURITIES> 0
<RECEIVABLES> 17,346
<ALLOWANCES> 517
<INVENTORY> 38,026
<CURRENT-ASSETS> 68,211
<PP&E> 63,587
<DEPRECIATION> 51,233
<TOTAL-ASSETS> 80,565
<CURRENT-LIABILITIES> 28,047
<BONDS> 40,365
0
0
<COMMON> 77
<OTHER-SE> 12,076
<TOTAL-LIABILITY-AND-EQUITY> 80,565
<SALES> 106,267
<TOTAL-REVENUES> 106,267
<CGS> 88,503
<TOTAL-COSTS> 88,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,512
<INCOME-PRETAX> (9,714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,714)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
