<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 4
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 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
COMMISSION FILE NUMBER 0-14577
------------------------
GANTOS, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1414122
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1266 E. MAIN STREET, FIFTH FLOOR, 06902
STAMFORD, CONNECTICUT
(Address of principal executive offices) (Zip Code)
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 358-0294
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Shares, Par Value $.01 Per Share
(Title of Class)
------------------------
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of April 24, 1998 calculated by reference to the closing sale
price as reported by Nasdaq on such date, was approximately $4,031,939.
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 / /
The number of shares outstanding of the registrant's common shares, $.01 par
value per share, as of April 24, 1998 was 7,581,713.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
PART I
ITEM 1. BUSINESS
Gantos is a specialty retailer of a full range of quality, fashionable
women's apparel and accessories at moderate to upper moderate prices. As of
April 24, 1998, Gantos operated 115 stores averaging 7,800 square feet, in 23
states, located primarily in suburban malls in the West, Midwest and Northeast.
The Company does not plan to open any additional stores during 1998. The Company
offers an edited selection of private label and name brand sportswear, career
dresses and suits, social occasion dresses, accessories, outerwear, swimwear
and, in selected stores, shoes. The Company's marketing strategy emphasizes
quality merchandise with assortments from which women can build entire
wardrobes, personal attention and customer service. It is targeted to satisfying
the apparel needs of active, educated, career-orientated, fashion-conscious
women, primarily from 35 to late 50 years of age. The Company's four Bargain
Boutiques located in Illinois and Michigan feature final clearance merchandise,
both from Gantos stores and purchased directly for the boutiques. Gantos, Inc.
is a Michigan corporation incorporated November 10, 1952 as a successor to a
business founded in 1932. Unless otherwise specified, "Gantos" and "Company"
refer to the Registrant and its predecessors, and 1997, 1996 and 1995 refer to
the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively.
RECENT DEVELOPMENTS
RELOCATION
On January 27, 1997, the Company announced plans to relocate its
distribution center, financial and support functions to another facility in
Grand Rapids, Michigan as well as establish a merchandising office in Stamford,
Connecticut. The relocation of the merchandising office is expected to enhance
the Company's ability to do private label product development. These relocations
were completed during the second quarter of 1998.
CHANGES TO CREDIT AGREEMENT AND INDENTURE
The Fleet facility has certain financial covenants. In part because of the
net loss reported by the Company for the twenty six weeks ended August 2, 1997,
the Company would not have been in compliance with the covenant concerning
earnings before interest, taxes, depreciation and amortization for the four
quarters ended August 2, 1997, had Fleet Bank, N.A. and LaSalle National Bank
not granted a waiver of such covenant for such period. On October 8, 1997, the
Company entered into Amendment No. 3 to the Fleet facility (the Third
Amendment). The Third Amendment provides for an adjustment to the interest
rates, beginning in fiscal 1998, based upon financial performance, an increase
in the loan advance rate on inventory during the months of October through
January, and adjustments to the financial covenants so that compliance with the
financial covenants is based on a liquidity test as long as minimum levels of
liquidity are maintained. It also provides that if the Company prepays its
12.75% notes outstanding under its Indenture, it must pay Fleet Bank a fee of
$750,000 and the loan advance rate on inventory is reduced to pre-amendment
levels. The total commitment and term remain the same.
As of February 1, 1998, the Company entered into Amendment No. 4 to the
Fleet facility (the Fourth Amendment). The Fourth Amendment extended the
increase in the loan advance rate on inventory until February 28, 1998.
As of February 27, 1998, the Company entered into Amendment No. 5 to the
Fleet facility (the Fifth Amendment). The Fifth Amendment extended the increase
in the loan advance rate on inventory until March 31, 1998.
As of March 30, 1998, the Company entered into Amendment No. 6 to the Fleet
facility (the Sixth Amendment). The Sixth Amendment extends the increase in the
loan advance rate on inventory until May 2, 1998. Without these amendments the
Company would not have been in compliance with the new liquidity test.
1
<PAGE>
As of April 29, 1998, the Company entered into Amendment No. 7 to the Fleet
Facility (the Seventh Amendment). The Seventh Amendment extends the increase in
the loan advance rate on inventory until January 31, 1999.
As of April 30, 1998, the Company entered into Amendment No. 8 to the Fleet
Facility (the Eighth Amendment). The Eighth Amendment provides for an increase
in the availability under the Fleet Facility in an amount equal to the lesser of
ten percent of the eligible inventory (as defined in the agreement) and
$2,000,000. Additionally, the Eighth Amendment carries a $100,000 amendment fee
payable on January 1, 1999 if there are obligations still due under the Fleet
Facility as of that date.
The Company's Indenture, under which the Company's 12.75% Notes were issued,
also contains certain financial covenants. In part because of the net loss
reported by the Company for the twenty-six weeks ended August 2, 1997 and the
thirty-nine weeks ended November 1, 1997, the Company was not in compliance with
the earnings before interest, taxes, depreciation and amortization covenant for
both quarters ended August 2, 1997, and November 1, 1997, and it was not in
compliance with the interest coverage ratio covenant for the quarter ended
November 1, 1997. As of April 24, 1998, $7.0 million in principal amount of
Notes were outstanding. On December 15, 1997, the Company entered into
Supplemental Indenture No. 1 and an Agreement with the trustee and principal
holder of the Notes, respectively, to waive existing EBITDA and interest
coverage ratio defaults and to revise some of the financial covenants under the
Indenture so that compliance with those covenants is based on a liquidity test
as long as minimum levels of liquidity are maintained under the Fleet facility.
The Indenture Supplement was entered into in exchange for the payment of
approximately $400,000 plus expenses to the Trustee for the benefit of the Note
holders.
The Indenture, as amended, continues to require a minimum net worth of $20
million at the end of each quarter. As of January 31, 1998, the Company's net
worth was approximately $21.7 million. Management does not believe that the
Company will be able to meet this covenant in the second quarter of 1998 and
might not be able to meet the new liquidity test in the third quarter of 1998.
The Company is negotiating with Fleet Bank and the principal holder of the Notes
to amend these covenants. If the Company is unsuccessful in renegotiating these
covenants on terms and conditions acceptable to the Company, it would consider
refinancing the applicable indebtedness. Any inability by the Company to
renegotiate these covenants or to refinance the applicable indebtedness on terms
and conditions acceptable to the Company could have a material adverse effect on
the Company's business, operations, liquidity, financial condition and results
of operations, and could require the Company to substantially reduce or
discontinue its operations.
Even if the Company is successful in renegotiating the net worth covenant
under the Indenture, there can be no assurance that the Company would be able to
meet the revised covenants or liquidity test under the Indenture or the Fleet
facility, unless sales substantially improve. As a result, the Company has
engaged a financial advisor to assist it in exploring its strategic
alternatives, although there can be no assurance that any viable strategic
alternatives will be found.
MANAGEMENT CHANGES
In March 1997, David Rodgers was appointed Vice President, Management
Information Systems. In April 1997, Tony Barnett resigned as Vice President of
Store Operations, Gordon Tendler resigned as Vice President, General Merchandise
Manager for Sportswear, Coats and Suits and Neal Gottfried joined the Company as
Senior Vice President, Store Operations and Visual Merchandising. In August
1997, David C. Nelson joined the Company as Senior Vice President, Chief
Financial Officer and Treasurer. In December 1997, David Rodgers resigned as
Vice President, Management Information Systems. In April 1998, Kenneth Green
resigned as Vice President, General Counsel, and Secretary.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's business consists of a single industry segment.
2
<PAGE>
MARKETING STRATEGY
The Company's marketing strategy emphasizes quality merchandise, with
assortments from which women can build entire wardrobes, personal attention and
customer service. It is targeted to satisfying the apparel needs of active,
educated, career-oriented, fashion-conscious women, primarily from 35 to late 50
years of age. This strategy is implemented by (i) offering a full range of
current, fashionable quality merchandise at moderate to upper moderate price
levels; (ii) training sales associates in the skills needed to provide a high
level of personal attention and customer service; and (iii) locating its stores
primarily in or near more affluent neighborhoods in regional malls which contain
at least one traditional upscale department store frequented by its target
customers.
Management's research indicates that the typical Gantos customer is a career
woman, residing in a two-income, upper-middle to higher income household, who
has attended college, has sophisticated fashion taste and has high expectations
regarding quality, value, and service.
MERCHANDISE
The Company's stores offer a full range of current, quality, fashionable
merchandise at moderate to upper moderate prices. Each store carries an edited
selection of both private label and name brand sportswear (both coordinated
groupings and separate tops and bottoms), career dresses and suits, social
occasion dresses, accessories, outerwear, swimwear and, in selected stores,
shoes. The Company attempts to stock all stores with the same basic merchandise
content; however, certain merchandise is varied among stores depending on
individual store or customer attributes.
During the last quarter of 1996, the Company began the process of
redirecting merchandising and marketing strategies to enhance the position of
Gantos as a fashion brand. The Company plans to achieve this through:
- Emphasis on product design and development to reinforce Gantos as a
fashion brand by offering more private label product.
- Focus on consistent quality and fit through the addition of a technical
product management team.
- Development of direct sourcing capabilities to reduce costs and improve
quality.
- Improved quality and increased frequency of communications with the
customer through both charge statement inserts and direct mail catalogs.
Each of the Company's stores is designed to be a well-organized and complete
shopping source for its target customers, providing merchandise to outfit them
in casual, work and evening wear, including accessories.
The following table shows the approximate percentage of net sales for major
merchandise classifications (other than shoes) for the past three years:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
PRODUCT CLASS 1997 1996 1995
- - ------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Sportswear............................................................... 38% 39% 38%
Dresses.................................................................. 40 37 34
Accessories.............................................................. 13 15 15
Outerwear................................................................ 4 5 10
Swimwear................................................................. 5 4 3
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
The percentage of net sales accounted for by each merchandise group is
affected by pricing, consumer trends and the development and introduction of new
fashions. Historical net sales percentages may not be indicative of percentages
in future years.
3
<PAGE>
PERSONAL ATTENTION AND CUSTOMER SERVICE
Personal attention is fundamental to the Company's marketing strategy.
Gantos sales and desk staff are trained to provide courteous and knowledgeable
service to each customer from the time the customer enters the store until the
sale is completed, including assisting customers in the coordination of
merchandise, advising customers about the latest fashion trends, and helping
customers make purchases efficiently. The Company motivates its sales associates
through incentives and periodic productivity awards based largely on multiple
item sales and sales volume.
SALES TERMS AND CONSUMER CREDIT
The Company accepts cash, checks, third party credit cards and the Gantos
credit card. Management believes that offering the Gantos credit card helps
convey Gantos' image as an upscale specialty retailer, enhances customer loyalty
and provides a large customer list available for targeted advertising promotions
on a monthly basis. In 1997, approximately 37.4% of the Company's sales were
made for cash, 34.3% by third party credit cards and 28.3% by the Gantos credit
card. During 1997, the Company continued to offer its customers, consistent with
industry practice, a 10% discount on purchases if the customer opened a Gantos
charge account as a means of encouraging usage of the Gantos credit card.
A Gantos credit card is offered to customers who qualify for credit based on
the Company's established credit criteria. The minimum monthly payment is the
greater of $15 or 10% of the unpaid balance of its credit accounts. The Company
imposes finance charges at annual rates varying from 18% to 21%, depending upon
state laws. The allowance for doubtful accounts was 3.2% of customer receivables
at 1997 year-end compared with 2.9% at 1996 year-end and 2.5% at 1995 year-end.
The Company's credit card program may be affected by changes in federal and
state consumer credit laws.
Gantos has a liberal return policy, offering merchandise exchanges or
refunds for cash or credit on returned merchandise at its stores within 90 days
from purchase.
ADVERTISING AND PROMOTION
Gantos relies largely on mall traffic to generate customer traffic. In
addition, the Company utilizes direct mail advertising. Advertising, primarily
by direct mail, informs customers about fashion trends and emphasizes Gantos'
fashion image. Direct mail advertising varies in size and format, from postcards
and catalogs to inserts and coupons mailed to Gantos credit card customers with
their monthly statements.
Gross advertising expenditures in 1997 and 1996 approximated 1.2% and 0.9%
of net sales, respectively. A part of advertising costs are paid by vendor
contributions. Such vendor contributions are subject to change or cancellation
at each vendor's sole discretion from year to year. The Company experienced a
decrease in vendor participation in 1997 compared to 1996.
STORES
The Company's stores are primarily located in enclosed regional malls which
contain at least one traditional upscale department store frequented by the
Company's target customers. A few stores are located in major urban
office-shopping centers which are typically located near at least one such
department store. Store interiors are designed to convey a warm feeling.
Merchandise is attractively arranged by department classifications, rather than
vendor, and is displayed in coordinated groups on fixtures designed to allow the
customer easy access to purchase complete outfits. The merchandise set and
visual display are centrally administered by Gantos management.
Gantos operates four clearance stores (Bargain Boutiques) which are located
in Illinois (Countryside) and Michigan (one each in Grand Rapids, Kalamazoo and
Livonia). The clearance stores feature marked-down merchandise, which either
comes from Gantos stores or is purchased directly for the boutiques.
4
<PAGE>
The following table sets forth information concerning sales per store and
per square foot (sales include shoe sales and exclude license fees from shoe
departments) for stores open in the last three years:
<TABLE>
<CAPTION>
YEAR
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Average sales per store (in thousands):
All stores(1)...................................................................... $ 1,456 $ 1,672 $ 1,752
Stores open at least two years at end of year(2)................................... $ 1,473 $ 1,689 $ 1,766
Average sales per square foot of selling space:
All stores(1)...................................................................... $ 207 $ 237 $ 248
Stores open at least two years at end of year(2)................................... $ 208 $ 238 $ 249
</TABLE>
- - ------------------------
(1) The number of stores and the selling space are adjusted to reflect the
number of months during the period that new stores and stores which closed
were open. These amounts are not adjusted to reflect the seasonal nature of
the Company's sales or the resulting impact of opening stores in different
periods during the year. See "Business--Seasonality". Sales include shoe
sales and do not include shoe license fees.
(2) The sales numbers are restated in prior years to reflect the number of
stores open at the end of fiscal 1997.
Store hours are generally determined by the mall in which the store is
located. Most stores are open seven days and six nights a week, except major
holidays.
LEASED DEPARTMENTS
During 1997, a portion of the selling space in 29 midwestern stores was
licensed to an unaffiliated party for the operation of a shoe department. Fees
received by the Company from the shoe department licensee (included in net
sales) were approximately $889,000 in 1997, $874,000 in 1996, and $789,000 in
1995. In January 1998, the shoe department licensee decided to close 6 of the
shoe departments leaving the Company with 23.
NUMBER OF STORES AND LOCATION
The following table sets forth information with respect to store openings
and closures since fiscal 1984:
<TABLE>
<CAPTION>
NUMBER OF STORES
--------------------------------------------------------------------
OPEN AT
BEGINNING OF OPENED DURING CLOSED DURING OPEN AT END OF
YEAR ENDED YEAR YEAR YEAR YEAR
- - ------------------------------------------------------------- ------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
February 2, 1985............................................. 39 4 1 42
February 1, 1986............................................. 42 10 2 50
January 31, 1987............................................. 50 15 0 65
January 30, 1988............................................. 65 20 1 84
January 28, 1989............................................. 84 25 1 108
February 3, 1990............................................. 108 32 1 139
February 2, 1991............................................. 139 31 6 164
February 1, 1992............................................. 164 0 6 158
January 30, 1993............................................. 158 1 0 159
January 29, 1994............................................. 159 2 43 118
January 28, 1995............................................. 118 1 5 114
February 3, 1996............................................. 114 1 2 113
February 1, 1997............................................. 113 1 0 114
January 31, 1998............................................. 114 2 1 115
</TABLE>
5
<PAGE>
In 1997, the Company opened one new store in New Jersey and one new store in
Tennessee. The Company closed one store that was located in Pennsylvania during
1997. The Company does not plan to open any new stores in 1998.
The following table shows the geographic distribution of the Company's
stores by state for the 115 stores open as of April 24, 1998.
<TABLE>
<CAPTION>
California.............................. 4
<S> <C>
Colorado................................ 4
Connecticut............................. 2
Illinois................................ 11
Indiana................................. 5
Kansas.................................. 1
Kentucky................................ 2
Maryland................................ 5
Massachusetts........................... 3
Michigan................................ 20
Minnesota............................... 3
Missouri................................ 4
New Hampshire........................... 2
New Jersey.............................. 5
New York................................ 6
North Carolina.......................... 2
Ohio.................................... 11
Oregon.................................. 1
Pennsylvania............................ 9
Rhode Island............................ 1
Tennessee............................... 5
Virginia................................ 4
Wisconsin............................... 5
</TABLE>
Capital expenditures for 1997 were incurred primarily to relocate the
corporate offices and distribution center, to open two new stores and to make
various information system enhancements. The Company expects that approximately
$1-2 million will be required for capital expenditures in 1998, principally for
remodeling and refixturing two to three existing stores.
DISTRIBUTION, SUPPLIERS AND PURCHASING
The majority of the merchandise purchased by the Company from vendors is
delivered by the vendors to the Company's East coast or West coast
"consolidator". Each consolidator stages the merchandise it receives for
shipment and arranges for delivery to the Company's distribution center in Grand
Rapids, Michigan. Merchandise not shipped through a consolidator is delivered
directly to the distribution center.
Merchandise is then inspected, allocated and shipped to the Company's
various stores. The Company generally does not warehouse merchandise, but
distributes it promptly to stores. The Company does warehouse damaged items
awaiting return to vendors and a portion of selected merchandise for later
allocation to stores in which such items are selling more rapidly than in other
stores. Shipments are made to the stores via package delivery service.
All of the products sold by Gantos are purchased directly from
manufacturers. The Company's purchasing strategy is to buy, where possible,
substantial quantities of quality merchandise from selected manufacturers to
whom the Company is an important customer. All purchasing decisions are made
centrally based on detailed merchandising plans. No manufacturer accounted for
more than 10% of the Company's purchases during any of the last three fiscal
years. The Company does not maintain any long-term or exclusive commitments or
arrangements to purchase from any manufacturer. The Company supplements some of
its merchandise lines with private label merchandise.
Management believes that the Company is one of the larger customers (based
on purchase volume) of a number of its suppliers. Gantos works closely with its
suppliers, keeping them informed of selling trends and helping them develop
merchandise lines and production schedules. The Company will continue to require
close working relationships with suppliers to obtain adequate supplies of
quality merchandise on favorable terms. To diminish the risk of not obtaining
satisfactory additional supplies of merchandise, the Company is continually
exploring possible additional resources for merchandise supply, including other
recognized domestic labels, private label merchandise (manufactured domestically
and overseas) and foreign manufacturers. There is no assurance that the Company
will be able to continue to purchase merchandise from preferred vendors in the
quantities and on the terms its desires.
6
<PAGE>
INFORMATION AND CONTROL SYSTEMS
The Company's integrated computer information system, which has been
installed and operational since May 1995, provides the Company with financial,
merchandise, inventory, personnel, credit, analytical and other information
concerning its business. This system includes several point-of-sale registers in
each store, which are connected on-line with the Company's corporate computers
via satellite. This network, which allows for in-house processing of most of the
Company's data processing needs, is used to communicate with the stores and
capture all sales transactions, Gantos credit card authorizations, data
collections by corporate computers and third party bankcard authorizations.
The system provides Gantos buyers with timely selling information by vendor,
style, color and size and assists in the distribution to each store of required
merchandise. Planners and buyers use this information to plan and budget
inventory monthly by department and analyze the profitability and turnover of
merchandise as well as local consumer tastes. The system monitors the selling
rate of merchandise by classification. It also calculates markdowns at specified
intervals based upon standards established for each merchandise classification,
which are then reviewed by management.
The system maintains over 1,100,000 customer charge accounts (approximately
203,000 of which are active) and generates monthly customer statements and
financial reporting. The system also provides information to help management
schedule, compensate and evaluate employees.
The Company maintains a comprehensive system of internal controls, one of
which is the taking of a complete physical inventory at least two times per year
to determine actual cost of merchandise sold. Inventory shrinkage, at cost, as a
percentage of net sales was 2.0%, 1.5% and 1.5% in 1997, 1996 and 1995,
respectively. The increase in shrink was primarily the result of decreased sales
and an increase in shrinkage of higher cost items.
TRADEMARKS AND SERVICE MARKS
The Company has registered the names "Gantos," "Bargain Boutique" and "Sale
For All Seasons" as service marks and its logo as a trademark with the United
States Patent and Trademark Office. Registration of these service marks is
renewable indefinitely. The Company is not aware of any adverse claims
concerning its names or marks.
EMPLOYEES
As of January 31, 1998, the Company had 1,949 employees. This total consists
of 677 full-time employees and 1,272 part-time employees. The full-time
employees consist of 400 salaried employees and 277 hourly employees. Of the
full-time, hourly employees, 139 were salespersons who receive incentives in
addition to their hourly wages. Gantos employs additional part-time personnel as
needed throughout the year.
Management believes that its employees are paid competitively compared to
industry standards. All employees receive discounts on Gantos merchandise, and
most full-time employees are entitled to life insurance, medical, dental and
disability coverage and are eligible to participate in a 401(k) plan and an
Employee Stock Purchase Plan. All Gantos employees are non-union. The Company
considers its relationship with its employees to be good.
COMPETITION
The women's retail apparel business is highly competitive, with quality,
price, service and fashion being the principal competitive factors. The
Company's principal competitors include women's apparel specialty stores,
department stores and off-price apparel stores. Many competitors are national or
regional chains which are considerably larger than the Company and have
substantially greater financial and other resources.
7
<PAGE>
SEASONALITY
The Company's business is seasonal, with its highest and second highest
sales volumes and net income levels historically being in the Christmas and
spring seasons, respectively. The following tables set forth the Company's net
sales and net income (loss) per fiscal quarter for 1997 and 1996, on an
unaudited basis and including the results of store closings and new store
openings:
<TABLE>
<CAPTION>
NET SALES
------------------------------------------
FIRST SECOND THIRD FOURTH
YEARS ENDED QUARTER QUARTER QUARTER QUARTER
- - ---------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
January 31, 1998...................................................... $ 45,564 $ 35,816 $ 35,478 $ 45,108
February 1, 1997...................................................... 50,365 41,809 41,716 50,476
</TABLE>
<TABLE>
<CAPTION>
NET INCOME (LOSS)
------------------------------------------
FIRST SECOND THIRD FOURTH
YEARS ENDED QUARTER QUARTER QUARTER QUARTER
- - ---------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
January 31, 1998...................................................... $ 1,455 $ (4,714) $ (3,388) $ (4,314)
February 1, 1997...................................................... 2,548 (1,592) (275) 1,256
</TABLE>
- - ------------------------
Because of the importance of the Christmas season, sales and operating
results for any quarter are not necessarily indicative of results for the year.
The Company's working capital and cash demands are seasonal, increasing in the
fall when inventories are being increased for the Thanksgiving/Christmas
seasons.
ITEM 2. PROPERTIES
The Company's stores are located primarily in the West, Midwest and
Northeast portions of the United States. Gantos' regular priced merchandise
stores range in size from 5,000 to 13,000 square feet, with most stores within
the chain ranging from 5,000 to 11,000 square feet. Boutiques range in size from
10,000 to 18,000 square feet. The average size of the Company's stores is
approximately 7,800 square feet, with approximately 91% of this area
representing selling space.
The Company leases all of its stores. Most store leases contain fixed rental
provisions and generally leases contain rental payment provisions based on a
percentage of sales. Most leases also require payment of insurance, real estate
taxes and other charges (such as advertising, maintenance and merchants'
association charges) which are subject to escalation clauses. During 1997, total
store rent under these leases was approximately $15.1 million, of which $20,000
was percentage rent. The Company owns substantially all of the equipment in its
stores.
The following table shows the years in which leases on stores in operation
at April 24, 1998 expire:
<TABLE>
<CAPTION>
NUMBER OF LEASES
FISCAL YEARS EXPIRING
- - ---------------------------------------------------------------------------- ---------------------
<S> <C>
1998-1999................................................................... 26(1)(2)
2000-2001................................................................... 52
2002-2003................................................................... 28(1)
2004-2005................................................................... 2
2006-2007................................................................... 5
2008-2009................................................................... 2
---
Total..................................................................... 115
---
---
</TABLE>
- - ------------------------
(1) One of these leases contains an option to renew for five years.
8
<PAGE>
(2) One of these leases contains an option to renew for ten years.
Beginning in May 1997, the Company relocated the merchandising portion of
its corporate offices to a 23,000 square foot facility in Stamford, Connecticut.
The Company has a seven year lease with one five year renewal option.
Beginning in July, the Company relocated the remaining corporate
departments, including the distribution center, to a new location in Grand
Rapids, Michigan with 20,000 square feet of office space and 100,000 square feet
of distribution space. The Company has a sixty-four month lease with two five
year renewal options. The Company believes the combined new facilities better
serve its needs and also allow it to further expand to accommodate future
business volume.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of pending lawsuits and claims which are
ordinary, routine suits and claims incidental to its business. In the opinion of
management, the disposition of these actions will not have a material adverse
effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of this Annual Report on Form 10-K.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common shares of Gantos, Inc. are traded over-the-counter and are quoted
on The Nasdaq National Market under the symbol GTOS. The Company has received a
notice, however, that unless its stock price is above $1.00 a share for at least
ten consecutive trading days ending on or before May 28, 1998, it will receive a
delisting letter from The Nasdaq Stock Market. In addition the Company received
a separate notice that its stock will be delisted July 21, 1998 unless (a) the
stock meets the $5,000,000 market value of public float requirement on or before
July 17, 1998 or, (b) the Company requests a hearing prior to July 17, 1998.
The table below sets forth the high and low closing sale prices for the
Company's common shares as reported by Nasdaq for 1997 and 1996.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
-------------------
PERIOD HIGH LOW
- - -------------------------------------------------------------------------------- -------- -------
<S> <C> <C>
1997
1st Quarter..................................................................... 2 3/4 1 7/8
2nd Quarter..................................................................... 3 9/16 1 7/8
3rd Quarter..................................................................... 3 7/16 2
4th Quarter..................................................................... 2 11/16 7/16
1996
1st Quarter..................................................................... 3 13/16 2
2nd Quarter..................................................................... 7 1/8 3 9/16
3rd Quarter..................................................................... 4 5/8 2 7/8
4th Quarter..................................................................... 3 15/16 2 1/16
</TABLE>
The number of shareholders of record of the Company's common shares as of
April 24, 1998 was 704.
The Company has never paid cash dividends on its common shares. The Company
expects that for the foreseeable future it will follow a policy of retaining
earnings to finance the development of its business, including for working
capital and to fund capital expenditures. For a description of financial
covenants in the Company's loan agreement that may restrict dividend payments,
see Note 7 of "Notes to Financial Statements".
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
5-YEAR SUMMARY AND SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995* 1994** 1993
--------- --------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales................................................... $ 161,966 $ 184,366 $ 192,790 $ 197,288 $ 229,422
Cost of sales............................................... (137,237) (147,022) (151,912) (160,434) (205,899)
Selling, general and administrative expense................. (38,807) (37,407) (40,018) (40,114) (47,004)
Finance charge and other revenue............................ 4,843 4,732 4,472 5,020 6,660
(Provision) credit for facilities closings and other........ -- (400) 944 2,652 (29,254)
Operating income (loss)..................................... (9,235) 4,269 6,276 4,412 (46,075)
Interest expense............................................ (2,341) (2,332) (2,278) (122) (1,785)
Reorganization items........................................ -- -- (279) (1,764) (831)
Income (loss) before income taxes, extraordinary item and
cumulative effect of change in accounting method.......... (11,576) 1,937 3,719 2,526 (48,691)
Net income (loss) before extraordinary item and income
tax....................................................... (11,576) 1,937 3,719 2,526 (47,514)
Extraordinary item.......................................... -- -- -- 1,628 --
Net income (loss) before income taxes....................... (11,576) 1,937 3,719 4,154 (47,514)
(Provision) benefit for income taxes........................ 615 -- -- -- 4,450
Net income (loss)........................................... $ (10,961) $ 1,937 $ 3,719 $ 4,154 $ (43,064)
--------- --------- --------- --------- ---------
PER SHARE DATA***
Net income (loss) per share (basic and diluted) before
extraordinary item........................................ $ (1.45) $ 0.26 $ 0.55 $ 0.95 $ (16.58)
Extraordinary item.......................................... -- -- -- 0.61 --
Net income (loss) per share (basic and diluted)............. $ (1.45) $ 0.26 $ 0.55 $ 1.56 $ (16.14)
--------- --------- --------- --------- ---------
BALANCE SHEET DATA
Total assets................................................ $ 65,194 $ 65,858 $ 68,410 $ 95,983 $ 125,611
Working capital............................................. $ 34,531 $ 30,407 $ 25,193 $ 55,347 $ 82,706
Long-term obligations....................................... $ 27,398 $ 11,940 $ 12,395 $ 66,981 $ 104,715
Shareholders' equity........................................ $ 21,680 $ 32,462 $ 30,330 $ 6,748 $ 2,594
--------- --------- --------- --------- ---------
FINANCIAL RATIOS AND OTHER DATA
Current ratio............................................... 3.1 2.4 2.0 3.5 5.5
Return (loss) on average assets............................. (16.7)% 2.9% 4.5% 3.7% (36.0)%
Return (loss) on average shareholders' equity............... (40.5)% 6.2% 20.1% 88.9% (178.6)%
Book value per share at year end............................ $ 2.87 $ 4.29 $ 4.49 $ 2.53 $ 0.98
Number of stores at year end................................ 115 114 113 114 118
Weighted Shares Outstanding***.............................. 7,550 7,574 6,759 2,665 2,669
</TABLE>
- - ------------------------
* Data for 1995 include the results of operations for 53 weeks.
** The Company closed 46 stores between the fourth quarter of 1993 and the
second quarter of 1994, and emerged from its chapter 11 bankruptcy
proceedings (filed on November 12, 1993) on March 31, 1995.
11
<PAGE>
*** As part of the Company's Plan of Reorganization, each shareholder of record
on March 31, 1995 was
entitled to receive one common share for every two common shares previously
held. All stock-related data in the table above reflect this stock
distribution for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
tables indicate the percentage relationships to net sales of various revenue and
expense items included in the Statements of Income for 1997, 1996 and 1995
(fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively) and the percentage changes in the dollar amounts of those items
for such years.
<TABLE>
<CAPTION>
PERCENT
CHANGE IN
DOLLAR
AS A PERCENT OF NET SALES AMOUNTS
------------------------------ ---------
1997 1996 1995 1996-1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales....................................................................... 100.0% 100.0% 100.0% (12)%
Cost of sales (including buying, distribution and occupancy costs).............. (84.7) (79.7) (78.8) (7)
-------- -------- --------
Gross income.................................................................. 15.3 20.3 21.2 (34)
Selling, general and administrative expense..................................... (24.0) (20.3) (20.7) 4
Finance charge and other revenue................................................ 3.0 2.6 2.3 2
(Provision) credit for facilities closings and other............................ -- (0.2) 0.5 (100)
-------- -------- --------
Operating income (loss)....................................................... (5.7) 2.4 3.3 (316)
Interest expense................................................................ (1.4) (1.3) (1.2) 0
-------- -------- --------
Income (loss) before reorganization items and income taxes...................... (7.1) 1.1 2.1 (698)
-------- -------- --------
Reorganization items:
Professional fees............................................................. -- -- (0.3) --
Interest earned on accumulating cash from Chapter 11 proceedings.............. -- -- 0.1 --
-------- -------- --------
-- -- (0.2) --
-------- -------- --------
Income (loss) before income taxes............................................... (7.1) 1.1 1.9 (698)
Income taxes.................................................................... 0.4 -- -- --
-------- -------- --------
Net income (loss)............................................................... (6.7)% 1.1% 1.9% (666)
-------- -------- --------
-------- -------- --------
<CAPTION>
1995-1996
---------
<S> <C>
Net Sales....................................................................... (4)%
Cost of sales (including buying, distribution and occupancy costs).............. (3)
Gross income.................................................................. (9)
Selling, general and administrative expense..................................... (7)
Finance charge and other revenue................................................ 6
(Provision) credit for facilities closings and other............................ (142)
Operating income (loss)....................................................... (32)
Interest expense................................................................ 2
Income (loss) before reorganization items and income taxes...................... (52)
Reorganization items:
Professional fees............................................................. (100)
Interest earned on accumulating cash from Chapter 11 proceedings.............. (100)
(100)
Income (loss) before income taxes............................................... (48)
Income taxes.................................................................... --
Net income (loss)............................................................... (48)
</TABLE>
1997 COMPARED TO 1996
Net sales decreased approximately 12%, or approximately $22.4 million, from
1996 to 1997. The decrease was due primarily to a decrease in net sales for
stores in operation throughout both periods of approximately $23.9 million,
partially offset by a net increase of $1.5 million due to one new store opening
in 1996, two new stores opening in 1997 and one store closing in 1997. The 12.3%
decrease in comparable store sales was comprised of a 15.0% decrease in unit
sales and a 0.5% decrease due to the merchandise mix, partially offset by a 3.2%
increase in average sales dollars per unit. Management expects the negative
comparable store sales trends to continue into the first half of 1998 in part
due to difficulties in getting merchandise from vendors.
Cost of sales decreased approximately $9.8 million from 1996 to 1997. The
decrease is due primarily to reduced sales volume. As a percent of net sales,
cost of sales increased to 84.7% in 1997 from 79.7% in
12
<PAGE>
1996. The increase in cost of sales, as a percent of net sales, is primarily the
result of decreased sales volume with consistent buying, distribution and
occupancy costs, and lower vendor allowances, partially offset by lower net
markdowns and higher markups for the period compared to a year ago.
Selling, general and administrative (SG&A) expense increased approximately
$1.4 million from 1996 to 1997. The increase was primarily due to the moving
costs associated with the relocation of the Company's merchandising operations
to Stamford, Connecticut, an increase in maintenance and dues expense as a
result of a rent settlement made to one of the Company's store landlords, an
increase in net advertising expense due to a decrease in vendor participation in
advertising co-op programs and an increase in corporate salaries as a result of
officers hired in 1996 and 1997. These increases were partially offset by
savings from cost control measures of approximately $810,000 at the store and
corporate levels during 1997 compared to 1996. As a percent of net sales, SG&A
expense increased from 20.3% to 24.0% primarily as a result of the lower sales
coupled with the expensed increases described above partially offset by the cost
control measures.
Finance charge and other revenue increased $111,000 to 3.0% of net sales
compared to 2.6% of net sales in the prior year. The increase was primarily due
to an increased late fee policy implemented on the Gantos charge card in 1997,
partially offset by a decrease in finance charge income due to a lower average
outstanding balance of Gantos credit card receivables compared to 1996. The
decrease in the receivable balances is primarily due to lower sales and a lower
percentage of total sales on the Gantos charge card from 30.7% in 1996 to 28.3%
in 1997.
During 1996, the Company recorded a provision of $0.4 million for
anticipated severance costs related to the relocation of the corporate offices
to Stanford, Connecticut.
Interest expense remained flat in 1997 compared to 1996. Decreases in
interest expense due to the completion of loan fee amortization in March 1997
and to payments made on long-term debt in 1996 and 1997 were offset by higher
average revolving credit facility borrowings outstanding during 1997 and higher
interest rates. Revolving credit interest rates are expected to increase in 1998
as a result of recent amendments to the facility and the average amounts
outstanding under the revolving credit facility are expected to be higher in
1998.
The effective tax rate for the year ended January 31, 1998 was 5.3% which is
less than the statutory rate of 35% due to the establishment of valuation
allowances against tax assets related to net operating loss carryforwards due to
the Company's inability to determine that it is more likely than not that these
assets will be realized, partially offset by the reversal of previously recorded
valuation allowances during the year for other deferred tax items.
These factors resulted in a net loss of $11.0 million, or $1.45 per share,
in 1997 compared to net income of $1.9 million, or $0.26 per share, in 1996.
1996 COMPARED TO 1995
Net sales decreased approximately 4%, or approximately $8.4 million, from
1995 to 1996. The decrease was due primarily to a decrease in net sales for
stores in operation throughout both periods of approximately $6.3 million and a
decrease of approximately $2.6 million resulting from an additional week of
sales reported in fiscal 1995 as a result of the fifty-three week retail
calendar, partially offset by a net increase of $0.5 million due to one new
store opened in both 1995 and 1996 and two store closings in 1995. The 3.6%
decrease in comparable store sales (excluding the 53rd week of 1995) was
comprised of a 4.3% decrease in average sales dollars per unit due primarily to
a change in the mix of merchandise sold partially offset by a 0.7% increase in
unit sales.
Cost of sales decreased approximately $4.9 million from 1995 to 1996. The
decrease is due primarily to reduced sales. As a percent of net sales, cost of
sales increased to 79.7% in 1996 from 78.8% in 1995. The increase was primarily
due to higher net markdowns taken and increased shrinkage expense, partially
13
<PAGE>
offset by an increase in vendor allowances received, higher markups and lower
net merchandise costs incurred in 1996 compared to 1995.
Selling, general and administrative (SG&A) expense decreased approximately
$2.6 million from 1995 to 1996. The decrease was primarily due to a decrease in
payroll as a result of fewer bonuses paid out in 1996 compared to 1995,
reductions in store payroll due to improved controls at the store level,
decreases in special services and supplies as a result of the elimination of
computer outsourcing fees and increased general cost control measures and lower
depreciation and insurance expense in 1996 compared to 1995. The decrease in
SG&A was partially offset by an increased rent expense in 1996 compared to 1995
due to the expiration of certain rent restructure deals and increased bad debt
expenses, due to the rise in personal bankruptcies in 1996 compared to 1995.
SG&A expense, as a percent of net sales, decreased from 20.7% to 20.3% in 1996
as a result of the decreases described above, partially offset by lower retail
sales.
Finance charge and other revenue, as a percent of sales, increased to 2.6%
this year compared to 2.3% last year. The increase was primarily due to an
increase in late charge fees from a policy that took effect in October 1995,
partially offset by a decrease in average outstanding credit card receivables
during 1996 compared to 1995. The decrease in receivable balances was primarily
the result of faster payment by customers, a decrease in Gantos charge card
sales as a percentage of net sales from 31.1% in 1995 to 30.7% in 1996 and a
decrease in sales.
During 1996, the Company recorded a provision of $0.4 million for
anticipated severance cost related to the relocation of the corporate offices to
Stamford, Connecticut.
Interest expense increased approximately $54,000 in 1996 compared to 1995.
The increase was the result of borrowings accruing interest for twelve months in
1996 compared to only ten months in 1995, partially offset by lower average
amounts outstanding during 1996.
The effective income tax rate varies from the statutory rate of 35% due to
the effect of the graduated tax rate and the reversal of valuation allowances
during the year.
These factors resulted in net income of $1.9 million, or $0.26 per share, in
1996 compared to net income of $3.7 million, or $0.55 per share, in 1995. The
net income for 1995 includes a credit of $0.9 million to Facilities Closing and
Other, and a charge of approximately $0.7 million as a result of the early
adoption of SFAS No. 121. As part of the Company's Plan of Reorganization, each
shareholder of record on March 31, 1995 was entitled to receive one common share
for every two common shares previously held. All stock-related data above
reflect this stock distribution for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, support its accounts receivable and fund its capital
expenditure and debt payment obligations and operations. Merchandise purchases
vary on a seasonal basis, peaking in the fall. Accounts receivable also vary on
a seasonal basis, peaking during the holiday season.
Total capital expenditures during 1997, 1996 and 1995 were $4.9, $2.7, and
$6.1 million, respectively. Capital expenditures for 1997 were incurred
primarily to open two new stores, relocate the corporate offices and
distribution center and make various information system enhancements. Capital
expenditures for 1998 are estimated to be $1-2 million. These amounts are
expected to be used primarily to remodel and refixture approximately two to
three existing stores. The actual amount of the Company's capital expenditures
will depend in part on the number of stores remodeled, and on the amount of
construction allowances the Company receives from the landlords of the remodeled
facilities. Capital expenditures for 1998 are expected to be financed primarily
from funds generated from operations and from borrowings under the Fleet
facility.
14
<PAGE>
Net cash used by operating activities was $13.2 million in 1997 compared to
net cash provided by operating activities of $6.1 million in 1996. This
substantial increase in cash used by operations is the result of a net loss (net
of non-cash items) in 1997 compared to a net income (net of non-cash items) in
1996, an increase in cash used for facilities closing and other due to the
completion of the relocation of the corporate facilities, a larger increase in
prepaid expenses, and a larger decrease in accounts payable, both the results of
tightened trade credit requiring partial prepayment for merchandise before it is
received and approximately $2.0 million of cash deposited with certain factors
securing accounts payable, and an increase in merchandise inventory levels in
1997 compared to a decrease in 1996, which is the result of lower sales volume
being only partially offset by reduced purchases resulting in higher ending
inventory levels, and a net increase of one store at the end of 1997 compared to
1996, partially offset by the effects of the tightened trade credit. These
factors are offset somewhat by a larger decrease in accounts receivable due to
lower sales volume and reduced percentage of net sales made using on the Gantos
card and a smaller decrease in accrued expenses and other due to the timing of
payment. The Company expects the accounts receivable balance to be lower in 1998
than 1997 and that trade credit will remain tight through at least the first
half of 1998.
Net cash used by reorganization items during 1995 was approximately $33.1
million. In addition to the reorganization items discussed in "Results of
Operations", the Company used approximately $31.6 million of cash to pay the
remaining liabilities subject to compromise, including secured, unsecured and
administrative claims, and approximately $1.4 million in cash to pay accrued
bankruptcy expenses. Pursuant to the Company's Plan of Reorganization, during
1995, the Company used $31,868,000 of its cash, issued approximately $12,395,000
in original principal amount of six-year notes payable, bearing interest at
12.75% a year, and issued or committed to issue approximately 4,735,000 Common
Shares (valued for this purpose at $4.16 a share), in payment of approximately
$58,255,000 of its liabilities subject to compromise, $5,192,000 in long-term
debt and $514,000 of accrued expenses, including the settlement costs of the
purported class action lawsuit.
Net cash provided by financing activities in 1997 was approximately $15.1
million compared to net cash used of approximately $0.5 million in 1996. The
cash provided by financing activities in 1997 is primarily due to borrowings
under the Fleet facility, partially offset by scheduled payments on the 12.75%
notes (see Note 7 of the financial statements, which is incorporated in this
Item 7 by reference, for a description of the terms of such notes). The Company
expects to make payments on the notes of approximately $3.1 million in 1998. The
use of cash in 1996 was primarily an excess cash flow payment on the notes.
The Company has a borrowing agreement with Fleet Bank N.A. (formerly Natwest
Bank N.A.) expiring March 31, 2000 (the "Fleet Facility"). The Fleet Facility
provides the Company 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 $15 million in face amount. The Fleet Facility is expected to be
used to provide for the Company's working capital requirements.
As of April 30, 1998, the Company entered into Amendment No. 8 to the Fleet
Facility (the Eighth Amendment). The Eighth Amendment provides for an increase
in the availability under the Fleet Facility in an amount equal to the lesser of
ten percent of the eligible inventory (as defined in the agreement) and
$2,000,000. Additionally, the Eighth Amendment carries a $100,000 amendment fee
payable on January 1, 1999 if there are obligations still due under the Fleet
Facility as of that date.
The Company has entered into eight amendments to the Fleet facility. Without
the amendments through number 6 the Company would not have been in compliance
with the financial covenants, including the new liquidity test, under the Fleet
Facility. For a description of the most recent amendments, see Recent
Developments in Item 1 of this Report, which information are incorporated in
this Item 7 by reference. For a description of the terms of the Fleet Facility
and the covenants under that facility, see
15
<PAGE>
note 7 of the financial statements, which is incorporated in this Item 7 by
reference. As of April 24, 1998, the Company had $22.0 million in borrowings and
$1.2 in letters of credit outstanding under the facility, and approximately $6.4
million was available for borrowing under the facility. During 1997, the
weighted average interest rate under this facility was 8.9%.
The Company's Indenture, under which the Company's 12.75% Notes were issued,
contains certain financial covenants. In part because of the net loss reported
by the Company for the twenty-six weeks ended August 2, 1997 and the thirty-nine
weeks ended November 1, 1997, the Company was not in compliance with the
earnings before interest, taxes, depreciation and amortization (EBITDA) covenant
for both quarters ended August 2, 1997, and November 1, 1997, and it was not in
compliance with the interest coverage ratio covenant for the quarter ended
November 1, 1997. As of April 24, 1998, $7.0 million in principal amount of
Notes were outstanding. On December 15, 1997, the Company entered into
Supplemental Indenture No. 1 and an Agreement with the trustee and principal
holder of the Notes, respectively, to waive existing EBITDA and interest
coverage ratio defaults and to revise some of the financial covenants under the
Indenture so that compliance with those covenants is based on a liquidity test
as long as minimum levels of liquidity are maintained under the Fleet facility.
The Indenture Supplement was entered into in exchange for the payment of
approximately $400,000 plus expenses to the Trustee for the benefit of the Note
holders.
The Indenture, as amended, continues to require a minimum net worth of $20
million at the end of each quarter. As of January 31, 1998, the Company's net
worth was approximately $21.7 million. Management does not believe that the
Company will be able to meet this covenant in the second quarter of 1998 and
might not be able to meet the new liquidity test in the third quarter of 1998.
The Company is negotiating with Fleet Bank and with the principal holder of the
Notes to amend these covenants. If the Company is unsuccessful in renegotiating
these covenants on terms and conditions acceptable to the Company, it would
consider refinancing the applicable indebtedness. Any inability by the Company
to renegotiate these covenants or to refinance the applicable indebtedness on
terms and conditions acceptable to the Company could have a material adverse
effect on the Company's business, operations, liquidity, financial condition and
results of operations, and could require the Company to substantially reduce or
discontinue its operations.
Even if the Company is successful in renegotiating the net worth covenant
under the Indenture, there can be no assurance that the Company would be able to
meet the revised covenants or liquidity test under the Indenture or the Fleet
Facility, unless sales substantially improve. As a result, the Company has
engaged a financial advisor to assist it in exploring its strategic
alternatives, although there can be no assurance that any viable strategic
alternatives will be found.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations during the past three years.
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, future compliance with financial
covenants and alternative courses of action regarding non-compliance) 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 ability to amend its
Indenture or refinance the related Notes, the Company's ability to comply with
or amend the Fleet Facility liquidity requirements, both on terms and conditions
acceptable to the Company, the Company's comparable store sales changes, the
Company's ability to obtain merchandise,
16
<PAGE>
and the factors set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Company has reviewed its Management Information Systems in regards to
becoming year 2000 compliant and has determined that the costs to be incurred
will not have a significant impact to the Company's financial results. The
Company also believes that all work will be completed in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item are set
forth in the "Index to Financial Statements" on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of May 29, 1998, regarding the
Company's directors and executive officers:
<TABLE>
<CAPTION>
DIRECTOR OR
EXECUTIVE
NAME AGE POSITIONS WITH THE COMPANY OFFICER SINCE
- - ------------------------------- --- ------------------------------------------------------------- ---------------
<S> <C> <C> <C>
L. Douglas Gantos.............. 66 Consultant and Director 1961
Hannah H. Strasser............. 38 Director 1995
Mary Elizabeth Burton.......... 46 Director 1995
Elizabeth M. Eveillard......... 51 Director 1992
S. Amanda Putnam............... 48 Director 1995
Arlene H. Stern................ 47 President, Chief Executive Officer and a Director 1996
Fred K. Schomer................ 58 Director 1992
Erwin A. Marks................. 60 Director 1995
Joseph Giudice................. 48 Senior Vice President, Merchandise Planning and Operations 1996
Dennis Horstman................ 52 Senior Vice President, Merchandising and Marketing 1996
Neal Gottfried................. 55 Senior Vice President, Store Operations and Visual
Merchandising 1997
David Nelson................... 48 Senior Vice President, Chief Financial Officer and Treasurer 1997
Vicki Boudreaux................ 41 Vice President, Planning and Allocation 1996
Hope Grey...................... 41 Vice President, Technical Product Management 1996
</TABLE>
CURRENT DIRECTORS WHOSE TERMS EXPIRE IN 1998 CLASS III
L. DOUGLAS GANTOS
L. Douglas Gantos served as the Company's Chairperson of the Board from
September 1996 to May 1998 and has served as a consultant to the Company since
May 1998. From July 1996 until September 1996, he served as the Company's Chief
Executive Officer and Chairperson of the Board. From August 1993 until July
1996, Mr. Gantos served as the Company's President, Chief Executive Officer and
Chairperson of the Board. From April 1992 until August 1993 he served as the
Company's Chief Executive Officer and Chairperson of the Board. From April 1963
until April 1992, Mr. Gantos served as the Company's President and Chief
Executive Officer. While Mr. Gantos receives cash payments pursuant to a letter
of employment, as amended (see Item 11, "Executive Compensation--Employment
Contracts and Termination of Employment and Change-in-Control Arrangements--L.
Douglas Gantos"), he will serve as a director of the Company during any period
in which the Company's Board of Directors desires him to serve as a director,
unless he is not elected by the shareholders or dies. The Company filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code on November 12, 1993. Mr. Gantos was an executive officer of the Company at
the time of the filing. Mr. Gantos will not continue as a director of the
Company if the proposed Merger of the Company and HOM Holding, Inc. (the
"Merger") is consummated.
18
<PAGE>
HANNAH H. STRASSER
Hannah H. Strasser is co-head of the high yield group, responsible for
portfolio management and research for Cardinal Capital Management, a money
management company Ms. Strasser co-founded in April 1995. Prior to co-founding
Cardinal, Ms. Strasser was co-head of the high yield group and was responsible
for portfolio management and research for Deltec Asset Management Corp., a money
management firm. She was also a Managing Director and a member of Deltec's
Executive Committee. She currently serves as a member of the Board of Directors
of Rymer Foods Inc. Ms. Strasser will change from a Class III director to a
Class I director if the Merger is consummated.
MARY ELIZABETH BURTON
Mary Elizabeth Burton has been the Chairman of BB Capital, Inc., a company
that was formed by Ms. Burton to invest in retail or service companies in the
health and beauty industries, since November 1994. From July 1992 until November
1994, she served as Chairman of the Board and Chief Executive Officer of
Supertans, Inc., a tanning store chain. Ms. Burton currently serves as a member
of the Board of Directors of Staples, Inc., the office superstore. Ms. Burton
will not continue as a director of the Company if the Merger is consummated.
CURRENT DIRECTORS WHOSE TERMS EXPIRE IN 1999 CLASS I
ELIZABETH M. EVEILLARD
Elizabeth M. Eveillard has been the Managing Director and head of the
Retailing Industry Group for PaineWebber Incorporated, an investment-banking
firm, since April 1988. Ms. Eveillard currently serves as a member of the Board
of Directors of Lillian Vernon Corporation, a specialty catalog retailer. Ms.
Eveillard will continue as a Class I director if the Merger is consummated.
S. AMANDA PUTNAM
S. Amanda Putnam has been the Vice President, Marketing Strategies for
Fitch, Inc., which is an international business and design consulting
organization, since 1992. Ms. Putnam will not continue as a director of the
Company if the Merger is consummated.
CURRENT DIRECTORS WHOSE TERMS EXPIRE IN 2000 CLASS II
ARLENE H. STERN
Arlene H. Stern has been the Company's President and Chief Executive Officer
since September 8, 1996. From July 8, 1996 to September 8, 1996, Ms. Stern was
the President and Chief Operating Officer for the Company. Ms. Stern served as
Executive Vice President and Chief Operating Officer of Casual Corner Group,
Inc., a retail apparel specialty store chain and a division of U.S. Shoe
Corporation, from July 1993 to August 1995. From February 1985 to July 1993, Ms.
Stern was the Executive Vice President for Human Resources and Distribution with
P.A. Bergner & Company, a department store chain. While Ms. Stern will not
continue as an officer of the Company if the Merger is consummated, Ms. Stern
will continue as a Class II director.
FRED K. SCHOMER
Fred Schomer was the Executive Vice President and Chief Executive Officer
for Gerber Products Company, a consumer products manufacturer, from November
1988 until his retirement in December 1997. Mr. Schomer will not continue as a
director of the Company if the Merger is consummated.
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<PAGE>
ERWIN A. MARKS
Erwin A. Marks has been the President of Marks & Associates, Inc., an
interim management and consulting firm specializing in underperforming companies
and restructurings, since April 1996. From June 1995 to April 1996, Mr. Marks
was the President of Circle Fine Arts Corporation, a retail art gallery chain.
From 1989 to June 1995, Mr. Marks was the Managing Director and Senior Vice
President of Heller Investments, Inc., a subsidiary of Heller Financial Inc., a
financial services company. Mr. Marks is also on the Board of Directors of Value
Merchants, Inc. Circle Fine Arts Corporation filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code on February 8,
1996. Mr. Marks was an executive officer of Circle Fine Arts Corporation at the
time of the filing. Mr. Marks will continue as a Class II director if the Merger
is consummated.
ARRANGEMENTS CONCERNING ELECTION OF DIRECTORS
If the Merger is consummated, the Board of Directors will consist of seven
members. Three of the directors will be designated by HOM Holding, Inc. (the
"Holding Designees") and four of the directors (Ms. Stern, Ms. Eveillard, Mr.
Marks and Ms. Strasser) will be continuing directors of the Company (the
"Company Designees"). The other four current directors of the Company will
resign. If the Merger is not consummated, the current eight directors of the
Company will remain in office until the Annual Meeting of Shareholders for the
year in which his or her term expires and until their respective successors have
been elected and qualified.
In connection with the Merger, on May 12, 1998, the Company entered into the
Stockholder Voting and Proxy Agreement (the "Voting Agreement") with Arlene
Stern, Erwin A. Marks and Elizabeth Eveillard (collectively, the "Company
Shareholders"), HOM Holding, Inc. ("Holding"), and Herbert Yalof, Jack Concannon
and Access Capital Partners, L.P., (collectively, the Holding Stockholders). In
the merger, Access Capital Partners, L.P. the principal stockholder of Holding
("Access Capital"), will receive approximately 7.0 million shares, or
approximately 47% of the issued and outstanding common shares of the surviving
corporation and, upon exercise of the warrants, if and when exercised, Access
Capital and affiliated entities will have received approximately 8.2 million
shares, or approximately 50%, of the issued and outstanding Common Shares of the
surviving corporation.
Pursuant to the Voting Agreement, each of the Holding Stockholders has
agreed to vote all of his, her or its Common Shares of the Company issued in the
Merger, to the extent that any of the following matters are submitted to the
shareholders of the Company (i) in favor of the re-election (unless after such
re-election there will be greater than three Company designees) of, and against
any proposed removal (if after such removal there will be fewer than three
Company Designees) of, a Company Designee to the surviving corporation's Board
of Directors, and (ii) to fill all vacancies on the Board of Directors caused by
the resignation or removal of a Company Designee (if after such resignation or
removal there will be fewer than three Company Designees), for the nominees
designated by the affirmative vote of at least two of the Company Designees then
in office, subject to the consent of a sufficient number of the remaining
directors such that the voting requirements set forth in the Company's bylaws
are satisfied, and (iii) against any proposed expansion of the surviving
corporation's Board of Directors beyond seven members (or such increased number
as may have been approved in accordance with the provisions of the Voting
Agreement described herein) unless at least two of the Company Designees then in
office and a majority of the Holding Designees then in office vote to approve
such expansion; PROVIDED, HOWEVER, that this provision does not apply to any
expansion of the surviving corporation's Board of Directors which is effected in
connection with an acquisition of, or a merger, consolidation or other business
combination with, another company, so long as the vacancies caused by the
expansion of the surviving corporation's Board of Directors are solely filled
(x) with persons who are significant stockholders, executive officers or
directors of the acquired company, (y) immediately upon the consummation of the
acquisition, merger, consolidation or business combination with the acquired
company and (z) pursuant to a vote approving
20
<PAGE>
such expansion by a majority of the surviving corporation's directors then in
office. The Company Shareholders have agreed to similar provisions with respect
to the Holding Designees.
The Company has amended its bylaws to be consistent with the Voting
Agreement. The Voting Agreement also requires the Company Shareholders and the
Holding Stockholders to vote in favor of the Merger and contains restrictions on
their transfer of shares or voting rights.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Joseph Giudice has been the Company's Senior Vice President, Merchandise
Planning and Operations since September 16, 1996. From January 1994 to September
1996, Mr. Giudice was Executive Vice President of Operations/Management
Information Systems for Casual Corner Group, Inc., a retail apparel specialty
store chain. Prior to that position, Mr. Giudice was Vice President of
Operations of Foley's Department Store, a division of the May Company, from
March 1990 to January 1994. Pursuant to a letter agreement, dated September 25,
1996, Mr. Giudice is to be employed at will as the Company's Senior Vice
President, Merchandise Planning and Operations.
Dennis Horstman has been the Company's Senior Vice President, Merchandising
and Marketing since December 2, 1996. Prior to joining Gantos, Mr. Horstman was
Senior Vice President/General Merchandise Manager for Petrie Retail, Inc., a
retail apparel specialty store chain, from July 1995 to December 1996. Petrie
Retail, Inc. filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code on October 13, 1995. Mr. Horstman was an executive
officer of Petrie Retail, Inc. at the time of the filing. Prior to Petrie, Mr.
Horstman was President of the Petite Sophisticate Division of Women's Specialty
Group, a retail apparel specialty store chain and a division of U.S. Shoe
Corporation from November 1994 to July 1995. From May 1994 to November 1994, Mr.
Horstman was General Merchandise Manager for the Capezio Sportswear Division of
Women's Specialty Group. From 1991 to 1994, Mr. Horstman was Vice
President/General Merchandise Manager for the Wilsons Leather Division of
Mellville Corporation, a retail apparel specialty store. Pursuant to a letter
agreement, dated November 11, 1996, Mr. Horstman is to be employed at will as
the Company's Senior Vice President, Merchandising and Marketing.
Neal Gottfried has been the Company's Senior Vice President, Store
Operations and Visual Merchandising since April 14, 1997. From January 1994
until April 1997, Mr. Gottfried was the Vice President of Operations for the
Southern Zone of Casual Corner Group, Inc., a retail apparel specialty store
chain and a division of U.S. Shoe Corporation. From September 1992 until January
1994, Mr. Gottfried was the Executive Vice President for Caren Charles, a retail
apparel specialty store chain and a division of U.S. Shoe Corporation. From May
1987 until September 1992, Mr. Gottfried was the Executive Vice President for
Casual Corner Group, Inc., a retail apparel specialty store chain and a division
of U.S. Shoe Corporation. Pursuant to a letter agreement, dated April 23, 1997,
Mr. Gottfried is to be employed at will as the Company's Senior Vice President,
Store Operations and Visual Merchandising.
David Nelson has been the Company's Senior Vice President, Chief Financial
Officer and Treasurer since August 19, 1997. From July 1994 to August 1997, Mr.
Nelson was an independent financial consultant and advisor to private and public
corporations and financial institutions. From April 1991 to July 1994, Mr.
Nelson was the Vice President of Whitman Heffernan Rhein & Co. Inc., a merchant
banking and advising firm. Pursuant to a letter agreement, dated August 19,
1997, Mr. Nelson is to be employed at will as the Company's Senior Vice
President, Chief Financial Officer and Treasurer.
Vicki Boudreaux has been the Company's Vice President, Planning and
Allocation since September 16, 1996. From April 1996 to September 1996, Ms.
Boudreaux was Vice President-Organizational Management at Casual Corner Group,
Inc., a retail apparel specialty store chain and a division of U.S. Shoe
Corporation, and from April 1995 to April 1996, was Vice President--Quick
Response at Casual Corner Group, Inc. From December 1991 to April 1995, Ms.
Boudreaux was the Director and subsequently Senior Director--Quick Response for
Casual Corner Group, Inc. Pursuant to a letter agreement,
21
<PAGE>
dated September 3, 1996, Ms. Boudreaux is to be employed at will as the
Company's Vice President, Planning and Allocation.
Hope Grey has been the Company's Vice President, Technical Product
Management since September 30, 1996. Prior to joining Gantos, Ms. Grey was Vice
President-Quality Assurance for Casual Corner Group, Inc., a retail apparel
specialty store chain and a division of U.S. Shoe Corporation, from November
1990 to May 1996. Pursuant to a letter agreement, dated September 25, 1996, Ms.
Grey is to be employed at will as the Company's Vice President, Technical
Product Management.
Executive officers are elected annually by the Board of Directors and serve
at the pleasure of the Board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) reports
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 31, 1998 all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, except that during 1997 one
report covering one transaction was filed late by Gordon J. Tendler and one
report covering one transaction was filed late by L. Douglas Gantos.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996 concerning the
compensation of (i) any person serving as the Company's Chief Executive Officer
during the fiscal year ended January 31, 1998, (ii) each of the Company's other
most highly compensated executive officers who were serving as executive
officers as of January 31, 1998 and whose total annual salary and bonus exceeded
$100,000, and (iii) up to two additional executive officers whose total annual
salary and bonus exceeded $100,000 for the fiscal year ended January 31, 1998
and who were not serving as executive officers as of January 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
RESTRICTED
----------------------- OTHER ANNUAL STOCK SECURITIES ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS(#) ($)(7)
- - --------------------------------------------- ---- ---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arlene H. Stern, President, Chief Executive 1997 425,000(1) 0 2,384 0 50,000 2,975
Officer and Director 1996 245,193 75,000 5,939 0 350,000 14,260
1995 N/A N/A N/A N/A N/A N/A
Dennis Horstman, Senior Vice President 1997 300,000(2) 52,500 11,321 0 20,000 1,306
Merchandising And Marketing 1996 51,923 0 33,123 0 35,000 0
1995 N/A N/A N/A N/A N/A N/A
Joseph Giudice, Senior Vice President, 1997 225,000(3) 0 9,193 0 15,000 2,029
Merchandise Planning and Operations 1996 86,538 0 25,912 0 25,000 106
1995 N/A N/A N/A N/A N/A N/A
Neal Gottfried, Senior Vice President, Store 1997 177,404(4) 0 8,439 0 25,000 805
Operations and Visual Merchandising 1996 N/A N/A N/A N/A N/A N/A
1995 N/A N/A N/A N/A N/A N/A
Kenneth Green, former Vice President, General 1997 152,500(5) 0 0 0 12,500 1,961
Counsel and Secretary 1996 150,000 0 0 75,000(6) 12,500 1,885
1995 149,039* 70,000 0 50,000 1,861
</TABLE>
- - ------------------------------
* Annual salary for fiscal 1995 includes 53 weeks compared to 52 weeks in
fiscal years 1997 and 1996.
(1) Ms. Stern became an executive officer of the Company on July 8, 1996. The
amounts disclosed include all compensation paid by the Company to Ms. Stern
during fiscal 1997 and fiscal 1996.
(2) Mr. Horstman became an executive officer of the Company on December 2, 1996.
The amounts disclosed include all compensation paid by the Company to Mr.
Horstman during fiscal 1997 and fiscal 1996.
(3) Mr. Giudice became an executive officer of the Company on September 16,
1996. The amounts disclosed include all compensation paid by the Company to
Mr. Giudice during fiscal 1997 and fiscal 1996.
(4) Mr. Gottfried became an executive officer of the Company on April 14, 1997.
The amounts disclosed include all compensation paid by the Company to Mr.
Gottfried during fiscal 1997.
(5) Mr. Green resigned as an executive officer of the Company as of April 23,
1998.
(6) The restricted shares awarded in fiscal 1995 vested in one-third cumulative
annual installments, which began March 31, 1996. Mr. Green was originally
awarded 20,000 restricted shares in 1995. The officer receiving such
restricted shares is entitled to receive any dividends declared on Gantos
Common Shares with respect to his restricted shares. No such dividends have
been paid, however, since such restricted shares were awarded. Based on the
$0.56 closing price of the Common Stock as reported by the Nasdaq National
Market as of January 30, 1998 (the last trading day of fiscal 1997) the
executive officer named in the table above held the following number of
restricted shares with the following value as of January 31, 1998: Kenneth
Green--6,667 restricted shares ($3,750.19).
(7) The amounts shown for fiscal 1997 include (i) $1,600, $742, $1,600, $527 and
$1,548 for Ms. Stern, Mr. Horstman, Mr. Giudice, Mr. Gottfried and Mr.
Green, respectively, representing the Company's contribution to the
executive officer in fiscal 1997 under the Company's 401(k) Plan and (ii)
$1,375, $564, $429, $278 and $413 for Ms. Stern, Mr. Horstman, Mr. Giudice,
Mr. Gottfried and Mr. Green, respectively, representing life insurance
premiums paid by the Company in fiscal 1997 for policy values in excess of
$50,000.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended January 31, 1998, to each of the
executive officers of the Company named in its Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- - ------------------------------------------ ------------- --------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arlene H. Stern........................... 50,000 19.5% 2.15625 03/18/07 67,803 171,825
Dennis Horstman........................... 20,000 7.8% 2.15625 03/18/07 27,121 68,730
Joseph Giudice............................ 15,000 5.8% 2.15625 03/18/07 20,341 51,548
Neal Gottfried............................ 25,000 9.7% 2.12500 04/14/07 33,410 84,668
Kenneth Green............................. 12,500 4.9% 2.15625 03/18/07 16,951 42,956
</TABLE>
- - ------------------------
* Less than 1%
Each of these options becomes exercisable in one-fifth cumulative annual
increments beginning one year after the date of grant. Pursuant to the Gantos,
Inc. 1996 Stock Option Plan under which these options were granted, if upon the
exercise of these options the Company must pay any amount for income tax
withholding, in the Compensation Committee's sole discretion, either the Company
will appropriately reduce the amount of stock to be delivered to the optionee or
the optionee will pay such amount to the Company to reimburse the Company for
such income tax withholding. Also pursuant to the Gantos, Inc. 1996 Stock Option
Plan, the Compensation Committee may accelerate the exercisability of stock
options and stock appreciation rights in connection with termination of a
participant's employment or a change in control of the Company.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning each exercise of stock
options during the fiscal year ended January 31, 1998 by each of the executive
officers named in the Summary Compensation Table above and the value of
unexercised options held by such persons as of January 31, 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED UNDERLYING UNEXERCISED IN THE MONEY OPTIONS
ON VALUE REALIZED OPTIONS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - ------------------------------------ ----------------- ----------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Arlene H. Stern..................... 0 0 116,666/283,334 0/0
Dennis Horstman..................... 0 0 7,000/48,000 0/0
Joseph Giudice...................... 0 0 5,000/35,000 0/0
Neal Gottfried...................... 0 0 0/25,000 0/0
Kenneth Green....................... 0 0 35,833/39,167 0/0
</TABLE>
24
<PAGE>
COMPENSATION OF DIRECTORS
Under the Company's standard arrangements, each director who is not a
Company employee receives an annual fee of $15,000, payable quarterly, plus $500
for each Board meeting attended, including meetings by conference telephone
call, plus reasonable expenses.
Pursuant to the Gantos Inc. Amended and Restated Director Stock Option Plan
(the "Directors Plan"), on April 1 each year, the Company automatically grants
an option to purchase 1,000 of the Company's common shares to each director of
the Company who (i) is a director of the Company as of the date the option is
granted under the Directors Plan, (ii) has served as a director of the Company
for at least nine months as of the date the option is granted under the
Directors Plan, and (iii) is not an officer or employee of the Company. Up to
100,000 common shares are reserved for issuance under the Directors Plan.
Options are exercisable on the date of grant and expire ten years
thereafter. The option exercise price is the fair market value of the common
shares on the date of grant. Options may be exercised either by payment in cash
or, at the discretion of the Board of Directors, (i) by surrender of common
shares of the Company, or (ii) by a promissory note, or (iii) by delivery of the
proceeds from a broker's sale of, or loan secured by, some or all of the shares
received upon exercise of the option. No options may be granted under the
Directors Plan after March 16, 2002.
On April 1, 1997 and 1998, 6,000 options to purchase common shares were
granted under the Directors Plan at an exercise price of $2.40625 and $0.375,
respectively. As of the Record Date, options to purchase 40,000 common shares
remain authorized for future award under the Directors Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
ARLENE H. STERN. The Company has a letter of employment, dated as of June
20, 1996 with Arlene H. Stern. Pursuant to Ms. Stern's employment letter she is
employed as the Company's President and Chief Executive Officer until July 8,
1999 (the "Term"), unless earlier terminated.
Ms. Stern will receive (i) a salary of $425,000, subject to increase in the
discretion of the Compensation Committee, (ii) the right to participate in the
Executive Bonus Plan, (iii) a minimum bonus of $75,000 with respect to each of
fiscal 1996, 1997 and 1998 (if employed at the end of each applicable year),
except that Ms. Stern waived her right to such bonus for 1997, (iv) a grant of
an option to purchase 350,000 Gantos Common Shares, which was granted as of July
8, 1996, (v) a $750 a month car allowance, (vi) life insurance in the amount of
twice the amount of her base salary, as long as she is insurable at standard
rates, (vii) fringe benefits generally available to other executive officers of
the Company, (viii) reimbursement for various relocation expenses, and (ix)
reimbursement for the difference between the cost of her Simsbury, Connecticut
home and the net proceeds of its sale, up to $250,000 of reimbursement, if such
home is sold before July 8, 1999.
Ms. Stern will also receive termination benefits, which vary depending on
the reason for her termination. If Ms. Stern's employment is terminated before
July 8, 1999 by the Company without "Cause", other than because of her death or
disability, or by Ms. Stern for "Good Reason", she will be entitled to (i) her
salary through the date of termination, (ii) any bonus earned with respect to
the prior fiscal year and a pro rata bonus for the fiscal year in which the
termination occurs, (iii) payment for the pro rata portion of her unused
vacation time for the fiscal year in which the termination occurs, (iv) a
continuation of her salary and minimum bonus for one year after the date of
termination (the "Period"), (v) during the Period, the same medical long-term
disability, dental and prescription drug coverage generally available to other
Company executive officers and her life insurance policy, (vi) the options
granted to her pursuant to the letter agreement fully vesting and remaining
exercisable for 90 days after such termination, and (vii) her life insurance
policy being assigned to her at the end of the Period, if assignable and if she
pays the Company the cash surrender value of the policy. These termination
benefits
25
<PAGE>
are subject to Ms. Stern's obligation to seek other employment and the Company's
right to offset amounts paid to Ms. Stern from such other employment during the
severance period.
If a change in control occurs before July 8, 1999 and within two years after
the change in control Ms. Stern's employment is terminated without "Cause",
other than because of her death or disability, or she terminates her employment
for "Good Reason", she will be entitled to the same types of benefits described
in the preceding paragraph, except that (i) all cash payments would be payable
in a lump sum within 30 days after such termination, (ii) the Period would
continue for three years after the date of termination, (iii) the total amount
of compensation contingent on a change in the ownership or effective control of
the Company would be limited to the maximum amount that may be paid to her and
not be deemed a "parachute payment" resulting in an excise tax to her and loss
of compensation deduction to the Company, and (iv) Ms. Stern would not have any
mitigation obligations.
If Ms. Stern's employment is terminated before July 8, 1999 because of her
death or disability, she will be entitled to (i) her salary through the date of
termination, (ii) any bonus earned with respect to the prior fiscal year and a
pro rata bonus for the fiscal year in which the termination occurs, (iii)
payment for the pro rata portion of her unused vacation time for the fiscal year
in which the termination occurs, (iv) for one year after the date of
termination, the same medical, dental and prescription drug coverage generally
available to other Company executive officers and, if such termination is not
the result of her death, her life insurance policy, (v) the options granted to
her pursuant to the letter agreement fully vesting and remaining exercisable for
one year after such termination, (vi) if such termination is not the result of
her death, her life insurance policy would be assigned to her one year after the
date of such termination, is assignable and if she pays the Company the cash
surrender value of the policy, and (vii) receipt of the benefits under any
disability or life insurance policy covering her.
If Ms. Stern's employment is terminated before July 8, 1999 by the Company
for "Cause" or by Ms. Stern without "Good Reason", she will be entitled to (i)
her salary through the date of termination, and (ii) any bonus earned with
respect to the prior fiscal year. She would also be required to reimburse the
Company for a pro rata portion of her relocation expenses paid by the Company.
For purposes of Ms. Stern's employment letter, "Cause" generally means (i)
her continued failure to either devote substantially full time to her employment
duties (except because of illness or disability) or make a good faith effort to
perform her employment duties, (ii) any willful act or omission that she knew or
had reason to know would materially injure the Company, (iii) breach of the
non-competition, confidentiality and non-solicitation provisions of the
employment letter, (iv) misrepresentations or breach by her regarding specified
conflicting obligations or specified claims regarding conflicting obligations,
(v) conviction of a felony involving dishonesty or fraud, (vi) certain acts
contrary to directions of the Board of Directors, or (vii) material breaches of
the employment letter. The employment letter provides notice and a chance to
cure the items described in clauses (i) and (ii). "Good Reason" under the
employment letter generally means voluntary termination of employment with the
Company as a result of (i) a reduction without her consent in duties,
responsibilities, benefits or compensation, (ii) material breach by the Company
of the employment letter, (iii) any requirement that she relocate outside of
specified areas, or (iv) any failure of a successor to the Company's business
after a change in control to assume the Company's obligations under the
employment letter. "Change in Control" under the employment letter generally
means (i) any person (excluding specified related parties) becoming the owner of
30% or more of the Company's capital stock, (ii) the consummation of a business
combination unless the shareholders before the combination own more than 50% of
the combined entity in substantially the same proportions, (iii) a sale of
substantially all of the Company's assets, (iv) the continuing directors of the
Company cease to be a majority of the Company's directors, or (v) dissolution of
the Company and liquidation of substantially all of its assets.
Pursuant to the terms of the Stern Termination Agreement, dated as of May
12, 1998, between Ms. Stern and the Company, subject to the consummation of the
Merger, the Company and Ms. Stern have
26
<PAGE>
agreed to terminate Ms. Stern's employment letter and to terminate Ms. Stern's
employment with the Company thereunder as of the Closing Date of the Merger.
Under the Stern Termination Agreement, Ms. Stern will receive severance payments
in the aggregate amount of $750,000 in equal monthly installments of $41,666.67
over the 18 month period following the Closing Date (the "Period"). During the
Period, the Company shall continue to provide Ms. Stern with medical, disability
and dental insurance to the same extent and on the same terms as are available
to the Company's executive officers. To the extent it is renewable or Ms. Stern
is insurable at standard rates, the Company will maintain the life insurance
policy throughout the Period which had been provided pursuant to Ms. Stern's
employment letter and will assign such policy to Ms. Stern at the end of the
Period. Further, all unvested options held by Ms. Stern as of the Closing Date
shall vest and shall be exercisable for ninety days thereafter. The Stern
Termination Agreement further provides that, during the Period, Ms. Stern will
continue to be available to the Company by telephone, subject to her
availability, to assist the Company with management or strategic issues arising
after the merger. In consideration of such terms, Ms. Stern and the Company have
agreed to release one another from their respective obligations and liabilities
relating to Ms. Stern's employment with the Company or the termination thereof.
Ms. Stern will continue as a Class II director after consummation of the Merger.
L. DOUGLAS GANTOS. As of March 27, 1995, the Company entered into a letter
of employment with L. Douglas Gantos. This letter of employment was amended as
of March 19, 1996. Pursuant to Mr. Gantos' employment letter, as amended, he is
employed as part-time Chairperson of the Board or as a consultant to the Company
until September 8, 2000, unless earlier terminated. The Company's Board of
Directors will choose, in its sole discretion, which of the two positions he
will hold during that period. On May 19, 1998, the Board of Directors elected to
employ Mr. Gantos as a consultant to the Company. Prior to that time, Mr. Gantos
served as Chairperson of the Board. While Mr. Gantos receives cash payments
pursuant to the letter agreement, he will serve as a director of the Company
during any period in which the Company's Board of Directors desires him to serve
as a director, unless he is not elected by the shareholders or dies. Mr. Gantos
will not continue as a director of the Company if the Merger is consummated.
Mr. Gantos' will receive (i) a salary of $250,000 while he is a consultant
or part-time Chairperson of the Board, (ii) a $1,000 a month care allowance and
an $8,000 a year tax, financial planning and legal advice allowance, (iii) life
insurance in the amount of $1,000,000 in addition to his $50,000 life insurance
policy, (iv) medical, dental and prescription drug coverage for himself and his
wife for their joint lives, to the same extent as such benefits are provided by
the Company to its executives, subject to the same contribution and co-payment
requirements applicable to other executive officers, and (v) fringe benefits
generally available to other executive officers of the Company.
Mr. Gantos will also receive termination benefits, which vary depending on
the reason for his termination. Regardless of the reason for his termination,
Mr. Gantos and his wife will receive the medical, dental and prescription drug
coverage described above for their joint lives. If Mr. Gantos' employment is
terminated before September 8, 2000 without "Cause" or by Mr. Gantos for "Good
Reason", he will be entitled to (i) his accrued bonus for the preceding year, if
any, and any other accrued compensation and benefits through the date of
termination, (ii) a continuation of his salary and benefits described above
through September 8, 2000 or his death, if earlier, and (iii) immediate vesting
of the restricted stock and stock options granted to him pursuant to the
employment letter, and such options will remain exercisable for their original
term.
If Mr. Gantos' employment is terminated before September 8, 2000 by the
Company for "Cause" or by Mr. Gantos without "Good Reason", he will be entitled
to (i) his accrued bonus for the preceding year, if any, and any other accrued
compensation and benefits through the date of termination, and (ii) immediate
vesting of the stock options (but not the restricted stock) granted to him
pursuant to the employment letter, and such options will remain exercisable for
their original term. If Mr. Gantos' employment is terminated before September 8,
2000 because of his death, he will be entitled to (i) his accrued bonus for the
preceding year, if any, a pro-rated bonus for the year of termination, if any,
and any
27
<PAGE>
other accrued compensation and benefits through the date of termination, (ii)
the proceeds of his life insurance policy, and (iii) immediate vesting of the
restricted stock and stock options granted to him pursuant to the employment
letter, and the options would remain exercisable for their original term.
If Mr. Gantos' employment is terminated before September 8, 2000 because of
his disability, he will be entitled to (i) his accrued bonus for the preceding
year, if any, a pro-rated bonus for the year of termination, if any, and any
other accrued compensation and benefits through the date of termination, (ii) a
continuation of his salary described above through September 8, 2000 or his
death, if earlier, offset by any proceeds of disability insurance provided by
the Company, (iii) a continuation of the benefits described above for one year,
except that the life insurance policy would be maintained at least through
September 8, 2000 or his death, if earlier, and (iv) immediate vesting of the
restricted stock and stock options granted to him pursuant to the employment
letter, and such options would remain exercisable for their original term.
If Mr. Gantos' employment terminates because the agreement expires, he will
be entitled to (i) any accrued compensation and benefits through the date of
termination, and (ii) immediate vesting of the restricted stock and stock
options granted to him pursuant to the employment letter, and such options will
remain exercisable for their original term.
The termination benefits described above are Mr. Gantos' exclusive rights
with respect to termination of his employment. For purposes of Mr. Gantos'
employment letter, "Cause" generally means continued failure to either devote
substantially full working time to his duties (while he is a full-time employee)
or make a good faith effort to perform his employment duties, willful acts or
omissions materially injuring the Company, conviction of a felony involving
dishonesty or fraud that is injurious to the Company, or any material breach by
Mr. Gantos of the non-competition provisions of the employment letter. "Good
Reason" under the employment letter generally means termination as a result of
substantial reduction in Mr. Gantos' duties, responsibilities, benefits or
compensation, any material breach by the Company of the employment letter, any
requirement that Mr. Gantos relocate outside of specified areas or the failure
to elect Mr. Gantos as a director while he is an officer.
VICKI BOUDREAUX. The Company has a letter of employment, dated as of
September 3, 1996, with Vicki Boudreaux. Pursuant to Ms. Boudreaux's employment
letter she is employed as the Company's Vice President, Planning and Allocation.
Ms. Boudreaux's employment letter provides her with (i) an initial salary of
$120,000, (ii) the right to participate in the Company's Executive Bonus Plan,
(iii) six months separation pay, as her exclusive severance benefit, if her
employment is terminated without cause (other than pursuant to her death or
disability) before September 16, 1998 (subject to Ms. Boudreaux's obligation to
seek other employment and the Company's right to offset amounts paid to Ms.
Boudreaux from such other employment during the severance period), (iv)
reimbursement for various relocation expenses, (v) fringe benefits the Company
provides its other Vice Presidents, and (vi) a grant of an option to purchase
10,000 common shares, which was granted September 16, 1996.
JOSEPH GIUDICE. The Company has a letter of employment, dated as of
September 25, 1996, with Joseph Giudice. Pursuant to Mr. Giudice's employment
letter he is employed as the Company's Senior Vice President, Merchandise
Planning and Operations. Mr. Giudice's employment letter provides him with (i)
an initial salary of $225,000, (ii) the right to participate in the Company's
Executive Bonus Plan, (iii) twelve months separation pay, as his exclusive
severance benefit, if his employment is terminated without cause (other than
pursuant to his death or disability) before September 16, 1998 (subject to Mr.
Giudice's obligation to seek other employment and the Company's right to offset
amounts paid to Mr. Giudice from such other employment during the severance
period), (iv) reimbursement for various relocation expenses, (v) fringe benefits
the Company provides its other Vice Presidents, and (vi) a grant of an options
to purchase 25,000 common shares, which was granted September 16, 1996.
HOPE GREY. The Company has a letter of employment, dated as of September
25, 1996, with Hope Grey. Pursuant to Ms. Grey's employment letter she is
employed as the Company's Vice President,
28
<PAGE>
Technical Product Management. Ms. Grey's employment letter provides her with (i)
an initial salary of $120,000, (ii) the right to participate in the Company's
Executive Bonus Plan, (iii) six months separation pay, as her exclusive
severance benefit, if her employment is terminated without cause (other than
pursuant to her death or disability) before September 30, 1998 (subject to Ms.
Grey's obligation to seek other employment and the Company's right to offset
amounts paid to Ms. Grey from such other employment during the severance
period), (iv) reimbursement for various relocation expenses, (v) fringe benefits
the Company provides its other Vice Presidents, and (vi) a grant of an option to
purchase 10,000 common shares, which was granted September 30, 1996.
DENNIS HORSTMAN. The Company has a letter of employment, dated as of
November 1, 1996, with Dennis Horstman. Pursuant to Mr. Horstman's employment
letter he is employed as the Company's Senior Vice President, Merchandising and
Marketing. Mr. Horstman's employment letter provides him with (i) an initial
salary of $300,000, (ii) the right to participate in the Company's Executive
Bonus Plan, and if employed at the end of the 1997 fiscal year, a minimum bonus
of $52,500 for that year, (iii) twelve months separation pay, as his exclusive
severance benefit, if his employment is terminated without cause (other than
pursuant to his death or disability) before December 2, 1998 (subject to Mr.
Horstman's obligation to seek other employment and the Company's right to offset
amounts paid to Mr. Horstman from such other employment during the severance
period), (iv) reimbursement for various relocation expenses, (v) fringe benefits
the Company provides its other Senior Vice Presidents, and (vi) a grant of an
option to purchase 35,000 common shares, which was granted December 2, 1996.
NEAL GOTTFRIED. The Company has a letter of employment, dated as of April
23, 1997, with Neal Gottfried. Pursuant to Mr. Gottfried's employment letter he
is employed as the Company's Senior Vice President, Store Operations and Visual
Merchandising. Mr. Gottfried's employment letter provides him with (i) an
initial salary of $225,000, (ii) the right to participate in the Company's
Executive Bonus Plan, (iii) twelve months separation pay, as his exclusive
severance benefit, if his employment is terminated without cause (other than
pursuant to his death or disability) before April 23, 1999 (subject to Mr.
Gottfried's obligation to seek other employment and the Company's right to
offset amounts paid to Mr. Gottfried from such other employment during the
severance period), (iv) reimbursement for various relocation expenses, (v)
fringe benefits the Company provides its other Vice Presidents, and (vi) a grant
of an option to purchase 25,000 common shares.
DAVID NELSON. The Company has a letter of employment, dated as of August
19, 1997, with David Nelson. Pursuant to Mr. Nelson's employment letter he is
employed as the Company's Senior Vice President and Chief Financial Officer. Mr.
Nelson's employment letter provides him with (i) an initial salary of $225,000,
(ii) a $4,000 sign on bonus and the right to participate in the Company's
Executive Bonus Plan, (iii) twelve months separation pay, as his exclusive
severance benefit, if his employment is terminated without cause (other than
pursuant to his death or disability) before August 19, 1999 (subject to Mr.
Nelson's obligation to seek other employment and the Company's right to offset
amounts paid to Mr. Nelson from such other employment during the severance
period), (iv) fringe benefits the Company provides its other Senior Vice
Presidents, and (v) a grant of an option to purchase 25,000 shares, which was
granted August 19, 1997.
MASTER SEVERANCE PLAN. On January 11, 1994, the Company's Board of
Directors adopted a Master Severance Plan as amended March 15, 1994. The Master
Severance Plan provides severance benefits to employees (including the officers
listed in the Summary Compensation Table above) if they are terminated without
cause. The amount of such benefits payable to executive officers of the Company
is (i) two weeks of the employee's base salary at the time of termination (one
week for Mr. Gantos) multiplied by the number of full years of such employee's
service to the Company at the time of termination; provided that such benefits
may not exceed one year of the employee's base compensation; plus (ii) such
employee's accrued vacation at the time of termination. As described above, Ms.
Stern, Mr. Gantos, Ms. Boudreaux,
29
<PAGE>
Mr. Giudice, Ms. Grey, Mr. Horstman, Mr. Gottfried and Mr. Nelson have
employment letters, with the Company providing for severance rights that differ
from those under the Master Severance Plan.
STOCK OPTION TERMS. The stock option granted to Mr. Gantos on March 31,
1995 to purchase 180,000 Gantos Common Shares at $4.16 a share provides that the
option becomes immediately exercisable, and continues to be exercisable until
its original termination date, upon termination of Mr. Gantos' employment and
consultation with Gantos. The stock option granted to Mr. Gantos on March 19,
1996 to purchase 50,000 Gantos Common Shares at $3.375 provides that the option
becomes immediately exercisable until its original termination date upon
termination of Mr. Gantos' employment and consultation with the Company. The
stock option granted to Ms. Stern on July 8, 1996 to purchase 350,000 Gantos
Common Shares at $4.65625 a share provides that the option becomes immediately
exercisable upon termination of Ms. Stern's employment with the Company, unless
such termination is by the Company for Cause or by Ms. Stern without Good
Reason, and if a Change in Control occurs. The vested portion of the options at
the date of termination of Ms. Stern's employment with the Company may be
exercised (i) until one year after termination as a result of her death or
disability, and (ii) until 90 days after termination for any other reason,
except that all rights to exercise the options terminate if she is terminated
for Cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1998 Mr. Schomer, Ms. Putnam and
Ms. Strasser served as sole members of the Company's Compensation Committee.
None of the members of the Company's Compensation Committee during the fiscal
year ended January 31, 1998 (i) was, during such fiscal year, an officer or
employee of the Company, or (ii) was formerly an officer of the Company or its
subsidiary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 26, 1998, the only person known to the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Shares was
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED OUTSTANDING SHARES
- - ------------------------------- ----------------- -----------------------
<S> <C> <C>
Franklin Resources, Inc. 500,000(a) 6.6%
777 Mariners Island Blvd.
San Mateo, CA 94404
</TABLE>
- - ------------------------
(a) The information with respect to Franklin Resources, Inc. is based solely on
a Schedule 13G report, dated, January 27, 1998. Franklin Resources, Inc.
("FRI") is a parent holding company. FRI's wholly-owned subsidiary, Franklin
Advisory Services, Inc. ("FASI"), is an investment adviser registered under
the Investment Advisors Act of 1940. One or more of FASI's advisory clients
is the legal owner of an aggregate of 500,000 of the Company's common
shares. Pursuant to investment advisory agreements with its respective
advisory clients, FASI has sole investment discretion and voting authority
with respect to such shares. Charles B. Johnson and Rupert H. Johnson, Jr.
(the "Principal Stockholders") each owns in excess of 10% of the outstanding
common stock of FRI and are the principal shareholders of FRI. Each of the
Principal Stockholders, therefore, may be deemed to have indirect beneficial
ownership of such shares. The Principal Stockholders, FRI and FASI disclaim
any economic interest or beneficial ownership of the Company's common
shares. The address of each of the Principal Stockholders and FRI is as set
forth in the table above. The address of FASI is One Parker Plaza, Sixteenth
Floor, Fort Lee, NJ 07024.
30
<PAGE>
The following information is furnished as of May 26, 1998 with respect to
each current director of the Company, with respect to each present or former
executive officer of the Company named in the Summary Compensation Table in Item
11, and with respect to all current directors and executive officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES OF COMMON COMMON STOCK
STOCK OF THE OF THE
COMPANY COMPANY
BENEFICIALLY BENEFICIALLY
NAME OWNED(A) OWNED
- - ------------------------------------------------------------ ----------------- -------------
<S> <C> <C>
CURRENT CLASS III DIRECTORS
L. Douglas Gantos, Inc...................................... 247,667(b) 3.2%
Hannah H. Strasser.......................................... 244,803(c) 3.2%
Mary Elizabeth Burton....................................... 8,000(d) *
CURRENT CLASS I DIRECTORS
Elizabeth M. Eveillard...................................... 24,500(e) *
S. Amanda Putnam............................................ 8,000(f) *
CURRENT CLASS II DIRECTORS
Arlene H. Stern............................................. 340,595(g) 4.4%
Fred K. Schomer............................................. 24,700(h) *
Erwin A. Marks.............................................. 8,000(i) *
OTHER NAMED EXECUTIVE OFFICERS
Dennis Horstman............................................. 22,718(j) *
Joseph Giudice.............................................. 34,458(k) *
Neal Gottfried.............................................. 10,000(l) *
Kenneth Green............................................... 29,129(m) *
All current directors and executive officers
As a group (14 persons)................................... 992,107(n) 12.2%
</TABLE>
- - ------------------------
* Less than 1%.
(a) All directors and executive officers named in this Table have sole
investment and voting power with respect to the Company's Common Shares
beneficially owned by them, except as provided below.
(b) Mr. Gantos will not continue as a director of the Company if the Merger is
consummated. Includes 214,333 Gantos Common Shares that Mr. Gantos has the
right to acquire within 60 days of May 26, 1998 pursuant to options granted
to him under the Company's stock option plans (the "Stock Option Plan").
(c) Ms. Strasser will change from a Class III director to a Class I director if
the Merger is consummated. Includes 8,000 Gantos Common Shares that Ms.
Strasser has the right to acquire within 60 days of May 26, 1998 pursuant to
options granted to her under the Amended and Restated Director Stock Option
Plan (the Directors Plan). In addition, the information includes 11,315
Gantos Common Shares held in investment advisory accounts over which Ms.
Strasser has voting and investment discretion and 225,488 Gantos Common
Shares held by Cardinal Recovery Partners. Cardinal Capital Management LLC
is a 1% general partner in Cardinal Recovery Partners and Ms. Strasser is a
45% general partner in Cardinal Capital Management. Ms. Strasser disclaims
beneficial ownership of the Gantos Common Shares held by Cardinal Recovery
Partners.
(d) Ms. Burton will not continue as a director of the Company if the Merger is
consummated. Includes 8,000 Gantos Common Shares that Ms. Burton has the
right to acquire within 60 days of May 26, 1998 pursuant to options granted
to her under the Director's Plan.
31
<PAGE>
(e) Ms. Eveillard will continue as a Class I director if the Merger is
consummated. Includes 14,000 Gantos Common Shares that Ms. Eveillard has the
right to acquire within 60 days of May 26, 1998 pursuant to options granted
to her under the Directors Plan.
(f) Ms. Putnam will not continue as a director of the Company if the Merger is
consummated. Includes 8,000 Gantos Common Shares that Ms. Putnam has the
right to acquire within 60 days of May 26, 1998 pursuant to options granted
to her under the Directors Plan.
(g) Ms. Stern will continue as a Class II director if the Merger is consummated.
Includes 22,262 Gantos Common Shares acquired under the Gantos, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan") between January 31,
1997 and May 26, 1998 and 243,333 Gantos Common Shares that Ms. Stern has
the right to acquire within 60 days of May 26, 1998 pursuant to options
granted to her under the Stock Option Plan.
(h) Mr. Schomer will not continue as a director of the Company if the Merger is
consummated. Includes 14,000 Gantos Common Shares that Mr. Schomer has the
right to acquire within 60 days of May 26, 1998 pursuant to options granted
to him under the Directors Plan. In addition, the information includes
10,700 shares Mr. Schomer owns jointly with his wife.
(i) Mr. Marks will continue as a Class II director if the Merger is consummated.
Includes 8,000 Gantos Common Shares that Mr. Marks has the right to acquire
within 60 days of May 26, 1998 pursuant to options granted to him under the
Directors Plan.
(j) Includes 11,000 shares that Mr. Horstman has the right to acquire within 60
days of May 26, 1998 pursuant to options granted to him under the Stock
Option Plan. In addition, the information includes 8,000 shares Mr. Horstman
owns jointly with his wife and 3,718 shares acquired under the Gantos, Inc.
Employee Stock Purchase Plan between August 1, 1997 and May 26, 1998.
(k) Includes 8,000 shares that Mr. Giudice has the right to acquire within 60
days of May 26, 1998 pursuant to options granted to him under the Stock
Option Plan. In addition, the information includes 15,250 shares Mr. Giudice
owns jointly with his wife and 6,208 shares acquired under the Gantos, Inc.
Employee Stock Purchase Plan between May 1, 1997 and May 26, 1998.
(l) Includes 5,000 shares that Mr. Gottfried has the right to acquire within 60
days of May 26, 1998 pursuant to options granted to him under the Company's
1996 Stock Option Plan.
(m) Includes 9,129 shares Mr. Green acquired under the Gantos, Inc. Employee
Stock Purchase Plan between November 1, 1996 and April 23, 1998.
(n) Includes 547,666 shares that the Company's directors and executive officers
have the right to acquire within 60 days of May 26, 1998, pursuant to
options granted to them under the Company's Stock Option Plans.
POTENTIAL CHANGE IN CONTROL
On May 12, 1998, the Company 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 sale stockholder of Hit or Miss ("Holding"), regarding the
merger of Holding with and into the Company. Pursuant to the Merger Agreement,
the Company would acquire the assets and assume the liabilities 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 Common Shares for $1.50 per share. The
warrants would not be immediately exercisable.
In the Merger, Access Capital Partners, L.P., the principal stockholder of
Holding ("Access Capital"), will receive approximately 7.0 million shares, or
approximately 47% of the issued and outstanding common shares of the surviving
corporation and, upon exercise of the warrants, if and when exercised, Access
Capital and affiliated entities will have received approximately 8.2 million
shares, or approximately 50% of
32
<PAGE>
the issued and outstanding Common Shares of the surviving corporation. Following
completion of the Merger, the Board of Directors of the surviving corporation
(which will continue as Gantos, Inc.) will consist of seven individuals, three
of whom will be nominees of Holding and four of whom will be continuing Board
members of the Company. The Company's Bylaws will initially provide that
substantially all actions of the Board of Directors of the Surviving Corporation
will require the affirmative vote of more than 70% of the directors. Hit or Miss
will be operated as a separate subsidiary of the Company. Upon consummation of
the Merger, Arlene H. Stern, a director and the current President and Chief
Executive Officer of the Company, will resign as President and Chief Executive
Officer of the Company and Nesim Avigdor, a director and the current Chief
Executive Officer of Holding, will become the President and Chief Executive
Officer of the Company. The Company expects, subject to the satisfaction of all
conditions to consummate the Merger on or before August 31, 1998. Under certain
conditions, if the Merger Agreement is terminated or the merger is not
consummated, the Company or Holding may be entitled to a fee as liquidated
damages.
The Company and Holding have also entered into a Stockholder Voting and
Proxy Agreement (the "Voting Agreement") whereby Access Capital and certain
other stockholders of Holding, who collectively own approximately 96% of the
equity of Holding, have agreed to vote in favor of the merger and, so long as
they own shares, to elect the continuing Board members of the Company to the
Board of Directors of the surviving corporation for a period of three years.
In connection with the Merger, the parties have received a proposal, which
has received credit committee approval, to refinance the working capital
facilities of the Company and Hit or Miss into a combined $60 million facility.
The consummation of the transaction contemplated by the Merger Agreement is
subject to several material conditions including, among others, the consummation
of the above-described financing, the approval of the Merger by the Company's
shareholders and Holding, the waiver of certain covenants of the debtholders of
the Company and Hit or Miss, the receipt of all necessary approvals under the
Hart-Scott-Rodino Antitrust Improvements Act and the absence of adverse changes
to the business of the Company and Hit or Miss. There can be no assurance that
the Company will be successful in closing the above-described Merger with
Holding and Hit or Miss.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of an engagement letter dated February 13, 1998, the
Company has agreed to pay PaineWebber an aggregate fee of $500,000 for acting as
the Company's exclusive financial advisor in connection with the Merger (see
Item 12). A $50,000 retainer fee paid by the Company upon execution of the
engagement letter and a $250,000 fee paid by the Company upon delivery of
PaineWebber's fairness opinion will be credited against the aggregate remaining
fee payable upon the closing of the merger. Whether or not the Merger is
consummated, the Company has also agreed to reimburse PaineWebber for its
reasonable out-of-pocket expenses incurred in connection with the Merger and has
further agreed to indemnify PaineWebber and certain related persons against
certain liabilities relating to or arising out of its engagement. Elizabeth M.
Eveillard, a Managing Director in the Investment Banking Division of
PaineWebber, is a member of the Board of Directors of the Company and will
continue as a director of the surviving corporation.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) FINANCIAL STATEMENTS
The list of the report, financial statements and notes required by this Item
14(a)(1) is set forth in the "Index to Financial Statements" on page F-1 of this
Report.
14(a)(2) FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedule required by this Item 14(a)(2) is set forth
in the "Index to Financial Statements" on page F-1 of this Report.
14(a)(3) EXHIBITS
The list of exhibits required by this Item 14(a)(3) is set forth in the
"Index to Exhibits" following the Financial Statements in this Report.
14(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
ended January 31, 1998.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
Date: November 17, 1998 GANTOS, INC.
(Registrant)
By: /s/ ARLENE H. STERN
-----------------------------------------
Arlene H. Stern
ITS: PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
35
<PAGE>
GANTOS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants, PricewaterhouseCoopers LLP.............................................. F-2
Financial Statements
Statements of Income (Loss) for the three years ended January 31, 1998................................... F-3
Balance Sheets as of January 31, 1998 and February 1, 1997............................................... F-4
Statements of Cash Flows for the three years ended January 31, 1998...................................... F-5
Statements of Changes in Shareholders' Equity for the three years ended January 31, 1998................. F-6
Notes to Financial Statements............................................................................ F-7
Quarterly Financial Information (unaudited)................................................................ F-20
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Gantos, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Gantos, Inc.
at January 31, 1998 and February 1, 1997, and the results of its operations and
cash flows for each of the three years in the period ended January 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company suffered losses from operations and a
tightening of trade credit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 6 to the financial statements, the Company changed its
method of accounting for long-lived assets to conform with Statement of
Financial Accounting Standards No. 121 in fiscal 1995.
As discussed in Note 12 to the financial statements, on November 10, 1998
the Company restated the financial statements for the periods ended January 28,
1995, February 3, 1996, February 1, 1997, and January 31, 1998 to revise the
accounting for restructuring reserves.
PricewaterhouseCoopers LLP
Battle Creek, Michigan
April 30, 1998, except as to Note 12, which
is as of November 10, 1998
F-2
<PAGE>
GANTOS, INC.
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................................. $ 161,966 $ 184,366 $ 192,790
Cost of sales (including buying, distribution and occupancy costs)......... (137,237) (147,022) (151,912)
----------- ----------- -----------
Gross income............................................................... 24,729 37,344 40,878
Selling, general and administrative expense................................ (38,807) (37,407) (40,018)
Finance charge and other revenue........................................... 4,843 4,732 4,472
Credit for facilities closings and other................................... -- (400) 944
----------- ----------- -----------
Operating income (loss).................................................... (9,235) 4,269 6,276
Interest expense (contractual interest of $2,585 for 1995)................. (2,341) (2,332) (2,278)
----------- ----------- -----------
Income (loss) before reorganization items and income taxes................. (11,576) 1,937 3,998
----------- ----------- -----------
Reorganization items:
Professional fees........................................................ -- -- (530)
Interest earned on accumulating cash from Chapter 11 proceedings......... -- -- 251
----------- ----------- -----------
-- -- (279)
----------- ----------- -----------
Income (loss) before income taxes.......................................... (11,576) 1,937 3,719
(Provision) benefit for income taxes....................................... 615 -- --
----------- ----------- -----------
Net income (loss).......................................................... $ (10,961) $ 1,937 $ 3,719
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share (basic and diluted)............................ $ (1.45) $ 0.26 $ 0.55
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
F-3
<PAGE>
GANTOS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 1,295 $ 4,346
Accounts receivable, less allowance for doubtful accounts of $591 and $636 at January
31, 1998 and February 1, 1997, respectively......................................... 18,607 21,973
Merchandise inventories............................................................... 22,540 22,373
Prepaid expenses and other............................................................ 8,205 3,171
----------- -----------
Total current assets................................................................ 50,647 51,863
----------- -----------
Property and equipment, at cost:
Leasehold improvements................................................................ 30,506 30,168
Furniture and fixtures................................................................ 32,034 32,159
Other................................................................................. 122 52
----------- -----------
Total property and equipment........................................................ 62,662 62,379
Less--Accumulated depreciation and amortization......................................... (48,115) (48,384)
----------- -----------
Net property and equipment.......................................................... 14,547 13,995
----------- -----------
Total Assets............................................................................ $ 65,194 $ 65,858
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 7,644 $ 10,749
Accrued expenses and other............................................................ 8,472 10,307
Reserve for facilities closings....................................................... -- 400
----------- -----------
Total current liabilities........................................................... 16,116 21,456
----------- -----------
Long-term debt.......................................................................... 27,398 11,940
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; 7,583,000 issued and
outstanding at January 31, 1998 and 7,563,000 issued and outstanding at February 1,
1997................................................................................ 76 76
Additional paid-in capital............................................................ 40,977 40,798
Accumulated deficit................................................................... (19,373 ) (8,412 )
----------- -----------
Total shareholders' equity.......................................................... 21,680 32,462
----------- -----------
Total Liabilities and Shareholders' Equity.............................................. $ 65,194 $ 65,858
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
F-4
<PAGE>
GANTOS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (10,961) $ 1,937 $ 3,719
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Reorganization items...................................................... -- -- 279
(Credit) provision for facilities closings and other...................... -- 400 (944)
Cash used for facilities closings and other............................... (400) (9) (571)
Depreciation and amortization............................................. 4,782 5,493 6,241
Loss on disposals of property and equipment............................... -- -- --
Restricted stock compensation expense..................................... 109 142 161
Changes in assets and liabilities:
Accounts receivable..................................................... 3,366 646 2,676
Merchandise inventories................................................. (167) 1,582 (1,411)
Prepaid expenses and other.............................................. (5,034) (320) (265)
Accounts payable........................................................ (3,105) (1,370) 3,645
Accrued expenses and other.............................................. (1,835) (2,410) 1,281
Income tax receivable................................................... -- -- --
---------- ---------- ----------
Total adjustments..................................................... (2,284) 4,154 11,092
---------- ---------- ----------
Net cash (used) provided by operating activities before reorganization
items..................................................................... (13,245) 6,091 14,811
---------- ---------- ----------
Net change to liabilities subject to compromise............................. -- -- (64,941)
Net non-cash change to liabilities subject to compromise.................... -- -- 33,374
---------- ---------- ----------
Net cash payments on liabilities subject to compromise...................... -- -- (31,567)
Reorganization items........................................................ -- -- (279)
Change in accrued interest receivable....................................... -- -- 88
Change in accrued bankruptcy expenses....................................... -- -- (1,352)
---------- ---------- ----------
Net cash used by reorganization items....................................... -- -- (33,110)
---------- ---------- ----------
Net cash (used) provided by operating activities............................ (13,245) 6,091 (18,299)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures...................................................... (4,901) (2,696) (6,057)
Net cash used by investing activities....................................... (4,901) (2,696) (6,057)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligations and other
long-term debt.......................................................... (4,119) (455) (25)
Issuance of Common Stock.................................................. 70 54 --
Borrowings under long-term credit facility................................ 204,550 206,467 175,561
Payments under long-term credit facility.................................. (184,973) (206,568) (176,272)
Other..................................................................... (433) -- --
---------- ---------- ----------
Net cash provided (used) by financing activities............................ 15,095 (502) (736)
---------- ---------- ----------
Net (decrease) increase in cash............................................. (3,051) 2,893 (25,092)
Cash and cash equivalents at beginning of year.............................. 4,346 1,453 26,545
---------- ---------- ----------
Cash and cash equivalents at end of year.................................... $ 1,295 $ 4,346 $ 1,453
---------- ---------- ----------
---------- ---------- ----------
Cash paid during the year:
Interest.................................................................. $ 2,378 $ 1,818 $ 2,136
---------- ---------- ----------
---------- ---------- ----------
Income taxes.............................................................. $ 92 $ 54 $ 48
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
F-5
<PAGE>
GANTOS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ------------ -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance January 28, 1995.............................. 2,665 $ 27 $ 20,789 $ (14,068) $ 6,748
Issuance of restricted stock.......................... 177 2 (2) -- --
Restricted stock compensation expense................. -- -- 162 -- 162
Stock issued in conjunction with Plan of
Reorganization...................................... 4,735 47 19,654 -- 19,701
Net income for the year............................... -- -- -- 3,719 3,719
----- --- ----------- ------------ -------------
Balance February 3, 1996.............................. 7,577 $ 76 $ 40,603 $ (10,349) $ 30,330
Restricted stock compensation expense................. -- -- 142 -- 142
Cancellation of restricted stock...................... (34) -- -- -- --
Exercise of stock options............................. 2 -- 8 -- 8
Shares issued under employee stock purchase plan...... 18 -- 45 -- 45
Net income for the year............................... -- -- -- 1,937 1,937
----- --- ----------- ------------ -------------
Balance February 1, 1997.............................. 7,563 $ 76 $ 40,798 $ (8,412) $ 32,462
Restricted stock compensation expense................. -- -- 109 -- 109
Cancellation of restricted stock...................... (14) -- -- -- --
Cancellation of old common stock...................... (28) -- -- -- --
Shares issued under employee stock purchase plan...... 62 -- 70 -- 70
Net loss for the year................................. -- -- -- (10,961) (10,961)
----- --- ----------- ------------ -------------
Balance January 31, 1998.............................. 7,583 $ 76 $ 40,977 $ (19,373) $ 21,680
----- --- ----------- ------------ -------------
----- --- ----------- ------------ -------------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
financial statements.
F-6
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. CHAPTER 11 REORGANIZATION:
On November 12, 1993 (the "Petition Date"), Gantos, Inc. and Gantos Stores,
Inc. (collectively referred to as "Debtor" or "Company") filed petitions under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Western District of Michigan (the "Bankruptcy Court"). The Company managed its
affairs and operated its business under Chapter 11 as a debtor-in-possession
while a plan of reorganization was formulated.
Through a reorganization under Chapter 11, management restructured the
operations and capitalization of the Company in order to strengthen the
Company's financial position and operating performance.
On January 19, 1995, the Company filed the Second Amended Joint Plan of
Reorganization of Gantos, Inc. and Gantos Stores, Inc. (as amended March 7,
1995, the "POR"). On March 7, 1995, the Bankruptcy Court confirmed the POR which
became effective March 31, 1995.
Pursuant to the POR, the former Gantos, Inc. merged into Gantos Stores, Inc.
which changed its name to Gantos, Inc.
As provided for in the POR, all holders of secured and priority claims
received cash equal to the allowed amount of such claims, and unsecured
creditors generally received 50% of the allowed amount of each claim in cash and
50% of the allowed amount of each claim in new common shares valued at $4.16 per
share. Certain unsecured creditors received approximately $12.4 million in
original principal amount of 6-year notes bearing interest at 12.75%.
The Company issued 4,735,000 common shares, and paid approximately
$31,567,000 in cash along with the notes as settlement for these claims. All
holders of old common shares were entitled to receive one new common share for
every two old common shares outstanding prior to March 31, 1995.
Secured and priority claims creditors received $34 million cash representing
100% of their claims, $28.8 million of which was paid prior to the effective
date. Unsecured creditors received 100% of their claims as follows: $26.4
million cash, $12.4 million notes and $20.8 million paid as 4,735,000 common
shares.
Prior to the March 31, 1995 effective date of the POR, the Company followed
the American Institute of Certified Public Accountants (AICPA) Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code". After the March 31, 1995 effective date, the Company's assets
and liabilities continued to be recorded at their historical basis.
2. BASIS OF PRESENTATION:
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 year ended January 31, 1998, the Company incurred a loss
of $11.0 million and has experienced a tightening of trade credit. These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
Management does not believe that the Company will be able to meet the
minimum net worth covenant on the Indenture during the second quarter of 1998
and might not be able to meet the Fleet Facility liquidity test in the third
quarter of 1998. The Company is negotiating with Fleet Bank and with the
principal holder of the Notes to amend these covenants. Additionally, the
Company has engaged a financial advisor to assist it in exploring its strategic
alternatives.
F-7
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION: (CONTINUED)
The financial statements do not include any adjustment relating to the
recoverability and classification of 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 agreement, and future profitable
operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION--The Company operates 115 women's apparel specialty
stores in 23 states located primarily in the Western, Midwestern and
Northeastern United States. The following is a summary of significant accounting
policies:
The Company's fiscal year ends on the Saturday closest to the end of
January. Fiscal year 1997 consisted of fifty-two weeks and ended on January 31,
1998; fiscal year 1996 consisted of fifty-two weeks and ended on February 1,
1997; and fiscal year 1995 consisted of fifty-three weeks and ended on February
3, 1996.
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investment instruments purchased with a maturity of three months
or less to be cash equivalents.
Non-cash financing charges in connection with the Company's POR, including
the issuance of long-term debt and additional common stock, are described in
Note 1 above.
Accounts receivable consists principally of Gantos credit card customer
receivables. Finance charges are imposed on the unpaid balance at annual rates
varying from 18% to 21% depending upon state laws. Minimum monthly payments of
$15 or 10% of the unpaid balance, whichever is greater, are required.
Merchandise inventories are valued at the lower of cost or market, using the
cost method, on the First-in, First-out (FIFO) basis. Approximately $1.4 and
$1.3 million of merchandise development, procurement, storage and distribution
costs are included in inventory at year end 1997 and 1996, respectively.
Commissions earned on leased shoe sales are included in net sales and
totaled $889,000 in 1997, $874,000 in 1996, and $789,000 in 1995. Third party
leased shoe sales totaled $6.4, $6.5, and $6.3 million in 1997, 1996 and 1995,
respectively.
Cost of sales includes the net cost of merchandise, buying, distribution and
occupancy expenses.
Depreciation and amortization are computed using the straight-line method.
Furniture and fixtures are depreciated over their estimated useful lives,
generally five to ten years. Leasehold improvements are amortized over the terms
of the respective leases or their estimated useful lives, whichever is shorter,
generally seven to ten years.
The Company expenses preopening costs of new stores in the year in which the
store is opened.
Advertising costs are expensed the first time the advertising takes place.
Net advertising expense approximated $1.5 million, $1.2 million, and $1.0
million in 1997, 1996 and 1995, respectively.
As part of the Company's POR, each shareholder of record on the effective
date, was entitled to receive one new common share for every two common shares
previously held. All share and per share data in the financial statements and
notes reflect this stock distribution for all periods presented. Each
F-8
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
shareholder of record on the effective date, was required to surrender or be
deemed to have surrendered such shares within two years of the effective date or
have its claim for a distribution pursuant to the POR discharged. Accordingly,
approximately 28,000 common shares were forfeited under this provision in 1997.
As part of the POR, the Company issued 4,567,000 common shares as partial
settlement for certain claims, 143,000 restricted common shares to management
(net of 14,000, 34,000, and 23,000 restricted common shares forfeited during
1997, 1996, and 1995, respectively) and 168,000 common shares as partial
settlement of a shareholder lawsuit.
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period. The
weighted average number of common shares outstanding was 7,550,000 in 1997,
7,574,000 in 1996, and 6,759,000 in 1995. Diluted net earnings 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 common
shares are principally comprised of employee stock options issued by the Company
and had an insignificant impact on the computation of diluted net earnings per
share during the periods presented.
The Company follows Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options and other stock-based compensation. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized. As permitted, the Company has elected to adopt the disclosure
provisions only of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts from the prior year have been reclassified to conform with
the presentation used in the current year.
4. CLASS ACTION LAWSUIT:
On March 16, 1994, a shareholder of the Company (the Plaintiff) filed a
purported class action lawsuit in the United States District Court for the
Western District of Michigan, against certain current and former Officers and
Directors of the Company (the Defendants). The lawsuit claimed that the
Defendants caused the Company to issue statements containing material
misstatements and omissions. In addition, a proof of claim which mirrored the
lawsuit, was filed in the Bankruptcy Court on behalf of the Plaintiff class.
In January 1995, the Company, Defendants and the Plaintiff entered into a
settlement of the lawsuit. The settlement provided for the Company's insurance
company to pay $550,000 and the Company to issue $700,000 worth of new common
stock on the POR effective date. The $700,000 worth of new common stock, 168,000
shares, was issued effective March 31, 1995 as part of the Company's emergence
from the Chapter 11 proceedings. The Company's expense was included in the
Credit for Facilities Closing and Other in 1994.
F-9
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR FACILITIES CLOSINGS:
On November 11, 1993, the Board of Directors approved a plan to realign the
Company's operations in an effort to improve the long-term profit potential of
the Company. This realignment enabled the Company to concentrate its efforts on
those stores that management believed provided potential for ongoing
profitability. Pursuant to this plan, the Company closed 41, 5 and 2 stores in
fiscal years 1993, 1994 and 1995, respectively. In October 1994, the Company
opened one of the stores closed in the prior year.
The provision of $29.3 million recorded for the anticipated costs of the
realignment consisted primarily of the expected costs of future lease
obligations and rejection claims, losses on disposal of property and equipment,
expenses and losses associated with the disposal of merchandise inventory in the
closed stores and other expenses and losses directly related to the closure of
the stores.
During 1994, the Company entered into settlement agreements with certain of
its creditors whereby early cash payments for approximately 25% of the legally
allowed claim were made as a full settlement of the Company's obligation, which
resulted in a $1.6 million reduction in the reserve for facilities closings and
other. This amount, which was treated as forgiveness of debt, was included as a
extraordinary gain in the Company's Statement of Income during 1994. In
addition, during 1994 the Company negotiated favorable lease terms with its
landlords on many of the remaining under performing stores. As a result, the
reserve was reduced by $9.6 million reflecting the decision to close fewer
stores than originally planned. This reserve reduction was recorded as a credit
to facilities closing and other in the Statement of Income during 1994. As
discussed in Note 4, above, $0.7 million was also recorded as a charge to
facilities closing and other in the Statement of Income in during 1994 for the
settlement of a class action law suit.
Also during 1994, the Company was unsuccessful in renegotiating its office
and distribution center lease with its former landlord who was the Company's
Chairperson and Chief Executive Officer at that time (See Note 9) and elected to
reject the lease in its bankruptcy proceedings. As a result the Company recorded
a charge to facilities closings and other of $6.2 million to cover the
anticipated costs of rejecting the lease and writing down associated fixed
assets.
During 1995, the Company settled the remaining disputes with its landlords
for less than the amounts accrued and reduced the reserve by $0.9 million, which
is recorded as a credit for facilities closing and other.
During 1996, the Company made the decision to relocate its corporate offices
to Stamford, Connecticut. In connection with this decision, an announcement was
made in January 1997 related to severance plans for employees terminated as a
result of this relocation. Accordingly, in the fourth quarter of 1996, a reserve
of $.4 million was recorded based upon management's calculations of the
anticipated severance costs. During 1997, actual severance payments were $.4
million.
F-10
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR FACILITIES CLOSINGS: (CONTINUED)
The following table sets forth the activity in the reserve for facilities
closing and other during fiscal 1995, 1996 and 1997:
FACILITIES CLOSING PROVISION
<TABLE>
<CAPTION>
NON- CASH
RESERVE AT COSTS AND
JAN. 28, CASH COSTS ASSET RESERVE AT
1995 INCURRED WRITE-OFFS OTHER FEB. 3, 1996
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Lease rejection costs............................... $ 10,379 $ (4,109) $ (5,326) $ (944) $ --
Asset write-offs.................................... 2,040 -- (1,190) -- 850
Other............................................... 1,043 (571) (472) -- --
----------- ----------- ----------- ----- ------
$ 13,462 $ (4,680) $ (6,988) $ (944) $ 850
----------- ----------- ----------- ----- ------
----------- ----------- ----------- ----- ------
<CAPTION>
NON-CASH
RESERVE AT COSTS AND
FEB. 3, CASH COSTS ASSET RESERVE AT
1996 INCURRED WRITE-OFFS OTHER FEB. 1, 1997
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Asset write-offs.................................... $ 850 $ -- $ (850) $ -- $ --
Severance........................................... -- -- -- 400 400
----------- ----------- ----------- ----- ------
$ 850 $ -- $ (850) $ 400 $ 400
----------- ----------- ----------- ----- ------
----------- ----------- ----------- ----- ------
</TABLE>
<TABLE>
<CAPTION>
RESERVE AT RESERVE AT
FEB. 1, CASH COSTS JAN. 31,
1997 INCURRED 1998
----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Severance........................................... $ 400 $ (400) $ --
- - ---------------------------------------------------- ----------- -----------
- - ---------------------------------------------------- ----------- -----------
</TABLE>
Non-cash costs in 1996 represent the write-off of assets at the Company's
then current corporate office and distribution center that were abandoned as
part of the relocations.
6. VALUATION OF LONG-LIVED ASSETS:
During the fourth quarter of 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement
requires companies to record impairments of long-lived assets, certain
identifiable intangibles and goodwill when there is evidence that events or
changes in circumstances have made recovery of asset carrying values unlikely.
Asset impairment is determined to exist if estimated future cash flows,
undiscounted and without interest charges, are less than the carrying amount.
The Company identified assets in certain retail stores that were impaired
because of a history of and projected future cash flow losses in these specific
stores. Upon adoption, an impairment loss of $687,000 was recorded for these
retail store assets and is recorded in selling, general and administrative
expense in the Statement of Income for 1995. The Company periodically evaluates
the carrying value of long-lived assets to be held and used.
F-11
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT:
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(THOUSANDS)
<S> <C> <C>
Revolving Credit Agreement due March 31, 2000, bearing interest at variable
rates....................................................................... $ 19,577 $ --
Notes issued pursuant to an Indenture Agreement due in sixteen quarterly
installments of $775,000 beginning July 1, 1997, bearing interest at
12.75%...................................................................... 7,821 11,940
----------- -----------
$ 27,398 $ 11,940
----------- -----------
----------- -----------
</TABLE>
Since March 10, 1995, the Company has had a borrowing agreement with Fleet
Bank N.A. (formerly NatWest Bank N.A.) (the "Fleet Facility"). The Company
amended the Fleet Facility as of April 25, 1996, March 18, 1997, October 8,
1997, February 1, 1998, February 27, 1998, March 30, 1998, April 29, 1998 and
April 30, 1998, and it currently expires March 31, 2000. The Fleet Facility
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 $15 million in face amount. During 1997, the maximum amount
outstanding on the Revolving Credit Agreement was $17.3 million, while the
average amount outstanding during the year was $8.0 million.
Prior to the October 8, 1997 amendment loans under the Fleet Facility bore
interest at Fleet's prime rate plus 1 1/4%, or, at the Company's option, the
reserve adjusted LIBOR rate plus 2 1/2%. The October 8, 1997 amendment provides
for an adjustment to the interest rate for both prime rate and LIBOR rate loans
beginning in 1998. Based upon the Company's financial performance in 1997, loans
under the Fleet Facility bear interest at Fleet's prime rate plus 2%, or, at the
Company's option, the reserve adjusted LIBOR rate plus 3 1/4%. These rates are
adjusted quarterly based upon the Company's financial performance for the four
quarters then ended. The interest is payable in arrears on the last business day
of each month for prime rate loans and on the last day of the applicable one,
two, three or six-month interest period or at the end of three months, whichever
is sooner, for the reserve adjusted LIBOR rate loans. As of January 31, 1998,
the Fleet prime rate is 8.5%.
The Fleet Facility carries commitment fees of .5% of the difference between
$40 million and the average amount outstanding under the facility (including the
face amount of letters of credit) and 1.50% (1.75% for standby letters of
credit) of the face amount of outstanding letters of credit. This facility is
secured by substantially all of the Company's assets. The Fleet Facility also
provides for a .5% reduction fee if the agreement is terminated on or before
December 31, 1998.
The Fleet Facility contains, among other things, covenants with respect to
(i) additional indebtedness, (ii) investments, (iii) capital expenditures, (iv)
fixed charge coverage ratios, (v) earnings before interest, taxes, depreciation
and amortization, (vi) interest coverage ratios, and (vii) prohibitions on
paying cash dividends.
In part because of the net loss reported by the Company for the twenty-six
weeks ended August 2, 1997, the Company would not have been in compliance with
the covenant concerning, earnings before
F-12
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT: (CONTINUED)
interest, taxes, depreciation and amortization for the four quarters ended
August 2, 1997 had Fleet Bank N.A. and LaSalle National Bank not granted a
waiver of such covenant for such period.
On October 8, 1997, the Company entered into Amendment No. 3 to the Fleet
Facility (the Third Amendment). The Third Amendment provides for the adjustment
to the interest rates described above, an increase in the loan advance rate on
inventory during the months of October through January, and adjustments to the
financial covenants so that compliance with the financial covenants is based on
a liquidity test as long as minimum levels of liquidity are maintained. It also
provides that if the Company prepays its 12.75% Notes outstanding under its
Indenture, it must pay Fleet Bank a fee of $750,000 and the loan advance rate
would be reduced to pre-amendment levels. Additionally, on October 8, 1997,
Fleet Bank N.A. purchased LaSalle National Bank's interest in the Fleet Facility
and currently is the sole lender.
The February 1, 1998, February 27, 1998, March 30, 1998, and April 24, 1998,
amendments to the Fleet Facility extend the increase in the loan advance rate on
inventory in 1998 until February 28, 1998, March 31, 1998, May 2, 1998, and
January 31, 1999, respectively. Without the February 1, 1998, February 27, 1998
and March 30, 1998 amendments the Company would not have been in compliance with
the new liquidity test.
As of April 30, 1998, the Company entered into Amendment No. 8 to the Fleet
Facility (the Eighth Amendment). The Eighth Amendment provides for an increase
in the availability under the Fleet Facility in an amount equal to the lesser of
ten percent of the eligible inventory (as defined in the agreement) and
$2,000,000. Additionally, the Eighth Amendment carries a $100,000 amendment fee
payable on January 1, 1999 if there are obligations still due under the Fleet
Facility as of that date.
As described in Note 1, the Company issued to some unsecured creditors
approximately $12.4 million in original principal amount of six-year notes
bearing interest payable quarterly at 12.75%. The Notes were issued pursuant to
an Indenture, dated as of April 1, 1995, between the Company and State Street
Bank and Trust Company (formerly Fleet Bank, N.A. and Shawmut Bank Connecticut,
National Association). The Notes are payable in 16 quarterly installments of
approximately $775,000 beginning July 1, 1997 and ending April 1, 2001. The
Notes are also subject to prepayment within 50 days after the end of each fiscal
year of the Company in an amount equal to the Company's "Excess Cash Flow".
Excess Cash Flow is 50% of the Company's "Free Cash Flow" in excess of $1.4
million in 1995, $3.5 million in 1996, $3.4 million in 1997, $2.4 million in
1998, and $4.3 million in 1999. Free Cash Flow is the Company's net income
before extraordinary items, plus depreciation expense, minus specified capital
expenditures and principal payments made with respect to indebtedness for
borrowed money (other than the quarterly payments with respect to the Notes and
payments under the Fleet Facility). The amounts due within one year have been
classified as long-term debt as the Company has both the intent and ability,
through the Fleet Facility, to refinance these amounts on a long term basis. The
Company must also prepay the Notes with the proceeds of specified asset and
securities sales. If Excess Cash Flows (as defined in the Indenture) were not at
least $2.25 million by March 31, 1997, the Company was required to pay the
shortfall. In fiscal 1996, the Company made an Excess Cash Flow Payment for
fiscal 1995 of $455,000. During fiscal 1996, the Company did not have Excess
Cash Flow and, accordingly, made a payment of $1.8 million for the shortfall
during fiscal 1997. During 1997, the Company did not have Excess Cash Flow and
accordingly, is not required to make a payment.
The Notes are secured by a $5,000,000 life insurance policy on the life of a
certain director of the Company until the Notes are transferred to a third
party. The Notes secured by the policy must be prepaid
F-13
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT: (CONTINUED)
with any proceeds from the life insurance policy. The Indenture contains, among
other things, covenants with respect to (i) additional indebtedness, (ii)
capital expenditures, (iii) minimum net worth, (iv) earnings before interest,
taxes, depreciation and amortization, (v) interest coverage ratios, and (vi)
prohibitions on paying dividends.
In part because of the Company's net loss for the twenty-six weeks ended
August 2, 1997 and the thirty-nine weeks ended November 1, 1997, the Company was
not in compliance with the earnings before interest, taxes, depreciation and
amortization covenant for both quarters ended August 2, 1997 and November 1,
1997, and it was not in compliance with the interest coverage ratio covenant for
the quarter ended November 1, 1997. On December 15, 1997, the Company entered
into the Supplemental Indenture No. 1 and an agreement with the trustee and
principal holder of the Notes, respectively, to waive the existing EBITDA and
interest coverage ratio defaults and to revise some of the financial covenants
under the Indenture so that compliance with those covenants is based on a
liquidity test as long as minimum levels of liquidity are maintained under the
Fleet Facility. The Indenture Supplement was entered into in exchange for the
payment of approximately $400,000 plus expenses to the trustee for the benefit
of the Note holders.
The Indenture, as amended continues to require a minimum net worth of $20
million at the end of each quarter. As of January 31, 1998, the Company's net
worth was approximately $21.7 million. Management does not believe that the
Company will be able to meet this covenant in the second quarter of 1998 and
might not be able to meet the new liquidity test in the third quarter of 1998.
The Company is negotiating with Fleet Bank and the principal holder of the Notes
to amend these covenants. If the Company is unsuccessful in renegotiating these
covenants on terms and conditions acceptable to the Company, it would consider
refinancing the applicable indebtedness. Any inability by the Company to
renegotiate these covenants or to refinance the applicable indebtedness on terms
and conditions acceptable to the Company could have a material adverse effect on
the Company's business, operations, liquidity, financial condition and results
of operations, and could require the Company to substantially reduce or
discontinue its operations.
Even if the Company is successful in renegotiating the net worth covenant
under the Indenture, there can be no assurance that the Company would be able to
meet the revised net worth covenant or the liquidity test under the Indenture or
the Fleet facility for the next 12 months, unless sales substantially improve.
The Company has engaged a financial advisor to assist it in exploring its
strategic alternatives, although there can be no assurance that any viable
strategic alternatives will be found.
F-14
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES:
The Company's (provision) benefit for income taxes is composed of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current..................................................... $ 615 $ -- $ --
Deferred.................................................... -- -- --
--------- --------- ---------
615 -- --
--------- --------- ---------
State
Current..................................................... -- -- --
Deferred.................................................... -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
(Provision) benefit for income taxes........................ $ 615 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effective tax rate varies from the statutory rate as follows:
<TABLE>
<S> <C> <C> <C>
Statutory rate................................... 35.0% 35.0% 35.0%
Effect of graduated tax rate..................... (1.0) (1.0) (1.0)
Change in valuation allowance.................... (34.0) (34.0) (34.0)
Reversal of tax reserves......................... 5.3
--------- --------- ---------
5.3% --% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, requires that deferred income taxes be recorded for "temporary
differences" between the basis of assets and liabilities for financial reporting
purposes and such amounts as determined by tax regulations. This method requires
that deferred taxes be recorded based upon currently enacted tax rates.
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not" criteria
under SFAS No. 109 and accordingly a valuation allowance for the entire net
deferred tax asset amount has been recorded.
F-15
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
The components of the net deferred tax asset (liability) and the related
valuation allowance are as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(THOUSANDS)
<S> <C> <C>
NOL carryforward.................................................... $ 9,580 $ 5,780
Reserve for facility closings....................................... -- 150
Tax credit carryforward............................................. 3,520 3,520
Other accrued expenses.............................................. 1,710 1,780
Property and equipment.............................................. 960 740
Other............................................................... 160 280
----------- -----------
Deferred tax assets............................................... 15,930 12,250
----------- -----------
Inventory........................................................... (930) (1,470)
Prepaid expenses.................................................... (680) (630)
Property taxes...................................................... (530) (530)
----------- -----------
Deferred tax liabilities.......................................... (2,140) (2,630)
----------- -----------
Subtotal............................................................ 13,790 9,620
----------- -----------
Valuation allowance................................................. (13,790) (9,620)
----------- -----------
Net deferred tax assets (liabilities)............................... $ -- $ --
----------- -----------
----------- -----------
</TABLE>
At January 31, 1998, the Company had net operating loss carryforwards
available to offset future income for federal income tax reporting purposes of
approximately $29.3 million, expiring in 2007-2013.
If the Company experiences a change in ownership within the meaning of
Section 382 of the Internal Revenue Code, an annual limitation could be placed
upon the Company's ability to realize the benefits of its net operating loss
carryforwards.
9. LEASES:
The Company leases store locations, the corporate distribution center and
office building, the corporate merchandising offices, and certain equipment from
third parties. The remaining terms of these leases range from one to thirteen
years. Generally, the store leases contain provisions for additional rentals
based on a percentage of sales. Total rent expense under these leases was
approximately $16.0, $15.9 and $15.4 million in 1997, 1996 and 1995,
respectively, which includes percentage of sales rentals of $0.0, $0.1 and $0.1
million, respectively. Accrued rent expense of $3.9 million at January 31, 1998
and $4.1 million at February 1, 1997 is included in accrued expenses.
Pursuant to the POR, the Company rejected the lease for the distribution
center and office building as of March 31, 1995. As settlement for the
rejection, the Company paid the owner of the distribution center and office
building, a director of the Company, $1.75 million in cash and $1.75 million in
shares of new common stock. Also on the effective date, the owner of the
distribution center and office building deeded in lieu of foreclosure, ownership
of the property to the mortgage holder. The Company then entered into a
F-16
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LEASES: (CONTINUED)
10 month lease that was subsequently extended three times for 6 months each with
the mortgage holder, the last of which expired July 31, 1997, with base annual
rent of $1,030,000 (including real estate taxes).
Beginning in May 1997, the Company relocated its corporate facilities into a
new office/distribution center in Grand Rapids, Michigan and a new merchandising
office in Stamford, Connecticut. Total annual rental expense on these facilities
is approximately $760,000 (excluding real estate taxes).
Estimated future minimum rental payments are as follows:
<TABLE>
<CAPTION>
YEAR
- - -------------------------------------------------------------------------------- LEASES
------------
(THOUSANDS)
<S> <C>
1998............................................................................ $ 16,295
1999............................................................................ 15,053
2000............................................................................ 13,171
2001............................................................................ 9,306
2002............................................................................ 6,083
Thereafter...................................................................... 6,867
------------
Total minimum lease payments.................................................... $ 66,775
------------
------------
</TABLE>
10. STOCK OPTION PLANS:
The Company has two stock option plans which provide for the granting of
stock options, restricted stock and stock appreciation rights to officers and
key management employees.
The Gantos, Inc. 1996 Stock Option Plan (the "1996 Plan") was approved by
shareholders on June 20, 1996. The 1996 Plan reserved 1,000,000 common shares
for issuance upon exercise of options or stock appreciation rights or for
restricted stock awards to key employees. The 1996 Plan provides for the
issuance of both incentive options and non-qualified options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended. The incentive
options generally must have an exercise price not less than the fair market
value of the shares on the date on which such option is granted. The non-
qualified options must have an exercise price not less than the par value of the
shares on the date on which such option is granted. Stock options and stock
appreciation rights may be exercised only within ten years of the date of grant.
During 1997, the Company issued options to purchase 256,500 shares under the
1996 Plan at exercise prices ranging from $2.00 to $2.28. These options become
exercisable over a five year period (except for one option to purchase 1,000
shares which was exercisable immediately). The number of shares available for
grant under the 1996 Plan as of January 31, 1998 is 375,000.
The Gantos, Inc. Stock Option Plan (the "1986 Plan") expired March 19, 1996.
During 1995, as part of the POR, the Company issued 200,000 restricted shares to
key management employees which vest in one-third annual installments beginning
March 31, 1996 and were subject to certain restrictions of forfeiture. The
compensation expense related to the awarding of restricted stock is recognized
ratably over the restriction period.
The total number of options that remain outstanding under the 1986 Plan
(including unvested restricted stock) are 386,840 and will be exercisable in
future years in accordance with terms of such options.
F-17
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
In addition, on June 18, 1992, the Company's shareholders approved the
Gantos, Inc. Director Stock Option Plan (the "Director Plan") which provides for
automatic granting of up to an aggregate of 100,000 shares of non-qualified
options to certain directors of the Company who are not officers or employees of
the Company. Options granted under the Director Plan become 100% exercisable on
the grant date and expire ten years after the grant date, or, if earlier, three
months after resignation, with certain exceptions.
During 1997, options to purchase 6,000 shares were granted under the
Director Plan at an exercise price equal to the market value of Company's common
shares at the grant date. The number of shares available for grant under the
Director Plan at January 31, 1998 was 46,000.
A summary of activity for the three years ended January 31, 1998 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL RANGE OF
NON-QUALIFIED RESTRICTED NUMBER OF PRICES PER
SHARES SHARES SHARES SHARE
------------- --------- --------- -----------
(THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
Outstanding January 28, 1995................................ 150 -- 150 $8.00-53.50
Granted..................................................... 634 200 834 $ 3.25-4.16
Exercised................................................... -- -- -- --
Canceled.................................................... (225) (23) (248) $4.16-53.50
----- --- --------- -----------
Outstanding February 3, 1996................................ 559 177 736 $ 3.25-4.16
Granted..................................................... 612 -- 612 $ 3.00-4.69
Exercised................................................... (2) (59) (61) $ 4.16
Canceled.................................................... (113) (34) (147) $ 4.16
----- --- --------- -----------
Outstanding February 1, 1997................................ 1,056 84 1,140 $ 3.25-4.69
Granted..................................................... 263 -- 263 $ 2.00-2.28
Exercised................................................... -- (42) (42) $ 4.16
Canceled.................................................... (282) (14) (296) $ 2.00-4.16
----- --- --------- -----------
Outstanding January 31, 1998................................ 1,037 28 1,065 $ 2.00-4.69
----- --- --------- -----------
Exercisable................................................. 393 -- 393 $ 3.25-4.69
----- --- --------- -----------
----- --- --------- -----------
</TABLE>
The Company has adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock Based Compensation". The standard requires pro forma
disclosure of net earnings and earnings per share as if the Company has
accounted for its employee stock options using a fair value method. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate................................ 7% 7% 7%
Dividend Yield......................................... 0% 0% 0%
Volatility............................................. 110.9% 83.9% 83.9%
Average expected term.................................. 5 Years 5 Years 5 Years
</TABLE>
F-18
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma results, including the impact of employee stock options after January
28, 1995, are estimated to be:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Compensation expense recognized for stock options.............. $ 440 $ 660 $ 546
Net income (loss).............................................. $ 11,401 $ 1,277 $ 3,173
Net income (loss) per share (basic and diluted)................ $ (1.51) $ 0.17 $ 0.47
</TABLE>
Employee stock options outstanding and exercisable under these plans as of
January 31, 1998, were:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ------------------------------
WEIGHTED AVERAGE REMAINING CONTRACTUAL WEIGHTED AVERAGE
RANGE OF PRICES SHARES EXERCISE PRICE LIFE SHARES EXERCISE PRICE
- - ------------------------------- ----------- ----------------- --------------------- ----------- -----------------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
$2.00-2.99..................... 200 $ 2.17 9.3 7 $ 2.39
$3.00-3.99..................... 176 $ 3.43 8.4 48 $ 3.37
$4.00-4.49..................... 311 $ 4.16 7.2 221 $ 4.16
$4.50-4.69..................... 350 $ 4.69 8.8 117 $ 4.69
--
----- ----- --- -----
1,037 393
----- ---
----- ---
</TABLE>
11. EMPLOYEE STOCK PURCHASE PLAN
On June 20, 1996, the shareholders approved the Gantos, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP, as amended August 15, 1996, grants eligible
employees the right to purchase common shares on a quarterly basis at the lower
of 85% of the market price at the beginning or the end of each three month
purchase period. These shares may be authorized but unissued shares, reacquired
shares or shares bought on the open market. The discount is treated as
equivalent to the cost of issuing stock for financial reporting purposes. During
1997, 61,427 shares were issued under the ESPP for $70,771. As of January 31,
1998, there are 120,862 shares reserved for future issuance under the ESPP.
F-19
<PAGE>
GANTOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FISCAL QUARTER FIRST SECOND THIRD FOURTH
- - ------------------------------------------------------------ --------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net Sales................................................. $ 45,564 $ 35,816 $ 35,478 $ 45,108
Gross Income.............................................. 10,348 4,165 5,451 4,765
Net Income (Loss)......................................... 1,455 (4,714) (3,388) (4,314)
Net Income (Loss) per share (basic and diluted)........... 0.19 (0.62) (0.45) (0.57)
1996
Net Sales................................................. $ 50,365 $ 41,809 $ 41,716 $ 50,476
Gross Income.............................................. 11,753 6,751 8,214 10,626
Net Income (Loss)......................................... 2,548 (1,592) (275) 1,256
Net Income (Loss) per share (basic and diluted)........... 0.34 (0.21) (0.04) 0.17
</TABLE>
In the fourth quarter of 1996, the Company recorded a charge of $.4 million
for severance in connection with the decision to relocate the corporate office
to Stamford, Connecticut.
12. RESTATEMENT
The Company revised the accounting for restructuring costs primarily
associated with the relocation of the corporate office and distribution center
for the years ended 1995, 1996, and 1997. The Company had previously accrued
such costs in 1994 as part of an overall restructuring plan shortly after filing
for bankruptcy. The Company has revised the accounting to reflect such costs as
incurred. As a result, additional severance costs of $.4 million is reflected in
the fourth quarter of 1996 and additional relocation costs of $.5 million were
charged to operations as incurred during the second quarter of 1997. The effect
of this restatement is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
AS PREVIOUSLY REPORTED
Net income (loss)......................................... 3,719 2,337 (9,794)
Net income (loss) per share............................... 0.55 0.31 (1.30)
Shareholders equity....................................... 28,763 31,295 21,680
AS RESTATED
Net income (loss)......................................... 3,719 1,937 (10,961)
Net income (loss) per share............................... 0.55 0.26 (1.45)
Shareholders equity....................................... 30,330 32,462 21,680
</TABLE>
F-20
<PAGE>
GANTOS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- - -------------------------------------------------- --------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997............................................ $ 636 $ 1,320 $ -- $ 1,365 $ 591
1996............................................ $ 572 $ 1,226 $ -- $ 1,162 $ 636
1995............................................ $ 600 $ 884 $ -- $ 912 $ 572
</TABLE>
F-21
<PAGE>
EXHIBIT INDEX
Each Management contract or compensatory plan or arrangement filed as an
exhibit to this Report is identified in the following list with an asterisk
before the exhibit number.
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
- - ----------- -------------------------------------------------------------------------------------------
<C> <S>
2.1 Second Amended Joint Plan of Reorganization of Gantos, Inc. and Gantos Stores Inc.,
incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
March 7, 1995 and filed with the Securities and Exchange Commission on March 22, 1995. A
list of the omitted exhibits is contained on page vii of the Plan. Gantos, Inc. will
supplementally furnish a copy of any omitted exhibit to the Securities and Exchange
Commission upon request.
2.2 Modifications to the Debtors' Second Amended Joint Plan of Reorganization, incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, dated March 7, 1995
and filed with the Securities and Exchange Commission on March 22, 1995.
2.3 Agreement of Merger, dated as of March 15, 1995, between Gantos Stores, Inc. and Gantos,
Inc., incorporated by reference to Exhibit 2.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1995.
3(i) Restated Articles of Incorporation, incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, dated March 7, 1995 and filed with the Securities and
Exchange Commission on March 22, 1995.
3(ii) Bylaws, as amended March 16, 1993, incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1993.
4.1 Long-term debt documents, see Exhibits 10.13 through 10.20 of this Form 10-K.
4.2 Form of Indenture between Gantos, Inc. and Shawmut Bank Connecticut, National Association,
as Trustee, including forms of notes attached as exhibits, a reasonable itemized table of
contents and a cross-reference sheet showing the location in the Indenture of the provision
inserted pursuant to Section 310 through 318(a) inclusive of the Trust Indenture Act of
1939, incorporated by reference to Exhibit T3C to the Company's Application for
Qualification of Indenture under the Trust Indenture Act of 1939 on Form T-3.
4.3 Supplemental Indenture No. 1, dated as of December 15, 1997, 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 December 15, 1997, between Elliott Associates, L.P. and Gantos,
Inc.; incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the year ended January 31, 1998.
10.1 Lease Agreement between Gantos, Inc. and First Industrial Financing Partnership, L.P.,
dated as of January 28, 1997, incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended February 1, 1997.
10.2 Lease Agreement between Gantos, Inc. and Soundview Plaza Associates, dated as of January
23, 1997, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the year ended February 1, 1997.
10.3 Lease Modification Agreement between Gantos, Inc. and Soundview Plaza Associates, dated as
of February 10, 1997, incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended February 1, 1997.
10.4 Form of Gantos, Inc. credit card application and agreement, incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended February 1,
1997.
10.5 License Agreement, dated as of October 15, 1982, as amended by amendments one through four,
between Gantos, Inc. and Sherman and Sons, Inc., incorporated by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year ended January 30, 1988.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
- - ----------- -------------------------------------------------------------------------------------------
<C> <S>
10.6 Fifth Amendment, dated as of May 31, 1989, to the License Agreement dated as of October 15,
1982, as amended, between Gantos, Inc. and Sherman and Sons, Inc., incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended
February 3, 1990.
10.7 Sixth Amendment, dated as of June 30, 1992, to the License Agreement dated as of October
15, 1992, as amended, between Gantos Stores, Inc. and Sherman and Sons, Inc., incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1992.
*10.8 Gantos, Inc. Amended and Restated Stock Option Plan, adopted March 20, 1986, as amended and
restated March 31, 1995, incorporated by reference to Exhibit 1 to L. Douglas Gantos'
Schedule 13D, dated March 31, 1995 and filed with the Securities and Exchange Commission on
April 10, 1995.
*10.9 Gantos, Inc. 1996 Stock Option Plan, adopted March 19, 1996, incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996.
*10.10 Gantos, Inc. Amended and Restated Director Stock Option Plan, adopted March 17, 1992, as
amended and restated March 31, 1995, incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.11 1997 Gantos, Inc. Executive Bonus Plan, adopted May 20, 1997, incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 3,
1997.
*10.12 Gantos, Inc. Master Severance Plan and Key Employee Retention Bonus Program adopted January
11, 1994 as amended March 15, 1994, incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
10.13 Revolving Credit Agreement, dated as of March 10, 1995, among Gantos, Inc., NatWest Bank,
N.A., LaSalle National Bank and NatWest Bank, N.A., as agent, incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended January
28, 1995.
10.14 Forms of note, Security Agreement, Security Agreement and Mortgage--Patents and Trade-
marks, and Assignment of Life Insurance Policy as Collateral Security, all in connection
with the revolving Credit Agreement, dated as of March 10, 1995, among Gantos, Inc.,
NatWest bank, N.A., LaSalle National Bank and NatWest Bank, N.A., as agent, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 29, 1995.
10.15 Amendment No. 1, dated April 25, 1996, to the Revolving Credit Agreement dated March 10,
1995, among Gantos, Inc., NatWest Bank, N.A. (now known as Fleet Bank, N.A.), LaSalle
National Bank and NatWest Bank, N.A., as agent, incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 1996.
10.16 Amendment No. 2 to Credit Agreement, dated March 18, 1997, among Gantos, Inc., Fleet Bank,
N.A. (formerly known as Natwest Bank, N.A.), LaSalle National Bank and Fleet Bank, N.A.
(formerly known as Natwest Bank, N.A.), as agent, incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the year ended February 1, 1997.
10.17 Amendment No. 3 to Credit Agreement, and related side letter, both dated October 8, 1997,
between Gantos, Inc. and Fleet Bank, N.A. (formerly known as Natwest Bank N.A.), incorpo-
rated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 1, 1997.
10.18 Amendment No. 4 to Credit Agreement, dated as of February 1, 1998, between Gantos, Inc. and
Fleet Bank, N.A. (formerly known as Natwest Bank N.A.); incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended January 31,
1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT
NUMBER DESCRIPTION
- - ----------- -------------------------------------------------------------------------------------------
<C> <S>
10.19 Amendment No. 5 to Credit Agreement, dated as of February 27, 1998, between Gantos, Inc.
and Fleet Bank, N.A. (formerly known as Natwest Bank N.A.); incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended January 31,
1998.
10.20 Amendment No. 6 to Credit Agreement, dated as of March 30, 1998, between Gantos, Inc. and
Fleet Bank, N.A. (formerly known as Natwest Bank N.A.); incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended January 31,
1998.
*10.21 Letter of Employment, dated June 20, 1996, between Gantos, Inc. and Arlene H. Stern,
incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 3, 1996.
*10.22 Letter of Employment, dated September 25, 1996, between Gantos, Inc. and Mr. Joseph
Giudice, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 2, 1996.
*10.23 Letter of Employment, dated November 1, 1996, between Gantos, Inc. and Mr. Dennis Horstman,
incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 2, 1996.
*10.24 Letter of Employment, dated April 23, 1997, between Gantos, Inc. and Mr. Neal Gottfried,
incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for
the year ended February 1, 1997.
*10.25 Letter of Employment, dated August 19, 1997, between Gantos, Inc. and Mr. David C. Nelson,
incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 2, 1997.
*10.26 Letter of Employment, dated September 3, 1996, between Gantos, Inc. and Ms. Vicki Bou-
dreaux, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended November 2, 1996.
*10.27 Letter of Employment, dated September 25, 1996, between Gantos, Inc. and Ms. Hope Grey,
incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 2, 1996.
*10.28 Letter of Employment, dated March 27, 1995, between Gantos, Inc. and Mr. L. Douglas Gantos,
Chairperson of the Board, incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*10.29 Amendment of Letter of Employment, dated as of March 19, 1996, between Gantos, Inc. and L.
Douglas Gantos, incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 3, 1996.
*10.30 Severance Agreement, dated as of March 18, 1997, between Gantos, Inc. and Mr. Kenneth
Green, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended February 1, 1997.
10.31 Letter Agreement, dated as of February 13, 1998, between Gantos, Inc. and PaineWebber
Incorporated; incorporated by reference to Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the year ended January 31, 1998.
23.1 Consent of independent accountants.
27.1 Financial Data Schedule; incorporated by reference to Exhibit 27.1 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1998.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-55496, 33-92576 and 333-14921) of Gantos, Inc.
of our report dated April 24, 1998, except as to Note 12, which is as of
November 10, 1998, appearing on page F-2 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan
November 10, 1998
