<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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
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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) (9,660) (17,637) (19,249)
Credit for facilities closings - - - -
and other
Finance charge and other revenue 1,061 1,218 2,132 2,429
-------- -------- --------- ---------
Operating loss (4,094) (4,277) (3,972) (2,307)
Interest expense (858) (437) (1,725) (952)
-------- -------- --------- ---------
Loss before income taxes (4,952) (4,714) (5,697) (3,259)
Income taxes - - - -
-------- -------- --------- ---------
Net loss (4,952) (4,714) (5,697) (3,259)
======== ======== ========= =========
Net loss per share (basic and (0.65) (0.62) (0.75) (0.43)
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) $(3,259)
--------- ---------
Adjustments to reconcile net loss
to net cash used by
operating activities:
Credit for facilities closings and -
other
Cash used for facilities closings (400)
Depreciation and amortization 2,251 2,558
Restricted stock compensation 30 55
expense
Other 79
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 2,944
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) (27.0) (24.9) (23.6)
Credit for facilities - - - -
closings and other
Finance charge and other 3.3 3.4 3.0 3.0
revenue
--------- -------- --------- ---------
Operating loss (12.9) (12.0) (5.6) (2.8)
Interest expense (2.7) (1.2) (2.4) (1.2)
--------- -------- --------- ---------
Loss before income taxes (15.6) (13.2) (8.0) (4.0)
Income taxes - - - -
--------- -------- --------- ---------
Net loss (15.6)% (13.2)% (8.0)% (4.0)%
========= ========= ========= ========
</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 $1,143,000, 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 decreased from 27.0% to 26.8% for the thirteen weeks ended
August 1, 1998 primarily as a result of reductions described above, partially
offset by lower sales.
Selling, general and administrative (SG&A) expense for the twenty-six weeks
ended August 1, 1998 decreased approximately $1,612,000, 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, 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
23.6% to 24.9% for the twenty-six weeks ended August 1, 1998 primarily as a
result of lower sales, partially offset by the reductions decribed above.
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 $4.7 million, or $0.62 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 $3.3 million, or $0.43 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, incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 1, 1998.
4.2 Form of Common Stock Purchase Warrant, dated as of July 1,
1998, issued to consenting note holders, incorporated by
reference to Exhibit 4.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 1, 1998.
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.), incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998.
10.2 Letter Agreement dated as of July 8, between Gantos, Inc.
and Enhanced Retail Funding, LLC, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended August 1, 1998.
10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19,
1998, incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1998.
27.1 Financial Data Schedule, incorporated by reference to
Exhibit 27.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998.
(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: November 17, 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, incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August 1,
1998.
4.2 Form of Common Stock Purchase Warrant, dated as of July 1, 1998, issued to
consenting note holders, incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August 1,
1998.
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, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998.
10.2 Letter Agreement dated as of July 8, 1998 between Gantos, Inc. and
Enhanced Retail Funding, LLC, incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended August 1,
1998.
10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19, 1998, incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998.
27.1 Financial Data Schedule, incorporated by reference to Exhibit 27.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August 1,
1998.
